Endesa Earnings: Working Capital Finally Improved and 2023 Guidance Maintained; Shares Undervalued

We retain our EUR 22.30 fair value estimate after no-moat Endesa ELE reported good first-half results and conservatively confirmed its 2023 guidance. Shares have been sold off after left-wing parties did better than expected at the Spanish general elections in July 2023, implying the possibility that they could keep control of the parliament. Still, our long-term estimates are based on conservative power price assumptions of EUR 60 per megawatt-hour, meaning that an extension of the EUR 67/MWh clawback on hydro and power producers would have no impact. Shares are undervalued.

First-half EBITDA came in at EUR 2.48 billion, growing by 27% over the first six months but sliding by 2% during the second quarter. Net ordinary income increased by 20% to EUR 0.87 billion as the EBITDA growth was mitigated by the Spanish energy levy and higher financial costs because of higher debt and cost of debt as well as higher provisions.

The key driver of the EBITDA decline during the second quarter is a positive one-off booked in the second quarter of 2022 related to the social bonus sentence. Generation and supply’s EBITDA doubled in the first half, slowing down from the first quarter’s 153% jump due to a higher comparison basis and lower free power unitary margin. The latter amounted to EUR 58/MWh, partially normalizing from the first quarter’s EUR 65/MWh but still 81% above the first half of 2022, thanks to lower sourcing costs and higher thermal margins.

Endesa confirmed its 2023 financial targets of EUR 4.4 billion-EUR 4.7 billion for EBITDA and EUR 1.4 billion-EUR 1.5 billion for net ordinary income, below our estimates of EUR 4.7 billion and EUR 1.7 billion. We will tweak the latter downward by raising our financial costs estimates, which will have no valuation impact.