Battered Italian utility going cheap

published 13 September 2012

Utilities are a safe haven for risk-averse investors. Populations are expanding, more people are living in cities and global demand for electricity is rising. Due to regulation, returns tend to be predictable, allowing bumper dividends to be paid. So why have shares in Enel, Italy's largest power firm, tanked over the past 15 months, putting the stock on a forward p/e ratio of just 7.3 with a 5.5% dividend yield?

It's largely been down to the ongoing crisis in southern Europe. Enel has net debt of €47.6bn, equivalent to 2.9 times EBITDA. If the central bank doesn't bring down sovereign spreads, Enel's debt costs could rise from today's 4.9%. Yet the average loan maturity is about 6.5 years, with 68% paying a fixed rate. This should give Enel room to bring the debt load down, which is what CEO Fulvio Conti is doing.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Enel's merger with Spain's Endesa has been completed and €1bn of synergies were extracted in 2011. Weaker demand in Italy (32% of sales) and Iberia (33%) should be offset by its operations in Latin America (19%), Russia (8%) and eastern Europe (8%). It also benefits from not being dependent on a single fuel source, supplying power to 61 million customers from its renewable (28%), coal (32%), nuclear (14%) and gas/oil (26%) assets. There are opportunities to further reduce costs by re-negotiating expensive gas supply agreements with Russia and investing in new smart-grid technology.

Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.

Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.

Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.