E.On Earnings: Nothing Unexpected in Final Results; One-Offs Drive Our 3.5% Valuation Increase

No-moat E.On EOAN released its final first-half results. There was no surprise since the firm had released them on July 28. They were materially above expectations, mostly thanks to positive one-offs that led E.On to significantly raise its 2023 guidance. Incorporating this drives an increase in our fair value estimate to EUR 11.40 from EUR 11.00. Shares are in 3-star territory.

Our new fair value estimate implies 2023 enterprise value/EBITDA of 7.2 times, P/E of 8.7 times, dividend yield of 4.7%, and free cash flow yield of 3%.

In 2023, we now forecast adjusted EBITDA to rise by 32% to EUR 9.2 billion, thanks to the material one-offs booked in the first half and the expansion of the margins of the customer solutions business as procurement costs fell on the back of the easing of the energy crisis. Our new EBITDA estimate is above the EUR 8.6 billion-EUR 8.8 billion guidance that we see as too conservative, as its high end involves an 8% fall in the second half. Accordingly, our EUR 3.4 billion net income estimate is also above the EUR 2.7 billion-EUR 2.9 billion guidance.

The only new information included in the final results released today was the economic net debt. It was EUR 37 billion at the end of June, EUR 1.9 billion higher than at the end of March and EUR 4.3 billion higher than at year-end 2022. Key to that was a seasonal negative swing in working capital of EUR 5.6 billion in the first half.

The final features of the regulatory regime starting in 2024 for German power networks will be released by year-end. Accordingly, E.On will update its medium-term guidance in March 2024. We anticipate an increase in the allowed cost of debt of German power networks from 1.7% to 3.9% from 2024 onward, which drives EUR 0.4 billion upside versus the midpoint of the group’s guidance for networks’ EBITDA in 2027.