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It’s going to be all about the power this winter, with a premium on energy and we suspect even more of a premium on green energy. The perfect storm for energy markets is here.

Some companies are more alive to this than others – E.ON [EURONEXT: EON] said today it is to invest €27bn in the energy transition until 2026, with €22bn for the expansion of energy networks and €5bn for the expansion of the customer solutions business.

The investment in the networks will see the regulated asset base grow by at least 6% annually, and earnings growth by 3% to 4% annually. E.ON’s energy networks currently have a RAB of €35bn and are home to about one million distributed renewable generating facilities.

In the next five years, E.ON says it expects to have to integrated 35 to 40GW of additional renewables capacity.

Digitalisation is going to be important for E.ON

Digitalisation will also play a key role in making networks more efficient and also enabling them to manage the growing proportion of renewables feed-in as effectively as possible. Through 2026, E.ON will invest about €2bn in its network business for the purpose of digitalising network planning, monitoring, and control.

Mark Nelson, Senior Equity Analyst at Killik & Co said “The strategy will see a ramp-up in investment which will be weighted towards its energy networks business, and which will see increased levels of digitalisation across the whole of the company. The investment is expected to generate annual growth in the regulated asset base of at least 6% annually, and combined with cost savings of roughly €500m through 2026 and the synergies from the innogy integration, is expected to produce group earnings per share growth of 8% to 10% per annum.”

Killik are Buy rated on E.ON shares as a play on the increased investment in and digitalisation of electricity networks in order to support the energy transition. The shares trade at a price to December 2022 earnings ratio of 12.3x and offer a prospective dividend yield of 4.6%.


E.ON projects increased earnings from energy sales

In the Customer Solutions business, E.ON says it plans to increase the earnings of its energy sales by 3% to 6% per year through 2026, with digitalisation a decisive factor here also as the company plans to have implemented a digital platform in all markets that will provide efficient and customer-friendly service to all customers.

E.ON also intends to install about 5,000 new charging points through 2026 and to increase its investment in climate-friendly distributed energy infrastructure solutions. E.ON also see potential in the scale-up of the hydrogen economy, and intends to expand its activities in this area.

Overall, the investment plan is expected to produce earnings per share growth of 8% to 10% per year on average through to 2026.

Other financials to keep an eye on

The company reaffirmed its target of having a strong BBB rating and a debt factor of 4.8 to 5.2 times EBITDA.

For the financial year 2021, E.ON plans to propose a dividend of 49 cents per share, corresponding to 4% growth to the previous year. From then to 2026, the company intends to increase its dividend by up to 5% per annum.

The investment plan includes further optimisation of E.ON’s portfolio, with divestments of business that do not fit into its strategy expected to generate proceeds of roughly €2bn to €4bn in the next five years.

Related

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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