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Chain reaction

26 November 2020 By Christopher Thompson

Fission occurs when the nucleus of an atom is split in two, releasing large amounts of energy. Jean-Bernard Levy may be a step closer to inducing his own value-generating division of energy provider EDF. His company’s shares are up 50% in the last six months, ahead of most European rivals, and a deal over higher nuclear prices would enable him to maintain the momentum.

Utility companies are known for their steady-eddy performance and reliable payouts. Not so EDF, where a sudden pandemic-induced drop in electricity demand earlier this year forced the French power provider to cancel dividends and sparked media reports of a possible rights issue. Narrowing year-on-year sales declines in the third quarter at least give Levy reason to be more cheerful.

More important, however, is an anticipated deal with European Union regulators over better nuclear prices, which account for roughly two-fifths of EDF revenue. At present, EDF gets a set price for around one-quarter of its nuclear output, allowing rivals to either lock in prices or buy more cheaply elsewhere if demand tumbles. The French government, which owns 84% of EDF, wants to introduce a price corridor for EDF’s output, hopefully leading to higher and more predictable earnings.

A favourable deal – which Reuters reported could occur within months – would help tackle the estimated 50 billion euro repair bill for EDF’s nuclear fleet without damaging its financial profile too much: net debt of around 42 billion euros is already close to a toppy 3 times this year’s estimated EBITDA.

It could also lead to a further re-rating of shares. UBS currently values the French power division, which encompasses nuclear, at 57 billion euros including debt, or 6.8 times projected 2022 EBITDA. That multiple could rise to around 10 times if a price corridor was introduced.

A stronger core business might also enable Levy to spin off the fast-growing renewables arm. The average peer multiple for wind, solar and hydro businesses in Europe is about 15 times 2022 EBITDA. That could then give the subsection an enterprise value of 18 billion euros.

Assume EDF’s other utility businesses transferring power via networks maintain their value, which they should, and deduct 106 billion euros of net debt, pensions and nuclear provisions. The new-look group would in theory have equity worth 61 billion euros. That’s two-thirds higher than its current market capitalisation, which implies Levy’s recent high-voltage tear has further to go.


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