Surprise Dividend Hike From RWE

We don’t expect to materially change our EUR 53 fair value estimate for no-moat RWE RWE after the company set 2023 earnings guidance above our expectations and those of company-compiled consensus and surprisingly hiked its dividend floor from EUR 0.90 to EUR 1 per share. Despite the company’s competitive assets portfolio and excellent record, the shares appear significantly undervalued.

RWE sets its 2023 EBITDA guidance at EUR 5.8 billion-EUR 6.4 billion. The EUR 6.1 billion midpoint implies a 3% decline versus 2022 as the contribution of the Con Ed clean energy business and expected normalization of wind conditions will be more than offset by price caps and lower profits from trading and combined-cycle gas turbines. The EUR 6.1 billion midpoint is above our EUR 5.77 billion estimate and consensus’ EUR 5.94 billion. Guidance for the offshore wind, onshore, and solar businesses is in line with our and consensus’ estimate. The sources of guidance upside versus our estimates are the hydro, biomass, and gas as well as the coal and nuclear businesses due to power prices and volatility that remain elevated despite recent declines. Accordingly, this upside won’t have a material impact on our long-term estimates and valuations based on long-term normalized power prices of EUR 60 per megawatt-hour. Interestingly, RWE is guiding for 2023 EBITDA from its supply and trading business in a EUR 0.3 billion-EUR 0.6 billion range whereas previously it constantly guided for EUR 0.15 billion-EUR 0.35 billion, although largely exceeding it every year since 2019. This isn’t a surprise as we and consensus expected 2023 EBITDA of EUR 0.45 billion and EUR 0.4 billion, respectively.

RWE sets 2023 adjusted net income guidance at EUR 2.2 billion-EUR 2.7 billion. The EUR 2.45 billion midpoint is 6% above consensus’ EUR 2.3 billion and 18% above our EUR 2.08 billion. Our downside at the EBITDA level is supplemented by minorities net income that should land below our estimate, according to the firm’s guidance.