Midstream Engie

Engie has changed a lot over the last 2-3 years, but the French utilities company is only in the middle of its long and thorough revamping process. After the ousting of Isabelle Kocher and the end of the asset-stacking strategy, the group has unveiled its green-tinted, asset-heavy roadmap for the coming years. Simplicity would be the new watchword. Lack of recognition as well? Engie (-23% since end of February 2020) is lagging its integrated peers (-1%), underperforming the recovery. However, we like the new strategic direction and foresee a promising outlook.

Engie lags integrated peers

Simpler means better

Adding is easy, pruning less so. Long considered a complex and growth-stymying pile of assets, with little or no synergy, the group engaged in precipitated disposals. The divestment of its equity stake in Suez, for €3.4bn in cash (and €1.8bn in pre-tax capital gains), was a first and essential step forward. But things have clearly accelerated with the appointment as CEO of Catherine MacGregor on February 2021 who, even though she has to implement the strategy defined by Jean-Pierre Clamadieu, the board chair, has instilled a new dynamic. The sale of Engie’s 60.5% stake in Engie EPS and half of its 40% stake in GTT, or the strategic review over Endel, make this point.

But the cornerstone of its operational simplification is the sale of Bright. These multi-technical service activities account for c. 74k employees, €12bn in revenues and approximately €400m in operating results. Bright is the epitome of Engie’s complexity and asset-stacking strategy weighing on profitability, where 40% of employees generates 20% of revenues and less than 10% of operating results. The bidding process is expected to begin this month and to be completed by H1 22. In all, total proceeds should amount to €4-6bn (10-15x EBIT), i.e. half of the total disposal plan in the range of €9-10bn. Several prospective buyers are already known, e.g. the French SPIE and Bouygues, both with allies (mainly PE funds). The other option being considered is a listing of the entity, but this remains unlikely.

In all, Engie is targeting a simpler organisational structure with clear accountability, from 25 to four business units, from 70 to less than 30 countries as its geographic footprint. That should help investors better understand and value the company which is moving towards the already established and successful model of renewables expansion backed by the network cash-cow.

Well-balanced green transition

The heart of Engie’s transition and the ultimate goal of its asset rotation plan is thus to move from complex, labour-intensive activities to an infrastructure-based, capital-intensive model. The utility sector is currently subject to a capacity-driven race, where companies are using almost-costless debt to massively invest in renewables. EnelIberdrolaEDPOrsted and Erg have unveiled biggish investment plans over the last few months. Engie wants its share.

Engie’s investment plan vs peers

The new strategic orientation was released on May 2021. In a nutshell, a progressive commissioning of 3GW additional RES capacity in 2021, 4GW/year in 2022-25 and 6GW/year in 2026-30 will raise installed capacity by 2.6x. We estimate the annual green capex until 2025 at €5.4bn to achieve this target (on which €15-16bn until 2023 in the group’s guidance). We particularly like the technology breakdown of the plan, well balanced between solar PV (less capital-intensive, quicker consolidation), onshore wind (high-quality assets, high EBITDA/capex ratio), and offshore wind (strong EBITDA/MW ratio, appreciated by investors). This is actually key as utilities have to find an impossible balance between additional capacity, profitability, capital intensity and market expectations. Note that 1MW of offshore wind contributes 5x EBITDA/MW vs solar PV and 3x vs onshore wind. On the other side, it is 140% more capital-intensive than solar PV and 70% more than onshore wind.

Renewable technologies’ insights

Engie broke up with its peers by deploying comparably rather balanced, realistic and even conservative investment plans. By investing 0.87x its market cap in green capex by 2025, Engie is halfway between EDP’s aggressiveness (1.1x) and integrated peers’ ambition (0.4x and 0.5x for Enel and Iberdrola). But the most explicit point is the gap between companies’ estimated capex/additional MW and our in-house estimates. In using our estimated capex/MW ratio in the table above, we do believe Engie is conservative in its capacity targets and may exhibit faster and/or stronger renewable acceleration. In all, we estimate Engie’s capex headroom at €2.3bn on its 19GW renewables expansion plans by 2025. Or, in other words, the group could install 1.8GW more than the 19GW planned for the same amount of capex.

Towards a re-rating closer to peers’ multiples

Engie currently trades at 11.8x FY21 P/E, while peers fall in the range of 15-18x. Admittedly, uncertainties remain, especially about disposal multiples, earnings dilution and increasing competition in renewables, not to mention some millstones that become structural (24% French state ownership, Belgian nuclear power and related provisioning). But the group’s transformation and re-focus deserves a fresh opinion.

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