By Felipe Bijit
Tools are still a very interesting sector. It provides opportunities in various exposures across power technologies and geographies, and all provide similar resistance to influences that will result from another set of coronavirus-related locks. This resilience may be a consequence of consumer shifts to reduced commercial activity, by home crew orders shifting power consumption to homes, or it may come from guaranteed reimbursement schemes by governments in regulated tools.
Taking advantage of both of these voltage vectors, we have Enel (OTCPK: ENLAY), which, on top of low operating volatility, provides good value for investors interested in global exposures. We had a finger from this underestimation from the fact that meaningful market players like Norges Bank appear to be unfair to believe that Enel does not meet the requirements of ESG mandates, and puts it in the same box as Glencore (OTCPK: GLCNF), although Enel quickly is the phasing out of coal as ordered by many European governments. Knowing that ESG gives a premium, we looked at the complex network of Enel subsidiaries starting with Endesa (OTCPK: ELEZF), a significant company in its own right. By analyzing the company's disclosures for multiples that are hard to find, we discover that in addition to a large dividend yielding over 6%, Endesa is a value proposition to boot, probably after being avoided due to its nuclear exposures. Overall, Endesa is a clear purchase for a recessionary environment.
Endesa's assets can be divided broadly into two. The first are the regulated consumables that are responsible for the distribution of electricity in the Spanish market. They are being looked at by the CNMC regulatory body, which is known to be unattractive to investors in Spanish regulated tools. Distribution activities are reimbursed on the basis of state tariffs, without any connection to demand effects. Although the demand for electricity has proven to be resilient in a blockage situation, as seen from the first quarter results of auxiliary companies, the revenues of regulated assets are essentially volatile in so far as regulatory schemes are not changed.
The other business is power generation. Some of these sales are sold on the regulatory market, but most are not. What is really worrying is the asset mix of technology. This business spans both mainland and non-mainland activities, with non-mainland sales being achieved in regulatory markets.
(Source: Consolidated Management Report 2019)
The revenue share can be gleaned from the following charts:
(Source: FY Presentation 2019)
Nuclear is a massive revenue contributor, with significant contributions from renewable assets with high value as hydropower as well. When we look at property sharing and the distinction between regulated and non-regulated sales, we can begin to appreciate the company that includes the various premiums that ESG assets have.
To appreciate the company's power-generating assets, we need relevant comp. The following is mainly gathered from available information on the sale of renewable assets.
(Source: Valkyrie Research, here and here)
For Endesa's renewable assets, we use the multiple for Red Electric's (OTCPK: RDEIY) business, which derives almost all revenue from regulated use activities with the Spanish transmission network. Since the regulated WACC on transfer agents is generally similar to distribution agents, the most appropriate component is also given the shared geography.
When it comes to power generators, we have weighed the aforementioned multiples of GWh technology split to get the proper valuation. For the non-mainland, we took the Red Electrica multiple since it is regulated sales, and we weighted it to reflect a value of 0x on coal assets that is completely phased out by European law. For the mainland, we have used the multiple for nuclear assets based on the market value calculated continuously by the French electricity company EDF (OTCPK: ECIFF), which is known to have the largest core exposures. Since these provisions reflect the cost of withdrawing nuclear assets, with all necessary waste management, it is a great floor for the value of nuclear assets, since we know that EDF would not operate these assets if it were cheaper to withdraw them. The rest is from multiples in precedent transactions. Using NFP as the complete stock bridge, we obtain the following valuation using TTM Endesa data:
(Source: Valkyrie Research)
This is a pretty significant underestimate suggested by our multiples. As always, one should question whether such underestimation can be held in competing markets. The train wreck, which is EDF's price trend, a company whose revenue generation has done well over the last five years, says a lot.
(Source: Google Finance)
Atomic assets have clearly been avoided, which helps due to the discount that Endesa has. Although we do not give the argument that nuclear should be valued higher, and speculate on greater public approval, regulations are clearly a very low line for what the value of extremely efficient, carbon-free energy should be. For savvy investors who are worried about other waves of lockdowns, Endesa still offers great value, which translates into revenue through an expansive dividend yield of over 6%. Given the tools that are robust and Endesa's greater focus on renewable assets in good faith, the watchlist for investors waiting to move money from the sidelines should be high. Of course, there are risks. Atomic exposure opens it up to all kinds of problems with the EU and governments turning their attention to winding it up, but we think given the energy economy of nuclear physics, government positions won't go far beyond making a show of wrinkling on it as an energy source. But in a crisis, energy is an important commodity, and Endesa provides it in numbers. At a discount and with ample dividends, Endesa is worthy of exposure.
Disclosure: I / we have no positions in the listed shares, and have no plans to start any positions over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I do not receive compensation for it (other than Seeking Alpha). I have no business relationship with any company mentioned in this article.