Last Friday we hosted a roadshow with GDF Suez in Brussels and sat down with CFO Gérard Lamarche (soon to be CEO of GBL), Isabelle Kocher (CFO from 1 October) and Anne Ravignon-Chassagnette (Director of Financial Communication). No genuinely new items were brought to light, but here we highlight some of the key points.
2011 implied EBITDA guidance of € 16.2-16.7bn
Mr. Lamarche was confident for the remainder of 2011 and reconfirmed the goal to reach EBITDA of € 17-17.5bn, dependent on average weather conditions and with no significant regulatory changes. With unfavourable weather having a € 465m adverse impact over 1H11 and a worst case € 340m impact from the French gas retail tariffs, we therefore see implied EBITDA guidance at € 16.2-16.7bn. We stand at € 16.6bn.
IPR & CIC offer diversification against struggling European market
The bullish guidance offered by International Power (IPR) at its CMD convinces us more than ever that the reverse take-over of IPR was a sound strategic move. Over the coming years IPR intends to spend € 3-4bn p.a. in a vast range of possible projects (at double-digit equity IRRs), while the US spreads seem to be moving higher, with ample LNG arbitrage opportunities. Also, the MoU and partnership with CIC should increase GSZ’s exposure to Asia, create new opportunities for joint investments, a strong local network and improve the group’s balance sheet structure. The deal should also allow access to financing whereas in Europe the Group is likely to face a tough financing environment.
Solid balance sheet structure to back both capex and dividends
Since the disposal of € 6.2bn in assets, the portfolio optimization plan is already >60% complete. This should allow GDF Suez to bring its net debt EBITDA to below 2.5x and provide the group with sufficient financial leeway to finance both capex (€ 11bn) and the dividend (= 2010) requirements. The commitment to the dividend could not be any clearer (never cut the dividend, strong BS, 3-years of distributable reserves, diversified). We also understand that the group will not pursue any more large-scale acquisitions.
Regulatory uncertainty remains
GDF Suez continues to oppose an increase in the Belgian nuclear tax to above the currently agreed € 250m. If no agreement is reached in October on the French gas tariffs, in our view it could take until after the French elections to renegotiate a new tariff formula. This could create continued uncertainty although this is well known by the market.
Diversified utility with coupon attached
At a 7.1% gross dividend yield, shares should have reached bottom. Although we acknowledge the political headwinds and adverse macro environment, we believe the solid balance sheet, above-sector-average EPS growth and attractive dividend yield warrant an Accumulate rating. We cut our TP to € 26/sh (from € 28/sh) on the back of a Belgian nuclear tax of € 500m p.a., and a more muted European business environment.