EDF: H1 2013 results - Blue sky scenario priced in; risk/reward unattractive
SELL, Fair Value EUR17 vs. EUR13 (-22%)
We initiated coverage of EDF arguing that the free cash flow trajectory of EDF was unsustainable, with the most favourable rescue solutions (the main one being tariff hikes) unlikely to be implemented near term. We now acknowledge i) the settlement of the CSPE, ii) granted tariff hikes, iii) the hybrid issuance, and iv) the release of excellent H1 numbers all have led to lower the probability of our base case scenario near term (dilutive disposals and growth capex cut). Hence, we factor these in our estimates and up our FV to EUR17/sh vs. EUR13. However, we retain our Sell rating as: i) we see fewer and fewer potential catalysts near term; ii) earning risks (mainly tariffs) is now skewed to the downside; iii) most of the 2013 guidance upgrade relates to EUR600m (non-recurring) weather effects (cold and hydro production); iv) we believe the current share price factors in a blue sky scenario understating risks (value creation of EUR100bn of capex by 2020, EUR80bn of liabilities).
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