Enel shares rise as Jefferies upgrades to Buy; Here's why the stock is undervalued

Investing.com

Fri, Jul 12, 2024, 12:38 AM 5 min read

Jefferies analysts helped push the energy giant higher, increasing their earnings per share (Eps) estimates for the company by 4% in their latest report for the period 2024-2026. The increase is due to the recovery in energy prices in the second quarter, the forecast of higher volumes and solid earnings in the retail sector.

Analysts expect long-term growth potential to be supported by rising demand for data center electricity.

Furthermore, according to Jefferies, the company led by CEO Flavio Cattaneo is currently undervalued on the stock market compared to its competitors EDP Energias de Portugal SA (ELI:EDP) and Iberdrola (BME:IBE) (OTC:IBDRY). For these reasons, the experts have upgraded Enel's rating to "Buy" with a target price increased by 23% to €8.

First half earnings expected to rise 6%

For its first-half 2024 results, to be unveiled on July 25, Jefferies expects solid financial results, with EBITDA estimated at €11.5 billion (+7% year-on-year) and net income of €3.5B (+6%) . The increase should come from strong hydroelectric generation, resilient energy prices and solid earnings in the retail and networks sectors. Jefferies believes Enel is well positioned to achieve the high end of its full-year EBITDA guidance, which ranges between €22.2B and €22.8B, and expects a significant improvement in net debt in the second quarter of 2024, thanks to around €5B of divestments.

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EPS up 5% in 2025-26

For the 2025-2026 period , Jefferies increased its earnings per share estimates by about 5% on average , thanks to higher energy prices in Italy, higher hydroelectric generation and the recent recovery in water volumes.

Enel should thus close the valuation gap with respect to its competitors, as it is currently valued at a 20% discount to EDP and 30% to Iberdrola (IBE).

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Enel undervalued compared to competitors

If we compare the three companies “based on historical growth and earnings metrics, business mix and balance sheet,” Jefferies points out, “Enel is well positioned relative to IBE/EDP, especially in terms of earnings and balance sheet, which implies that the valuation gap is potentially unjustified.”

Furthermore, the report states, “the growing demand for electricity from data centers could provide positive support to energy prices in Europe, the expansion of renewables and Enel's earnings growth in the future”.

And it is precisely based on Enel's network multiples compared to the trading multiples of its competitors that Jefferies decided to upgrade to Buy, raising the target price by 23% to €8 per share. "At this price," explains the investment bank, "Enel would trade at 12x the previous year's P/E, with a 20% discount to Iberdrola and 5% to EDP."

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