Yesterday morning we hosted a breakfast meeting in Brussels with the CEO of GDF Suez, Mr. Gérard Mestrallet. Below we present our feedback:
Is the utility model broken?
The old utility model is under pressure as a result of production overcapacity, unbundling, increased competition, renewables and decentralization. Hence, we find it normal that GSZ wants to change its model and become an “energy partner” for its customers. Energy Services could become an important pillar with spill-over effects on the other divisions. This is a logical development.
What is the reason behind the € 11bn disposal program?
The € 11bn disposal program 2013-14, on top of the € 5.0bn p.a. over 2010-12 does not only reflect the changing nature of the company, and its shift to growth segments, but it is also intended to strengthen the balance sheet. Although rational, we believe it’s mainly a necessity reflecting pressure in Europe, rating agency requirements and dividend coverage.
Is the dividend sustainable?
We remainwary whether GDF Suez will be able to maintain its dividend of € 1.50/sh (next distribution confirmed), especially when they would again start to consider acquisitions. Management hints for a “dynamic dividend policy” but could not confirm whether the dividend would remain at least stable over a 5-year timeframe. The dividend is barely covered by Eps (it is by FCFps), but disposals (at EV-level!) are just covering growth capex. We believe management will await the outcome of the S&P sector review, before making further decisions.
How much of the cost savings program can be retained?
The cost savings program of € 3.5bn (P&L impact) should have a net impact of € 0.4bn by 2014 and € 0.7bn by 2015. This shows that most savings are eliminated by inflation and/or given back to customers. Despite this net contribution, management still guides for net income of € 3.1-3.5bn over 2013-14 vs. € 3.8bn over 2012. Only by 2015 “real” growth should return.
Will they get on board of the shale gas train?
We believe it’s a logical step for GSZ to position itself in the European shale gas market, when and if it will come. The company has already taken various positions. Still, we believe this could only offer medium term benefit since over the short term, indirectly, US shale gas (via coal exports which put pressure on European electricity prices) puts pressure on CCGT profitability.
Net earnings forecasts & conclusion:
We expect GSZ to book an adj. net profit of € 3.2bn over FY13 and € 3.5bn over FY14. This compares to guidance of € 3.1-3.5bn. For FY15 our forecast comes in at € 3.9bn while our numbers exclude a € 0.3bn nuclear tax. This reflects a P/E 2014 of 11.3x (9.9x adj.) and a 10% gross dividend yield. We remain cautious on the stock given the challenging European environment, the ex-growth phase (2013-14) and the fact that we remain uncertain whether the dividend policy can be maintained.