CEZ held its conference call on the 2Q09 results yesterday afternoon. The main points of the call included the following:
• Unchanged management guidance for 2009 – The management has reiterated its EBITDA and net profit guidance of CZK 90.3bn and CZK 50.2bn for this year despite 1H09 figures being 57% and 63% of full-year forecasts. Market consensus (FY EBITDA at CZK 91.8bn) lends support to our view that CEZ pursues overly conservative policy in setting guidance.
• Lowered production target – CEZ has cut its production target for 2009 by 3.5% to 61.3TWh (+1.4% y/y) due to a reduced utilization rate of coal-fuelled power plants triggered by low spot electricity prices. The company, however, insists on its plan of increasing electricity production in 2009. The new figures still looks a bit ambitious for us as CEZ needs to increase its production by 9.5% y/y to meet the target. This can appear difficult even if CEZ does not face any unexpected outages in 2H09 as it did in 2008.
• Electricity consumption: the worst is over – Economic recession influenced Czech electricity consumption the most in April and May, when y/y drop exceeded 10%. In June power consumption started to rebound resulting in a more moderate annual decline of 6-7%. Consumption of industrial customers showed the biggest drop (-12.5% y/y in 1H09), whilst households provided a pleasant surprise as their consumption increased by 1.8% y/y in 1H09.
• 98.5% of planned production for 2009 is sold at an average of € 61/MWh – 90% of planned production for 2009 was hedged earlier at € 62/MWh, while CEZ kept 10% for trading purposes. In 2Q09 CEZ sold the great majority of the remaining capacity at a price range between €50-55/MWh. As a result, average price for the full year should average €61.1/MWh, higher than our previous estimate of € 60.2/MWh and current baseload price of € 45/MWh for 4Q09.
• 75% of 2010 production is hedged at €58/MWh – CEZ hedged an additional 20% of its planned production for 2010 between April and July. Thus, according to the company, the price for the total hedged volume for 2010 (nearly 75% of total capacity) averages at € 58/MWh compared to current baseload electricity contracts for 2010 at € 47.5/MWh.
• Acquisitions preferred to share buyback – As CEZ sees plenty of acquisition opportunities with attractive valuations, the management fully ruled out the option of share buybacks. Moreover, the mandate for share buybacks will expire in November and if CEZ wants to use this option in the future they have to get the approval of the shareholders at the next AGM. CEZ has not disclose the size of the pool detached for acquisitions but below 1.0x net debt-to-EBIDTA ratio enables the company to spend up to CZK 140bn for acquisitions, according to our calculations. M&A activities are likely to focus on Poland, Czech Republic and Turkey.
• Efficiency program in line with schedule – CEZ management continued to apply tight cost control in the course of its “Efektivita” (efficiency) program. According to the company, CZK 4bn has been spared so far and management expect an additional CZK 3.4bn saving in the remaining part of the year.
• Low risk of provisioning – The management revealed that its does not foresee any significant provision on non-payment of costumers. Since most of the clients are contracted with CEZ in a prepayment structure, in case of non-payment they are removable without any losses and CEZ can sell the generated electricity to other costumers in the region.
• Consolidation of current acquisitions – OSSh (Albania) will be fully consolidated whilst Sedas, Akenerji (Turkey) and Mibrag (Germany) will be incorporated in CEZ financials through equity method.
Our view: We expect positive market reaction on the conference call, as we believe market might feel management’s earnings guidance as overly conservative and suspects earnings upgrades to come.