Wed. Apr 24th, 2019

Red Eléctrica baffles investors | Markets

Red Eléctrica baffles investors | Markets



Red Eléctrica (REE) has started the year with intensity. It reached a record high of 20.24 euros in the first days of February, then announced the purchase of 89.68% of Hispasat to Abertis for 949 million and this week it presented the results of 2018 and a new strategic plan until 2022. The reaction from the market to a purchase and a strategic plan that modifies the business profile known up to now has nevertheless created confusion among investors, accustomed to a value without frights. The stock falls 5% since the announcement of the purchase of Hispasat.

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Several analysts have revised the recommendation downwards, with the majority of the sales councils, according to the Bloomberg consensus. This cloud over the company has to do with different factors. On the one hand, the purchase of Hispasat creates suspicion among investors for "lack of clarity about its strategic fit", according to Renta 4 and o the absence of "direct synergies", in Bankinter's opinion.

The electricity infrastructure manager enters with Hispasat in the management of telecommunications, in a step that reduces reliance on regulated revenues. But, in Moody's opinion, the acquisition will also cause some deterioration in REE's risk profile (it will be financed entirely with external debt) and its financial ratios. It estimates that its leverage will increase between 58% and 60% in 2019 compared to 56.2% in 2017. On the other hand, it does not rule out that some competitive pressure will arise in the medium and long term from other satellite operators.

Fitch at first was more pessimistic and threatened a possible downgrade of the rating, located in A, but has finally confirmed it along with a stable outlook. For its part, S & P has ratified its long-term rating on REE in A-, although it considers "a complex strategic adjustment". S & P highlights the financial strength of the company, supported by its regulated activities, which compensates for exposure to businesses that are not. In his opinion, "it has enough financial margin".

Bankinter also highlights that REE has financial margin to address the purchase without affecting the rating but aims to Some disappointment in the strategic plan, the other one of the factors that have weighed on the value. The annual net profit growth between 2018 and 2022, of 1% on average, is modest compared to 5% of the previous strategic plan, a difference that is explained in the cut in regulated return -the company will enter 110 million less with the framework regulatory framework that begins in 2020- and the scarce margin for improvement in the cost of debt. And the dividend per share, after rising 7% in 2019 to 1.05 euros, then remains unchanged at 1 euro.

"It's early to think what will happen. Red Eléctrica is carrying out projects that seek to increase the radius of action that implies an increase in fixed costs, something that is happening at a general level in a sector that is in the process of expansion, "explains Miguel Mommobela, an analyst at XTB. "It has an important route, but it's too early to decide," he says.

"We are positive with the value and with what he has corrected we would take advantage of to take positions"Says Susana Felpeto, deputy director of variable income at atl Capital.

In Berenberg they recommend instead to sell. The firm says that "The market does not discount enough the most challenging perspectives facing Red Eléctrica and Enagás". In REE it foresees "a radical change marked by the contraction of profits and the end of the growth of the uninterrupted dividend in the midst of regulatory uncertainty".

The analysts of the firm consider that the Government's decision to return to the National Commission of the Competition Market the power to set the prices of tolls on electricity and gas networks "will put on the table the excessive retribution of Spanish networks in relation to its comparables and market conditions. " In this sense, Morgan Stanley warns of the "hard blow that could have in the company the transfer of some powers in the setting of electric prices".

Regarding the current political situation in Spain, with the announcement of elections in April, the president of Red Eléctrica, Jordi Sevilla, has stated that there is "the guarantee of continuing with the road map of the strategic plan with total independence of the result".

Keys of the company

Retribution The company will propose at the next shareholders meeting the distribution of a gross dividend of 0.9831 euros gross corresponding to the results of 2018; 7% more on what was paid in 2017. In July it will make a complementary payment of 0.7104 euros gross.

Increase. The new strategic plan includes giving back to the shareholder in 2019 with 1.05 euros, 7% more than the one fixed for 2018. Until 2022, the dividend per share will remain at least 1 euro.

performance. Red Eléctrica offers a dividend yield of 5.55%, higher than the market. Its pay out ratio exceeds 70%.

Quotation. The value accumulates a revaluation of 100% since 2013 and more than 20% from the lows of 2018. Some analysts think that this almost uninterrupted climb has contributed to precipitate sales in recent days. It has a capitalization of more than 10,100 million.

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