Enel Chile Benefiting From PPA Indexation

May 18, 2022 11:00 AM ETEnel Chile S.A. (ENIC)3 Comments2 Likes

Summary

  • When the commodity boom was in full force, especially with copper which also drove the CLP value, indexation in PPAs was hurting company margin.
  • These effects have reversed as the commodity boom cools, and this could continue with rate hikes addressing inflation.
  • Gas price increases are now the main issue for power CCGT plants, but the worst of these effects, interacting with the hydrology crisis, have abated.
  • Results are finally turning around, and the list of analysts covering the stock has shrunk, maybe now is finally the time to take a position in this extremely beleaguered stock.
  • Looking for a helping hand in the market? Members of The Value Lab get exclusive ideas and guidance to navigate any climate. Learn More »

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Originally published on the Value Lab 14/5/22

Enel Chile (NYSE:ENIC) is a company that has burned us as investors, thankfully not as much as it could have. Indeed, the company was positioned against almost every aspect of the commodity boom. Initially, the effects were with negative indexation in PPA (purchase price agreements), that were very poorly negotiated in hindsight, and then the hydrology crisis coupled with growing CCGT energy production put them at odds with the gas rally. The former of these effects has finally reversed, and the second should reverse eventually as well. We think that perhaps we can benefit from our longitudinal coverage of the company, as things appear to be cycling for the better with Enel Chile. While there are some risks, we come out with a buy rating on the company now.

Salient Q1 Points

We will focus on the most important elements of the recent earnings, which have revealed potentially very valuable information. EBITDA has finally turned around from negative to positive growth. The effects of the PPA indexations, which were negative during the commodity rally, have finally turned. What were these effects? Essentially, many of the negotiated PPAs were negatively indexed to the level of the Chilean Peso, which in turn is indirectly linked to key export copper, as well as directly linked to commodity prices including copper.

CLP value

CLP devalues after 2021 peak (Google Finance)

With copper having rocketed on account of the goods boom in 2021, and also the furthered renewable push, the PPAs worked heavily against Enel Chile in 2021. These effects are finally reversing now that copper prices are calming down, and the general commodity boom is taking a breather on rate hikes further targeting inflation to the detriment of the world economy. The relative unpopularity of renewable right now might be contributing as well to the copper cool off at least.

EBITDA ENIC

EBITDA evolution (Q1 2022 Pres)

The spot price effect continues to be the main negative effect, where it offsets the benefits from PPA indexation and new PPAs negotiated. This is a more protracted issue that is accounted for by the Ukraine war, targeting fuels for thermal generation and gas generation of electricity. So higher coal, crude and gas prices are the issue here, and this is something that can only be solved by better hydrology results, where the rainy season starts next quarter. If hydropower production improves this year compared to droughts in 2021, the dependence on now very expensive commodities for generation should decline to the benefit of the company. These are weather effects that cannot be reliably bet upon, but in the first month of the season, the basins are filling much more quickly than last year.

hydrology enic

Hydrology Picture (Q1 2022 Pres)

Summary Remarks

The final dividend has been approved at 26 CLP per share, which on the Chilean market has us able to calculate the yield at 1%. The same yield applies to the US listed ADR of ENIC. That there's a dividend at all is a bit of a surprise given the commodity situation. The EV/EBITDA is around 5.5x based on our forecast of a potential 30% increase in EBITDA for the FY 2022. We think that the EBITDA could grow further in 2023 to get the forward EV/EBITDA multiple at around 3.9x, which is very cheap. ENIC, despite being a utility, ends up being a very cyclical stock due to the explicit commodity exposures in the PPAs and in their generation portfolio. Overall, we think the cycle is reversing, and the company which saw major declines in EBITDA might start seeing a recovery into 2023, even in spite of greater economic challenges posed by the stagflationary environment. While there are risks that the hard economic environment might create issues for ENIC on account of a socialist government protecting consumers and limiting the ability for the company to flex its advantages as a utility, the commodity effects should be independent of these political concerns, and this is what has driven the stock down these last years.

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This article was written by

Author of The Value Lab
A long-only voice with eclipsing growth through 2020 and 2022 bear markets.

Valkyrie Trading Society seeks to provide a consistent and honest voice through this blog and our Marketplace Service, the Value Lab, with a focus on high conviction and obscure developed market ideas.

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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