Target Price For GDF Suez: $28 By End Of Year


GDF Suez (GDFZY.PK) is the world's largest independent power producer and operates liquefied natural gas facilities, energy efficiency services and environmental services. Present in over 60 countries, it employs roughly 219,000 people around the world, and had revenue of 90.7 billion euros ($120.2B) in 2011.

Recent news

-Full ownership of International Power (OTC:IPRPY): Minority shareholders in IP approved GDF Suez offer to purchase the 30 percent that it does not already own.

-GDF Suez opened a trading floor in Singapore to handle the hedging of its exposure to energy prices in Asia.

-As stricter environmental rules led Belgium to raise taxes on fossil-fuel power stations, GDF Suez plans to cut its fossil-fuel powered electricity production by nearly 900 Megawatts, closing two gas units and one unit combining coal and biomass by September 2013.

-GDF Suez has issued a three-part Euro Benchmark Bond. The bond is divided into three tranches of €1 billion ($1.3 b) one maturing in February 2016 with price guidance at 50 to 55 bps over midswaps, one maturing in June 2018 with guidance at 80 to 85 bps over midswaps, and one maturing in February 2023 with guidance at 115 to 120 bps points over midswaps.

2012 and upcoming years guidance

GDF Suez 2012 financial objectives assuming average weather and stable regulation are the following:

• EBITDA of €17billion ($22.1 b).

• Net recurring income group share of €3.5-4.2 billion ($4.6-5.5 b).

• Gross Capex around €11 billion ($14.3 b).

• Ordinary dividend equal or superior to 2011.

• Net debt/EBITDA ratio less than or equal to 2.5x.

In my guidance, the French utility should offer limited downside and promising growth prospects.

I have considered an EBITDA of €17.2 billion ($22.3 b) and an Operating Profit of €9.5 billion ($12.4 b). GDF Suez should benefit from rising gas prices (up to 5%) in the second half of 2012. Gas prices charged by the group are set by the French Government and the procurement costs (which are for the most part oil-linked) of GDF Suez have to be fully reflected in consumer prices. The French Government has frozen gas prices over the second half of 2011 but the Council of State challenged this decision and confirmed that prices should reflect costs, leading a 4.4% price increase as of January 1, 2012.

Moreover, I expect a Net Income of €3.9 billion ($5.1 b) for the FY 2012, negatively impacted by rising financial expenses due to a debt increase (+$13 billion in gross debt). For the next years, I anticipate an improvement of the earnings profile thanks to more exposure in emerging markets. The company continues to boost its liquefied natural gas (NYSEMKT:LNG) business in Latin America and in Asia. GDF Suez has been supplying LNG into China, India, Japan and South Korea and is set to begin supplies to Malaysia's first LNG import terminal. Besides, recent results from International Power and Suez Environnement (OTCPK:SZEVF) have confirmed GDF Suez's continued progress outside Europe.

Furthermore, GDF Suez will be hit by the Belgian government's decision to close the three oldest reactors by 2015 as well as measures to encourage competition in the Belgian electricity market. Then, the net income could be affected by possible tax increases to reduce public deficit. Despite an unfavorable economic environment in Europe and the possibility of a political turning point in France and Belgium in energy policy, GDF Suez should mitigate these drawbacks thanks to a lower exposure to Europe.

The cash flow statement will be impacted mainly by high Capex levels: $13.5 billion in 2012 and 10% of revenues on average over the 2012-2016 period. I anticipate an increasing FCF yield over the period to 15.3% in 2016 in order to cover the Capex. Assets disposal will also enable GDF Suez to mitigate the Capex impact. Dividends and reduction in debt are other key assumptions in my forecasts. I consider the company to reduce its debt by 2014.

The balance sheet remains strong and the company has breathing space to manage its debt with a Net Debt/EBITDA below 2.5x over 2012-2016 and set to fall to 1.7x in 2016. I expect the French utility to cut its debt in the upcoming years thanks to its Free Cash Flow and its cash of $29.7 billion at the end of 2011.

Valuation and a target price of $28,2 by the end of 2012

My target price of $28.2 by the end of the year is the result of a DCF Valuation (terminal growth of 2%, long-term EBIT margin of 11% and a WACC of 6.55%). This target price offers a 36% premium considering the current price of $20.8. It is a good bargain and it is a good opportunity all the more so as the share is considered as a defensive stock in case of economic turmoil.

The sensitivity of my valuation to variations in the rate of growth to infinity and to the WACC is summarized in the table below.

Its current P/E of 9.8x is below its 5-year historical median. I think the 2012 share performance of GDF Suez is out-of-sync with its operating performance.

The peer analysis compares GDF Suez with Electricité de France (OTC:ECIFF), RWE (OTCPK:RWEOY), E.ON (OTCPK:EONGY), Enel , Fortum (OTC:FOJCF), Iberdrola (OTCPK:IBDRY) and Centrica (OTCPK:CPYYY).

Its current valuation is underpinning my buy recommendation with a P/E ratio 2012e of 9.8x, a EV/EBITDA ratio of 6.0x and an attractive dividend yield of 9.1 % (superior to that of its principal peers such as EDF, E.ON and RWE).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.