EDP Earnings: Better Hydro Conditions Drive a Rebound, Shares Cheap

We maintain our EUR 6 fair value estimate after no-moat EDP EDP released a good set of first-quarter results thanks to the recovery in hydro conditions after the severe drought of 2022. Shares appear undervalued.

First-quarter EBITDA doubled year on year to EUR 1.4 billion. Net profit came in at EUR 0.3 billion, largely improving from the EUR 80 million loss posted in the year-ago quarter. EBITDA growth largely offset a 50% increase in financial costs due to higher cost of debt because of the indexation of Brazilian debt to inflation and higher interest rates.

The main positive driver was the hydro, clients and energy management in Iberia, which posted EUR 530 million in EBITDA versus a loss of EUR 140 million in the first quarter of 2022. The better performance was due to a large improvement in hydro conditions and cheaper sourcing costs in the wake of the normalization of wholesale gas and power prices. Last year, performance was plagued by a severe drought that created a big short position while power prices were skyrocketing.

Wind and solar EBITDA increased by 14% from new capacity and higher average selling price. Networks’ EBITDA increased by 5% thanks to the commissioning of new transmission lines and the consolidation of EDP Goias.

Net debt was EUR 13.1 billion at the end of March, EUR 0.1 billion lower than at year-end 2022. The EUR 2 billion in cash proceeds from the rights issues of EDP and its subsidiary EDPR were largely absorbed by investments and a EUR 1.1 billion deterioration in regulatory working capital in Portugal because of a tariff deviation resulting from the decline in wholesale electricity prices.