Endesa Exceeds Expectations in 2022; Dividend Higher Than Expected

We maintain our EUR 22.30 fair value estimate after no-moat Endesa ELE released 2022 net income slightly above FactSet consensus and net debt above guidance. The firm intends to pay a EUR 1.59 dividend on 2022 results, 11% higher than 2021 and above EUR 1.5 guidance due to high 2022 net income. This implies a juicy yield of 8.6%. Due to the expected normalization of profits, the group guides for a 2023 dividend of EUR 1, implying a 5.4% yield. However, the group has been paying a higher dividend than planned for three years in a row. This could still be the case in 2023. Shares are undervalued.

Adjusted EBITDA for 2022 increased by 25% to EUR 5.3 billion. In the fourth quarter, EBITDA jumped by 60%, sharply accelerating from the third quarter’s 11% growth despite a significant positive one-off in the fourth quarter of 2021. Adjusted net income jumped by 26% to EUR 2.4 billion.

The main positive driver was its generation and supply business. Its EBITDA jumped 57% during the year and doubled during the fourth quarter. The drought in Spain was largely offset by higher profitability from CCGTs due to higher output and clean spark spreads driving unitary power margin of EUR 42/megawatt-hour, 31% higher than in 2021. In addition, gas unitary margin surged sixfold to EUR 6/MWh after a weak 2021 and as the firm was able to sell back contracted gas volumes at high wholesale prices as consumption from its clients was lower than expected. Networks’ EBITDA decreased 13% to EUR 1.7 billion, largely improving from a 21% fall at the end of September because of a negative one-off in the third quarter.

Endesa confirms its 2023 net income target of EUR 1.4 billion-EUR 1.5 billion, including a EUR 250 million impact from the Spanish extraordinary revenue levy. We will lower our EUR 1.8 billion estimate by incorporating the tax, which would leave us slightly above guidance. The negative valuation impact would be offset by the upside of 2022 earnings versus our estimates.