EDF: BUY

DEEP VALUE WITH ATOMIC UPSIDE

EDF break up talk in French press. Similar to RWE/IGY

” scenario has been circulating for many months separating EDF’s nuclear activities from the rest of the group, namely renewable energies, energy services and 27 million customers. Without going as far as a dismantling that would raise a sling of trade unions, the idea is to isolate the 58 nuclear reactors in a separate structure, which would remain owned by EDF. The aim would then be to regulate nuclear power generation and ensure reasonable profit”

http://bfmbusiness.bfmtv.com/entreprise/l-idee-de-bercy-pour-sauver-edf-1309942.html

If this is the case it is a screaming BUY. We see 50% upside from here.

See our original thoughts. Currently +22%, just the start

 

EDF: BUY
DEEP VALUE WITH ATOMIC UPSIDE


Thursday • 4th May 2017 • 11:33


Target Price €12.3 (upside of 50%)
Blue Sky €15.2 (upside of 85%)

EDF produces, transmits, distributes, imports & exports electricity though nuclear power, coal, gas and renewable. EDF generates 90% (75% nuclear) of the French consumptions and is 85% owned by the State.

EDF has to spend 51bn by 2025 to extend the life of its nuclear fleet by 10-to-20 years. The only viable way to achieve it is through an electricity price increase. The new French President, should do it early in their mandate to avoid being faced with a huge bill/bailout in a second mandate. The recent capital increase and assets sales will only plug the hole for a couple of years. EDF is FCF negative to the tune of 3bn/yr, 2.2bn with the government taking the dividend in shares. As Minister of the Economy, Mr. Macron has shown his understanding of the difficulties faced by the company during his address to the parliament in March 2016. He stated that EDF is faced with asymmetric returns due to the capped upside and no floor! If nothing changes, consensus is looking at earning declining by c50% over the next 4 years! This would make EDF’s balance sheet even more stretched and further dividend cuts to c25c/share.

A 5/6% price increase would make the company FCF neutral. Politically, the new President could easily make the case for higher prices as the French have one of the lowest electricity bills in Europe and it would also keep the French as the industry leader. Power prices have dropped below the regulated tariffs, i.e., both competitors and customers can arbitrage against EDF. Another way to achieve higher prices is through a carbon price floor which Mr. Macron was in favour as Economic minister. A 15 euro carbon price floor (vs. 4.6 today) would make the company FCF neutral. Mr. Macron has been an advocate of a carbon floor price of 100€/tCo2 by 2030 and closing all coal-fired power plant during his first term. On May 3rd, a source close to Macron, stated that he was in favour of a UK style CfD subsidy and extending the deadline for reducing nuclear share of power generation beyond 2025. Current plans are for a reduction to 50% by 2025.
EDF is key to France and Europe’s electricity as it is one of the largest suppliers and assures price stability. Last year, EDF’s outages showed how interdependent Europe has become. This should make it easier to pass through price increases at the French and European levels or re-regulates the market to allow fair economic returns.

As soon as EDF earns a fair economic return, the stock should trade at its book value of 15.16/share vs. a discount of c50% today. If one were to replace EDF’s nuclear plants (63.1GW), it would cost between 100bn (36.5/share) and 400bn (146/share). At current share prices, one is paying “only” 3% of EDF’s nuclear fleet replacement value at the top end.

If nuclear is not an option, the company could replace its fleet with renewable which would cost as much and lastly it could decide on gas fired plants which would cost “only” 44bn but France would lose its energy independence. The last option is unthinkable has it would annihilate a drive for independence started by De Gaule after WWII. Hence, whichever way the government decide to go (nuclear or renewable) it will require a price increase to insure the viability of EDF. I would lean for nuclear, has it gives the French a strong R&D base which benefits both civil and military sectors.

Target Price €12.3 (upside of 50%)
Blue Sky €15.2 (upside of 85%)

EDF