European utility analysts looking for greater visibility from Q3 earnings

European utility analysts expect several players to post higher earnings in the third quarter, against a backdrop of underwhelming stock price performance in recent months driven largely by rising interest rates.

"We expect strong results from power generation companies with hedged sales, continued volatility having benefited trading operations and retail divisions positively impacted ... by falling wholesale power prices," Barclays analysts said in an Oct. 11 note.

The analysts added that the valuations of many European utilities have suffered in the last year, with significant EPS upgrades on the back of high and volatile energy prices not leading to share price outperformance because of concerns over visibility and risks.

RWE AG has been hit particularly hard, the analysts said, with the German power producer's stock price down 7.9% in the last year compared with a 7.5% increase for the S&P Europe BMI Utilities index.

The decline is a result of RWE's strong 2022 performance, "overdone negativity" toward its renewables unit and perceived poor medium-term visibility, Barclays said — factors that lead the analysts to believe that the company's capital markets day on Nov. 28 could be "a major positive share price re-rating event."

Before that, RWE "is likely to deliver good results" in its third-quarter earnings, Deutsche Bank analysts said Oct. 20, as they raised their full-year earnings estimate by about 10%, above the top end of RWE's guidance.

Southern European utilities

Previewing the third-quarter earnings season for European utilities, Deutsche Bank said investors are "overestimating the importance of bond yield moves, while becoming too negative on the thematic outlook for renewables."

"Within the [European utilities] sector we still have a strong preference for integrated utilities, in spite of sharp pure-play drops," the analysts added, reiterating their "Buy" rating on RWE, Enel SpA, Engie SA, SSE PLC and E.ON SE.

Italy's Enel is holding its 2023 capital markets day Nov. 22, where new CEO Flavio Cattaneo is expected to shed further light into his strategy for the company.

Another utility, Spain's Iberdrola SA, could use its third-quarter earnings presentation to once again raise full-year guidance, according to RBC Capital Markets analysts. The company's high-single-digit growth outlook could be upgraded to low-double-digit growth due to higher output and prices of lower marginal cost generation, they added.

The analysts anticipate a weak quarter for Iberdrola's network units in the US and Brazil, while higher supply prices should improve its Iberian energy production and customers business.

Meanwhile, EDP - Energias de Portugal SA could post weaker results in the third quarter, RBC said, partly as a result of lower wind output in Spain. Spanish wind output dropped to 11.2 TWh in the third quarter compared with 12.6 TWh in the year-ago period, according to S&P Global Commodity Insights.

Market design reforms

Utility executives may also use earnings calls to offer thoughts on the EU's electricity market design, after energy ministers came to a general agreement on a reform package Oct. 17.

Morgan Stanley analysts see a "limited impact" on Europe's listed utilities given the agreement is broadly in line with the European Commission's proposals from March.

The agreement includes the need to promote the uptake of power purchase agreements and the establishment of two-way contracts for difference (CFDs) as the primary way to subsidize new low-carbon power generation.

"We think this could lead to more visibility and more standardization in future renewable business models, though we note PPAs and CFDs are already largely implemented on new assets," the Morgan Stanley analysts said.

Among other measures, the inframarginal cap on exceptional market revenues was extended, with member states able to apply the mechanism until June 30, 2024, while ministers agreed to offer more flexibility around the use of capacity market mechanisms.

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