Engie (ENGIY): 2024 guidance raised, buy reaffirmed

02/08/2024 Engie (OTCPK:ENGIY) (OTCPK:ENGQF) has released its first-half results. Before analyzing the company’s solid results, it is important to note that the French stock fell sharply in June 2024 after President Emmanuel Macron called unexpected early elections in response to his defeat in the European Parliament elections. The French renewable energy industry could see a sharp slowdown in solar and wind projects if the far-right wins the elections. Indeed, the party was supposed to strengthen the French nuclear industry. Engie is changing its strategy from Nuclear Down Additional renewable power. This was one of Mare Evidence Lab’s fundamental theses on Engie’s equity story. Our Buy rating was primarily driven by the solid earnings profile of Engie’s network division and a tasty dividend per share with appropriate capital allocation priorities.

H1 Profits

Engie reaches H1 2024 Core operating profit (excluding nuclear) of €5.62 billion, 3% above Wall Street analysts’ estimates of €5.45 billion. Compared to the previous year, EBIT decreased due to 1) lower volumes distributed in France, 2) normalization of market conditions in Germany and the United Kingdom, and 3) lower transit revenues between Germany and France. In addition, Engie’s sales decreased by 20.4% on an organic basis due to normalization of energy prices. Looking at the company’s segment, the GEMS (Global Energy Management & Sales) division’s EBIT decreased to €1.9 billion from €3.1 billion in the first half of 2023. GEMS is a key player in energy management services and provides risk management and purchasing solutions to create value throughout the energy chain. The division supports a diverse clientele of more than 200,000 companies on their decarbonization journey. In 2023, a temporary one-off transaction took place and the company confirmed its core operating profit forecast of EUR 2.0 billion for fiscal year 2024.

Source: Engie H1 Results Presentation – Fig. 1

According to the P&L analysis, Engie’s net profit reached €1.9 billion. Last year, the company suffered a one-off negative incident due to its nuclear reserves. However, after signing the agreement with the Belgian government, Engie’s assets are almost risk-free. There is only a reserve of €100 million for nuclear assets (Figure 2).

Having said that, we report positively on the CEO’s words. She explained how “In a market that is returning to normal, the company once again delivered strong H1 results, allowing us to raise our full-year guidance for 2024. These financial results demonstrate the strength of our integrated model and showcase our operational capabilities.”

Indeed, due to the strong financial results and lower expected recurring net financial costs, Engie has raised its 2024 guidance and is forecasting core operating profit (excluding nuclear) in 2024 in a range of €8.2 billion to €9.2 billion. It had previously been set at €7.5 billion to €8.5 billion (Figure 2). The Visible Alpha consensus was for €8.23 billion. Engie’s net income also rose and is now expected to be between €5.0 billion and €5.6 billion, compared with the previous range of €4.2 billion to €4.8 billion. In numbers, Engie has lowered its net financial cost guidance to €1.9 billion to €2.2 billion from €2.4 billion to €2.7 billion. This covers the two years from 2024 to 2026. The outlook was based on commodity forecasts at the end of June. In addition, the company confirmed its dividend policy with a payout ratio of 65-75% with a minimum DPS level of EUR 0.65.

Fig. 2

Why are we still positive?

1. The company added more than 1 GW of renewable capacity in the first half and is confident of achieving its annual target of 4 GW of average additional capacity by 2025 (Figure 3). The company has 6.9 GW of capacity under construction from 63 projects worldwide;
2. In the first half of 2024, the company completed 800 MW of Battery Energy Storage Solution capacity. BESS is instrumental and competitive in grid reliability, and with the change in renewable energy production, we believe it will play a key role in the dynamic energy system. BESS services are functional to mitigate supply and demand peaks, modernize grid expansion and reduce energy price volatility;
3. As part of our core business, in line with our strategy, we are reporting positively on the increase in transmission, storage and distribution (RAB) tariffs. The French Energy Regulatory Commission has set this and it is in force until 2027;
4. The key to the report is the evolution of the company’s net debt, which reached €45.8 billion, down €0.8 billion by the end of the year (Figure 4). The company also paid a dividend during this period.

Fig. 3

Fig. 4

Correcting estimates and valuations

Following the Q1 results, we forecast sales of EUR 83.2 billion and EBITDA in 2024 of EUR 14.54 billion. Due to higher net financial costs, we have reduced our EBIT from EUR 9.07 billion to EUR 8.97 billion. Following the Q2 results, our operating profit numbers fell exactly within the company’s range (EUR 8.2 billion and EUR 9.2 billion). We therefore see support for our previous forecast. Furthermore, we are not surprised by the positive reaction of the share price, as Engie’s new earnings were not included in the consensus estimates. There were no changes to technical guidance such as CAPEX and corporate tax. We therefore left the EPS guidance unchanged at EUR 1.79. Engie’s equity history remains intact.

In terms of Engie’s valuation, the company is trading at a P/E ratio of 8.37x, and looking at the sector median (Figure 5), Engie is significantly undervalued.

Fig. 5

At a higher level, the MSCI EU Utilities sector does not include earnings growth (figure 6). The MSCI EU sector is flat year-to-date, with Engie shares down about 6%. The sector also underperforms in the MSCI Europe.

Fig. 5

At Lab, we value Enel with a target P/E of 12x. The company is significantly deleveraged, while Engie is currently investing in growth. For this reason, we continue to apply a small discount to Enel’s P/E and confirm a target P/E of 10x, which is in line with EV/EBITDA of 6.5x (figure 6). We therefore value Engie at €17.9 per share ($19.5 in ADR).

Fig. 6

Risks

Utilities, including Engie, face a wide range of technical, operational, commercial, regulatory and political risks. Downside risks include CAPEX delays, given Engie’s ambitious capacity expansion. These new investments are also subject to CAPEX inflation. Compared to nuclear power, renewable energy assets are exposed to weather conditions. For this reason, Engie is currently investing in battery storage solutions. Higher and longer-term interest rates could negatively impact the company’s financial result. In numerical terms, Engie has net recurring financial costs of between €1.9 billion and €2.2 billion.

Application

We see support from Engie’s higher guidance, and more importantly, we continue to see solid execution. Wall Street analysts are likely to price in higher estimates going forward. Therefore, we suggest increasing your position.

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