Engie: For Now, We Wait And See

Here at the Lab, today we are back to comment on Engie (OTCPK:ENGIY). Since our last update, Challenges For Mature Businesses, the company has been flat at the stock price level. We estimated a target price of €15.3 per share ($16.5 in ADR), providing a neutral rate, and Engie's current stock price is pretty in line with our twelve-month forecast. However, as noted, with a 9% Yield On 2023 Numbers, the total return is double-digit.

Before looking at the Engie strategic plan, we deep-dive the H1 results. Firstly, we look at how results were compared to expectations. We are impressed that the company delivered solid numbers (up from H1 2022) and reaffirmed its guidance, which was already upgraded. Notably, we report how the nuclear deal's net debt impact is less than expected (€4.1 billion vs. €4.5 billion). Economic net debt/EBITDA is now at 2.7X and already factor the additional charge for the nuclear deal. Despite a normalized energy price environment, the GEMS division (energy marketing & trading) reported €2 billion in results. Post H1, we believe that investors would favorably see the company thanks to better margins, cash flow evolution, and a balance sheet in better shape.

Source: Engie Q2 results presentation

Why are we still Neutral?

On a positive note, Engie confirmed its payout ratio at 65%-75% of Net Recurring Income group share with an annual dividend floor of €0.65. In our estimates, we implied a DPS of €1.24 and €1.14 for 2024 and 2025. The company yield is set at an average yield of 7.85% for the next two years.

Conclusion and Valuation

At first sight, Engie's valuation looks attractive, with an 8x P/E and a 7.5% dividend yield. Looking at the sector, Engie is at least 20% cheaper, and this discount has grown lately. Here at the Lab, we would like to see a simplified business model and a solid execution before changing our valuation to a buy rating. We like energy transition exposure and believe Engie is in the right direction. In our estimates, Engie's wind & solar activities are on track to achieve a 30% EBITDA by 2030, but the group's strong pipeline needs to be expected. Therefore, we continue to remain neutral. Our internal team is more supportive of Enel with a disinvestment plan, a higher exposure in renewable energy (already in place), a valuation discount, and a simplified model with less earnings volatility, given many exits in riskier countries.

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