European utility analysts see strong earnings, possible guidance upgrades in Q2

Equity analysts expect most of Europe's major utilities to continue their strong start to the year as they prepare to announce their second-quarter earnings, with some even floating the possibility of full-year guidance upgrades.

While many companies may see earnings decline year over year, with power and gas prices in Europe having receded from the highs of summer 2022, those with merchant generation or energy trading divisions will continue to reap the benefits of prices still at levels above the long-term average.

"We generally expect [the first half of 2023] to be ahead of [the first half of 2022] although the year-on-year comparison is likely to be less dramatic [compared with 2021]," analysts at CreditSights said in a July 20 note.

Looking at second-quarter earnings, the S&P Capital IQ consensus estimate has a year-over-year EBITDA decline at Europe's largest utility by market capitalization, Iberdrola SA. Still, analysts at UBS said the company is on track to deliver its full-year guidance.

The lower power and gas prices may also hit second-quarter earnings at Ørsted A/S, whose first-quarter earnings were already down compared to the same period in 2022. Yet analysts said the green energy major's fundamentals remain strong as it targets 50 GW of renewables capacity by 2030.

"We continue to believe that the current share price barely reflects the group's 2030 targets let alone its longer-term growth opportunity," analysts at Berenberg said.

Guidance upgrades possible

Some companies could be in line for full-year guidance upgrades, according to CreditSights, picking out RWE AG, EnBW Energie Baden-Württemberg AG and EDP - Energias de Portugal SA as possible contenders.

With power and gas prices still higher than normal, German duo RWE and EnBW saw strong year-over-year earnings growth in the first quarter driven by their conventional generation and trading businesses.

Meanwhile, EDP's first-quarter earnings doubled as hydropower output normalized compared with 2022. While Europe has faced hot and dry conditions in recent weeks, EDP's hydro production in Iberia in the first half is still up 68% year over year, CreditSights noted.

Guidance upgrades in the second quarter would follow in the footsteps of France's Engie SA, which on June 30 upgraded its 2023 net recurring income group share guidance to a range of €4.7 billion to €5.3 billion. The company's previous range was €3.4 billion to €4.0 billion.

The upgrade reflects solid performance by Engie's Global Energy Management and Sales (GEMS) business, where a strong first quarter continued into April and May.

Analysts at Berenberg said the guidance upgrade shows Engie is "equipped to deliver in a difficult market environment," even if the GEMS performance is temporary.

Engie also signed an agreement June 29 with the Belgian government defining the terms of the 10-year extension of two 1-GW nuclear reactors in the country.

The deal "removes an important distraction to the Engie investment case," according to the Berenberg analysts, who added that the company's share price — while reacting positively to recent events — still has further to go.

New Enel CEO's strategy

Analysts at UBS said a guidance upgrade could also be in the cards at Spain's Endesa SA, which they said had already achieved 60% of its net profit target in the first half.

Meanwhile, the analysts expect Endesa's parent company, Enel SpA, to slightly exceed its €20.4 billion to €21.0 billion guidance range for full-year ordinary EBITDA, on the back of expected disposal proceeds in the second half.

Enel is targeting €21 billion of disposals by 2025 to help simplify its structure and reduce net debt. About €18 billion will be undertaken by the end of this year, with some €5.7 billion already completed in 2022.

Europe's second-largest utility is entering its first earnings season under the leadership of Flavio Cattaneo, who replaced longstanding CEO Francesco Starace in May. Cattaneo, who was previously CEO of Italian grid operator Terna SpA, is seen as a safe pair of hands at Enel, but analysts said his appointment also creates uncertainty about the company's future strategy.

Enel's second-quarter earnings call is expected to shed some light on the matter, ahead of more detail at its capital markets day in November.

"While it is early days for the new team, we would be surprised if they do not seek to set out some kind of initial direction for their tenure, which could include commentary on cost, disposals and dividend policy," UBS analysts said.

Analysts at Barclays said the appointment of a new CEO gives Enel "an opportunity to accelerate the removal of historical constraints on growth." That includes reducing the number of markets in which it is present, refocusing on hard-currency markets, introducing regular capital recycling and replacing expensive minority interests with cheaper debt, the analysts said.

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