Enel’s Industry-Leading Revival Finds No Love From Investors

Francesco Starace
Enel CEO Francesco Starace speaks during an interview in Rome. Photographer: Alessia Pierdomenico/Bloomberg

Francesco Starace increased profits at Italy’s biggest power company since he became chief executive officer of Enel SpA and that has analysts anticipating better earnings from his continued efficiency. Investors aren’t showing such enthusiasm.

While Enel has the highest price-to-earnings multiple among its peers in Europe, the ratio based on earnings estimates for next year is below the industry average, data compiled by Bloomberg show, revealing shareholders’ lack of confidence in analyst forecasts.

“It will take twelve to eighteen months for us to get the full message across,” Starace, 59, said in an interview at his Rome headquarters. “Investors need facts. If you can give them clarity that the debt is being paid, the dividend is coming, and the cash flow is robust, that is what they want.”

Starace, a wiry nuclear engineer with a passion for poetry and road biking -- he keeps a photo of his prized Bianchi on his tablet at work -- has been selling assets, cutting costs, and simplifying the corporate structure since his arrival in May

2014. This includes restructuring Enel’s complex Latin American activities made up of 80 different legal entities.

“Reducing all this complexity is key because it creates confusion and traps cash in the company which needs to be extracted,” Starace said, showing an ownership structure graph with more branches and offshoots than a royal family tree. He estimates it will take him about a year to finish.

Most Interesting

“Enel has one of the most interesting equity stories in the sector,” Oscar Najar Rios, a Madrid-based analyst at Santander Investment Bolsasv, who has a buy rating on the stock, said last week in a note to investors. “It has transformed itself from a quasi-monopoly in Italy to a well-diversified company in Southern Europe, Latin America, and renewables.”

While the stock market has yet to ratify the confidence of analysts, Enel has a halo in the bond market where its securities are outperforming comparable debt with similar maturities and credit ratings, according to data compiled by Bloomberg.

Rios says he sees the Latin American restructuring turning Enel’s Enersis Chile unit into a cash cow, and its Enersis Americas unit, under which the other regional companies will fall, into “more of a growth story.”

Enel’s profitability has been rising faster than its European peers, it has almost three times the sales growth of its competitors, and its indebtedness compared with profit has decreased faster than average.

Stock Falls

Still, the stock has fallen 4.7 percent in the past 12 months, cutting the company’s market value to 39.7 billion euros ($45 billion).

Investor wariness may result from the $60 billion takeover of Spain’s largest power company, Endesa SA, in 2008, a deal that increased Enel’s debt on the eve of the global financial crisis. The utility is also fighting a drop in electricity sales in its home markets of Italy and Spain.

In the first quarter, Enel’s net debt was 39.5 billion euros, mostly in bonds. To reduce its funding costs, the company has been refinancing at lower rates. In January, it completed a

1.4 billion-euro bond swap.

Rising profitability means that Enel’s ratio of earnings before interest, tax, depreciation and amortization to net debt has been falling faster than average among leading European utilities, data compiled by Bloomberg show.

Cash Flow

“There is no right amount of debt, it depends on what lenders will lend you, it depends on what you can pay,” said Starace. “We decided to focus on cash flow generation and deliver that story, at that point debt won’t be an issue anymore.”

The company had 13 billion euros of cash on hand at the end of last year. Starace said the money will be used for growth and to increase the dividend.

He confirmed Enel’s commitment to raise the dividend pay-out ratio to 50 percent of profit this year from 44 percent in 2014, and then to 65 percent by 2018, as outlined in a March strategy presentation.

“We’ll have another strategy presentation in November, to move to a new calendar which we think makes more sense, and to clear up any further doubts,” Starace said.

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