SILVER BULLETS - Espirito Santo Investment Bank incorporating ...
SILVER BULLETS - Espirito Santo Investment Bank incorporating ...
SILVER BULLETS - Espirito Santo Investment Bank incorporating ...
Create successful ePaper yourself
Turn your PDF publications into a flip-book with our unique Google optimized e-Paper software.
THIRD QUARTER 2010<br />
RWE<br />
Time To Bite The Bullet<br />
This is not a long note (most of the work is in our modeling). It is our<br />
third report on the fallout from the proposed German windfall tax<br />
(‘Your country needs YOU!’, 23rd June, ‘German nuclear levy’, 8th<br />
June). This time, we see no option but to slash 2011-2012 estimates<br />
(by 15% and 20%) and fair value (by 15%) for RWE. A dividend cut<br />
after the tax seems unavoidable in 2011 (-17%) and uncertainty still<br />
prevails over 2013. Whilst there are still uncertainties as to the final<br />
outcome, we believe that it is only a matter of degree. RWE<br />
continues to be a Sell.<br />
Utility sector in turmoil<br />
Many Continental European utility stocks are reeling from political backlash.<br />
Germany shocked the sector with a proposed windfall tax (even the companies did<br />
not see that one coming). Belgium has decided that might also be a good idea.<br />
Finland may follow suit with a tax discussed in 2009. Spain undid a decade of<br />
liberalization by freezing tariffs and there is also talk of a windfall tax. French<br />
Finance Minister likes the idea of freezing gas tariffs, another step backward.<br />
We have rebuilt and updated our model, marked to market<br />
What is more, we have completely rebuilt our RWE model to comply with the new<br />
reporting format. Our estimates fully reflect the prevailing forward curves (plus our<br />
own views further out).<br />
We have assumed windfall tax & life extensions<br />
• Windfall tax: €15MWh (c€700m) pa till 2020, i.e. beyond 2014<br />
• Nuclear life extensions: 15 years with 25% clawback<br />
We are slashing our estimates<br />
EPS: -15% for 2011, -19% for 2012 and -9% for 2013<br />
DPS: -17% for 2011, -17% for 2012 and -9% for 2013<br />
Capex: our spend is now c€4bn lower than company guidance 2009-2013<br />
We are cutting our fair value<br />
Whilst DCF value is largely unchanged (life extension off-setting windfall tax, plus<br />
higher commodity prices), we believe consensus EPS estimates will have to come<br />
down by 14% in 2011 and 19% in 2012. With this background, we do not believe that<br />
DCF valuations (€56ps) will be achieved. Instead, the share price will be driven by<br />
earnings and dividend downgrades and potential growing concerns over the<br />
impact of the tax on balance sheet gearing. Hence we have cut our fair value by<br />
15% to €47ps. RWE remains a Sell.<br />
http://www.execution-noble.com<br />
SELL<br />
12.5% downside<br />
Fair Value €47.00<br />
RIC, Bloomberg Code RWEG.DE, RWE GY<br />
Share Price €53.70<br />
Market Capitalisation €28,629<br />
Free Float 78.0%<br />
EUR 2009A 2010E 2011E 2012E<br />
Revenues m 47,741 49,557 50,628 51,653<br />
EBITDA m 9,165 10,041 9,682 10,051<br />
EPS 5.59 7.08 5.86 5.86<br />
DPS 3.50 3.55 3.10 3.22<br />
FCF ps 6.05 3.94 3.91 4.22<br />
EV 62,177 62,177 62,177 62,177<br />
Net Debt 13,782 15,328 18,123 20,068<br />
Net Debt/Ebitda 1.5 1.5 1.9 2.0<br />
At Current Price: 2009A 2010E 2011E 2012E<br />
PE 9.6 7.6 9.2 9.2<br />
EV/Ebitda 6.8 6.2 6.4 6.2<br />
Dividend Yield (%) 6.5% 6.6% 5.8% 6.0%<br />
FCF Yield (%) 11.3% 7.3% 7.3% 7.9%<br />
At Target Price: 2009A 2010E 2011E 2012E<br />
PE 8.4 6.6 8.0 8.0<br />
EV/Ebitda 5.8 5.3 5.5 5.3<br />
Dividend Yield (%) 7.4% 7.6% 6.6% 6.9%<br />
Analysts<br />
Lawson Steele<br />
+44 20 3364 6771<br />
lawson.steele@execution-noble.com<br />
Andrew Fisher<br />
+44 20 3364 6773<br />
andrew.fisher@execution-noble.com<br />
Page 41 of 44
Change language