Today Spain is trying to stop the tariff deficit of the Spanish utilities by issuing 3yr bonds. The target is to place between €1bn and €3bn at a yield around 4.8%. Although there is no official confirmation, it seems that the power bond demand is close to €2bn (the price is still unknown). Just to remind you, the overall tariff deficit will be around €22bn at the end of the year and, company by company, Endesa has €8,434M of tariff deficit, Iberdrola has €5,137M, Gas Natural has €1,931M and HC (a subsidiary of EDP) has €877M.As we said this morning, the moment for the placement couldn’t be worst: the Spanish risk premium was 270bp and during this week there will be a public debt issue race in periphericals (Greece, Italy, Portugal and Spain). The confidence in the placement was so low that people familiar with the placement commented that if the outcome of the Portugal debt placement on Wednesday was going to be negative, the placement of the power bond should be delayed. However, during this morning Greece was able to place 6month notes and the demand for the Spanish power bond could be, as we already said, highly satisfactory. In our view, (if finally confirmed) it would be very good news not only for the Spanish utilities sector (the confirmation should reduce its risk premium, as the rating agencies were threatening the Spanish utilities with downgrades if the power bond placement was delayed again) but for the overall Spanish sovereign risk premium as well. In fact, the sovereign debt spread shrank since the news of the possible €2bln placement appeared on bloomberg (maybe it was just a coincidence).
In our view, the growing Spanish risk premium and the uncertainties about the placement of the Power Bond, have driven the prices of the Spanish utilities to very attractive levels, where some local value funds are increasing their positions. The negativism on the sector is great and utilities are one of the most underweighted sectors right now (not only in Spain), as we said in our 22th October note (Contrarian Call: BUY Utilities on Strong Underweight). We remain bullish on the sector due to valuation reasons.
Furthermore, within the sector we like Gas Natural (GAS SM) the most, but we would like to focus your attention on Endesa (ELE SM) as well. Endesa has a P/E 2011 around 7.5x and a dividend yield over 5.5%. But the point here is that as Endesa has around €8.5bn on tariff deficit (40% of its market cap), the good news from the power bond placement could fuel a spiral of reratings by the research community. Indirectly, Enel (ENEL IM) could be a good option as well. It has been punished recently by credit rating agencies because the power bond placement delays (Enel is the biggest shareholder of Endesa) and so any supportive news for Endesa would be good news for Enel.
In our view, you should buy utilities sector when it is absolutely out of favour, as you could take an advantage of a possible overweighting process and an improvement in the consensus estimations (recently Exane, for example, has improved aggressively its view on the sector). We admit that the industry could burn value for a while, as WACCs are expected to remain over ROCEs, but we think that this short-term view on the sector is a big mistake. Investors should focus on the intrinsic value of the indutry´s assets keeping in mind when finally ROCEs surpass WACCs, the rerating on the sector will be already done. As Warren Buffet said: “[pessimism] is the most common cause of low prices… We want to do business in such an environment, not because we like pessimism but because we like the prices it produces”.
José María Díaz Vallejo - Renta4 Institutional Equity Desk
También os puede interesar:
Notas de un Analista (1): QE2
Notas de un Analista (2). Gas Natural
Notas de un Analista (3): Déficit de tarifa
Notas de un Analista (4): Gamesa
Notas de un Analista (5): Sector Renovables español
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