We have fully revamped our investment case on Electricité de France (EDF) in the light of recent improvements on the regulatory front. After a long period of scepticism about the stock, we believe that the group will come back into the big league and unlock its hidden value. Positive developments on the restructuring side are offering room for growth, while the prospect of having renewable expansion backed by network/nuclear activities is full of promises. Such potential remains unpriced.
Following an extensive refurbishment of our valuation, based on the annihilation of the group’s integrated structure and its improved prospects, we have changed our opinion on EDF.
Reasons for believing
Our valuation has been completely rebuilt and detailed to value each asset at its true value and avoid any hidden value linked to the integrated structure of the group. We consider this latter as value-destroying since it prevented EDF from moving towards the successful model of expanding in renewables backed by its network cash-cow activities. In particular, we changed our valuation methodology for the regulated activities in France, from a RAB-based to an EBITDA multiple-based valuation, which better reflects the strong margins of these activities (in the range of 30-33%), their risk-free profile and their sustainability over time.
EDF Renewables now accounts for 9.6% of total EV, a conservative but realistic view, in line with peers’ multiples (12x EBITDA). This also leads us to increase our short- and mid-term metrics as the generation activities are well-oriented to benefit from the increasing power prices and the balance sheet from its positive exposure to increasing interest rates (provisions).
In all, we see a general improvement in expectations about EDF’s hot buttons: the Hercules project (whose name should no longer be spoken), a new regulation to replace the current ARENH reform, and the inclusion of nuclear in the EU’s green taxonomy.
At the current share price, the stock does not reflect the positive developments of recent weeks. The market seems to have a biased propensity to overact to adverse news (additional 6 months requested by the EC in late January) and not to consider the clearing light at the end of the tunnel. In our view, the cautiousness applied by the market to EDF is thus unjustified.
Note also that our new target price does not include the consequences of improved regulations or the restructuring yet. We estimate an additional upside in the range of 50-70% if EDF becomes a renewable major player watered by its network cash-cow and rightly-priced nuclear electricity.
EDF is dead; long live EDF
The Hercules project will remove the discount linked to the integrated structure of the group, even if the final reform is unlikely to be fully satisfying. The prospect of having EDF Renewables backed by high-quality network activities is very promising, not to mention the underlying support of nuclear generation (that could finance ‘EDF Green’ when market prices are above the expected c. €49/MWh new price threshold for the whole nuclear electricity, 17% higher than the current price).
Thus, EDF should find the right balance between the integrated peers’ pattern (Enel, Iberdrola, EDP) and pure-players such as Orsted. In all, a unique case in the European utilities landscape.
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