We’ve already covered E.ON twice this year (OTCPK:EONGY). Our initial report (before Russia invaded Ukraine) underlined the German transmission provider’s long-term prospects. We were encouraged by greater CAPEX requirements (due to grid modernization and the addition of new renewable projects), a better pre-tax ROE for grids, and dividend policy visibility till 2026. In the first quarter report, we examined E.ON’s Russia exposure and the European Union’s energy transition support, which comforted the company’s present investors.
E.ON’s Q1 Results
Despite the current instability in the energy markets in the first quarter, E.ON feels it is on track to meet its lofty goals. The first-quarter business developments of E.ON were in accordance with expectations. The adjusted group EBITDA was roughly €2.1 billion, or about €360 million less than the prior year. The earnings gain from the German grid company was offset by charges from price-driven cost increases and system losses due to high energy costs, as predicted when the financial data for the full year 2021 were revealed. Furthermore, CFO Marc Spieker highlighted the effects of inflation: our energy network income is safeguarded against inflation, which is a significant advantage in the current climate.
In keeping with the EBITDA development, adjusted net income was 16% lower at €679 million, compared to €809 million the prior year. Overall economic net debt has remained practically steady at €38.9 billion, confirming the country’s strong financial structure and BBB rating. In the first quarter, E.ON was able to issue a total of €2.8 billion in bonds, covering a major portion of the estimated funding requirements for 2022. This includes €2.3 billion in green bonds, representing a significant share of our EU tax-compliant assets.
In light of the recently disclosed half-year results, we revisit E.ON today. Our readers may be interested in our follow-up notes on Engie (OTCPK:ENGIY) and Uniper (OTCPK:UNIP) (OTCPK:UNPRF).
Q2 results
E.ON reported a 15% year-on-year reduction in adjusted EBITDA to €4.06 billion in the first half of the year and a net profit of €1.43 billion, 20% less than the €1.75 billion recorded in the same time in 2021. On a divisional basis, network EBITDA was 3% lower than in the previous year. This was due to the network’s milder temperatures and greater costs in Turkey and Sweden. In detail, there was a beneficial effect due to excellent weather conditions completely offset by higher energy procurement prices that were not entirely passed through to B2C and B2B end-customers.
As previously stated in the Uniper memo, gas price hikes will be automatically collected in bills beginning October 1st. E.ON’s future accounting will benefit from this. Furthermore, as expected, the German nuclear division was drastically down due to the lack of additional compensation from the government.
E.ON has a 15.5% ownership participation in Nord Stream 1 through its pension fund, with Gazprom owning the bulk. The business registered the investment with a book value of €1.2 billion in March, warning that any depreciation would impact pension provisions and net debt. According to the half-year financial results, the investment item was around €700 million less than its previous value. The corporation stated that the write-off is recognized in equity alongside other non-operating income, noting geopolitics’ “increasing volatility.” Following the announcement, gas prices in the EU are currently climbing again.
Conclusion and Valuation
However, in light of the European Union’s intention to modernize its energy supply system, the German player has reiterated its estimate for 2022, predicting an adjusted EBITDA of €7.6 to €7.8 billion and an adjusted net profit of €2.3 to €2.5 billion.
When we first started covering E.ON, we were assigned a hold rating. Purchase recommendation confirmed. Following the energy shock, E.ON is trading at a discount, with a P/E 2023 of 9.9x vs the average European peer at 14x. This is not warranted given the current dividend yield of nearly 6%.
Featured Image: Megapixl @Neillockhart
