Kepler cuts Endesa to “reduce” on weak regulation, warns of political risks

Investing.com -- Kepler Cheuvreux downgraded Spanish electric utility company, Endesa (BME:ELE) to “reduce” from “hold” even as it lifted the Spanish utility’s target price to €23.70 from €22, warning of a 10% downside from its current level. 

The brokerage pointed to regulatory risks, capped growth potential and political sensitivities as reasons for the cut.

“We increase our TP by 8% to EUR23.7 due to model finetuning plus a EUR1bn valuation assigned to the gas business, implying c. 10% downside potential. We downgrade the stock from Hold to Reduce,” the analysts said. 

Endesa shares last closed at €26.45, valuing the company at €28 billion. The stock has climbed 27.3% year to date and touched a 52-week high of €27.87.

The downgrade follows changes in Spanish energy regulation. At its Capital Markets Day in November 2024, Endesa assumed a 7.5% rate of return for the 2026-31 period alongside capital expenditure plans 45% above the prior three-year cycle. 

But the Comisión Nacional de los Mercados y la Competencia later proposed a 6.5% return with “no incentives for anticipatory capex.” 

“The draft remuneration proposals issued by the CNMC have been disappointing,” the brokerage said. 

Kepler Cheuvreux said this shift could reshape Endesa’s investment priorities. “ In this context, we believe it would be logical for Spanish Distributors (including Endesa) to freeze their capex plans over the next few years, aiming to just preserve the RAB at current levels,” it said.

The brokerage added that with underleverage and full exposure to Spain, the company might redirect focus to higher shareholder distributions. 

But “the combination of flat capex and growing returns to shareholders could lead to a potential political backlash,” it warned.

Financial forecasts remain largely intact. Sales are projected at €22.3 billion in 2025, rising slightly to €22.8 billion by 2027. 

Adjusted EBITDA is expected at €5.46 billion in 2025 and €5.59 billion in 2026, with net profit forecast to ease from €2.01 billion in 2025 to €1.96 billion in 2027. 

Adjusted earnings per share are seen declining from €1.90 in 2025 to €1.85 in 2027.

Dividend per share is expected at €1.31 in 2025, €1.30 in 2026 and €1.28 in 2027, translating into a dividend yield of about 5%.

Endesa’s balance sheet shows net financial debt of €9.95 billion in 2025, increasing to €10.82 billion in 2027. 

Leverage remains moderate at around 2x EBITDA, while gearing is projected to ease from 102.6% in 2025 to 98.8% in 2027.

 Free cash flow is seen recovering to €1.21 billion in 2026 after a subdued €151 million in 2025.

While the downgrade underscores regulatory and political challenges, Kepler Cheuvreux said that “part of the potential improvement is already discounted (the stock is up 27% YTD).”

Endesa, 70% owned by Italy’s Enel, holds about 30% of Spain’s mainland generation and 42% of distribution, with significant exposure in the Canary and Balearic Islands.