Naturgy: Guidance Raised on Strong First-Half Results; 2025 Renewables Ambitions Slashed

We confirm our EUR 25 fair value estimate after no-moat Naturgy NTGY raised its 2023 guidance on the back of solid first-half results and shed more light on its 2023-25 strategic update whose key figures had been released July 12. Shares appear overvalued.

First-half EBITDA jumped by 39% to EUR 2.85 billion while net income nearly doubled to EUR 1.05 billion. The former’s growth was supplemented by a sharp improvement in net financial result as the year-ago semester was hit by accrued interest related to a provision for a lawsuit against a Chilean subsidiary.

The main positive growth driver was liquefied natural gas and markets where EBITDA more than doubled to EUR 0.86 billion chiefly thanks to a one-off linked to the reappraisal of the financial hedging ineffectiveness booked in first-half 2022. Supply’s EBITDA also more than doubled as the year-ago semester faced skyrocketing electricity costs not passed on to clients.

Naturgy is now projecting a 2023 EBITDA exceeding EUR 5 billion versus an EBITDA at least equal to the 2022 figure of EUR 4.95 billion previously. We will raise our 5 billion estimate on account of strong first-half results of the supply and LNG and markets businesses but this will have a limited impact on our long-term estimates and valuation.

On July 12, Naturgy raised its EBITDA target to EUR 5.1 billion, slightly above our EUR 5.03 billion forecast. Naturgy also raised its 2023-25 dividend floor from EUR 1.2 to EUR 1.4 and reduced its 2021-25 investments from EUR 14 billion to EUR 13.2 billion, in line with our estimate. As we suspected, the latter is driven by a reduction in renewables capacity target, albeit at a larger extent than we anticipated with the 2025 target slashed from 14 gigawatts to 10 GW versus our 12 GW.

Finally, Naturgy raised its 2025 net income estimate from EUR 1.6 billion to EUR 1.8 billion, above our EUR 1.62 billion. We believe our slight downside at the EBITDA level is balanced by our too-high financial expenses estimate.