GDF Suez is a well-diversified global utility, with a solid balance sheet and an attractive dividend yield. The company sees ample growth opportunities in E&P and International Power, while being well placed to profit from the gas bonanza. On the downside, the risk of political intervention remains high, while harsh economic conditions in the EU, excess European power capacity and negative clean spark spreads prevent an outperformance.
Adequate growth opportunities:
GDF Suez has ample growth opportunities and intends to invest € 9-11bn p.a. (€ 6-7bn growth capex) over 2012-2017, mainly in developing regions. The company wants to grow its installed capacity from 117GW in 2011 to 150GW by 2016 (>80% of capacity under construction gas & renewable of which 80% in fast-growing markets) and increase E&P production to 65Mboe by 2014-15 from 55Mboe 2012-2013. 40-50% of growth capex is situated in growing markets and management intends to sell off European assets to finance the upcoming IPR transaction.
Eps forecasts 2012-2013 trimmed by 2%:
While we believe GDF Suez can achieve 2012 guidance for adj. net income of € 3.7-4.2bn (€ 4.0bn KBCSe) and an indicative EBITDA of € 17bn (€ 17.4bn KBCSe), we believe the 2013 consensus numbers might be too high and a risk of further downgrades does exist. We have slightly reduced our Eps for 2012-2013 by 2%.
Valuation:
Management’s clear commitment to keeping the dividend at least stable y/y should appease dividend investors. However, downside pressure caused by an oversupplied European market, an ongoing risk of political intervention, negative clean spark spreads and a persistently large oil-to-gas spread still overshadow the growth potential from International Power (deal 2% accretive on 2013 EPS). We therefore stick to our Hold rating on GDF Suez, and slightly lower our TP to € 20.5/sh (from € 21.0/sh).