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.
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.
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.
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.
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.
If you thought our angle on this company was interesting, you may want to check out our service, The Value Lab. We focus on long-only value strategies, where we try to find international mispriced equities and target a portfolio yield of about 4%. We've done really well for ourselves over the last 5 years, but it took getting our hands dirty in international markets. If you are a value-investor, serious about protecting your wealth, our group of buy-side and sell-side experienced analysts will have lots to talk about. Give our no-strings-attached free trial a try to see if it's for you.
This article was written by
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.
DISCLOSURE: All of our articles and communications, including on the Value Lab, are only opinions and should not be treated as investment advice. We are not investment advisors. Consult an investment professional and take care to do your own due diligence.
DISCLOSURE: Some of Valkyrie's former and/or current members also have contributed individually or through shared accounts on Seeking Alpha. Currently: Guney Kaya contributes on his own now, and members have contributed on Mare Evidence Lab.
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.