Neoen: Initiating Coverage With a EUR 26.5 Fair Value Estimate and No Moat, Shares Fairly Valued

We initiate the coverage of Neoen NEOEN with a no-moat rating and a fair value estimate of EUR 26.5, implying a 2023 EV/EBITDA of 12.6. We view the shares as fairly valued and see more upside in peer, EDPR, which has a better track record in terms of returns on invested capital.

Listed since 2018, Neoen is a French renewables developer. It stands out from peers due to the weight of solar, batteries, and Australia in its capacity mix. At the end of 2022, it operated 4.1 GW of capacity of which 50% was solar, 36% onshore wind, and 13% utility-scale batteries—42% of the capacity is in Europe, 36% in Australia, and 22% in Americas but with no presence in the U.S.

Neoen’s assets are young with an average age of 3.8 years at end-2022. Most of the output is sold through purchase power agreement. Around 90% of the PPAs are public ones awarded through auctions. The weighted average remaining length of PPAs is 11.8 years, which grants earnings visibility on the existing assets. The high share of fixed revenue is an intangible asset source. However, it’s not sufficient to warrant an economic moat due to high upcoming capacity growth and lack of barriers to entry in the wind and solar industries that might result in downward pressure on PPA prices.

We forecast a 2022-27 CAGR of 37% for EPS and 17% for EBITDA thanks to the commissioning of 7.8 gigawatts of new capacity or 1.56 GW per year. Our 2023 and 2025 estimates are in line with the group’s guidance.

Neoen targets a midpoint equity internal rate of return of 7.5% in Europe and 8.5% in the rest of the world. Assuming that the current geographic breakdown is the same for future projects points to a weighted average equity IRR of 8.1%. Taking the projects in operation’s average gearing of 70% and assuming a cost of debt of 6% involves a weighted average unleveraged IRR of around 5%, in line with an unappealing returns track record versus peers. Still, we see this target as too conservative.