Enel Chile rescued by strong hydrological developments (NYSE:ENIC)
Posted on the Value Lab 11/11/22
Enel Chile (New York stock market :ENIC) reports another quarter, but rather than the years of poor results we’ve grown accustomed to, key elements have reversed, allowing for the return of stronger results that could promote the return of a more abundant dividend. Hydrology recovers, the impact on gas prices is reduced and the PPP margin returns as raw materials decline. Overall, we are witnessing a turning point in the cycle for ENIC. It is possible that the price will now recover to a point ahead of the 2021 commodity boom, however, we note the risks associated with the company’s reliance on hydrology. A temporary purchase.
Let’s burn through some of the main changes in Q3.
The evolution of EBITDA partly shows a weak mix at the end of 2021, i.e. when the increase in raw material prices was decimating the results, but also key improvements in commercial conditions for Enel Chile which restore the results.
- PPP sales have seen a recovery, and what this really means is that the negative indexation in the PPA agreements linked to increases in the value of the Chilean peso or the CLP and increases in the copper price and other commodities, which is also highly correlated to the performance of CLP, reversed as commodity prices fell significantly. Copper prices fell, as did energy prices in general, including gas.
- Gas is an important supplemental energy source for the Chilean energy system when hydrology fails. High gas prices in previous quarters, when droughts also occurred, forced ENIC to procure gas at horrible prices. These effects are much weaker this quarter, on the one hand, because gas prices declined considerably but also due to improved hydrological conditions.
- Rainfall in the basins has risen from devastating near-drought levels to multi-decade highs this year with an incredible inversion of environmental conditions. Much of ENIC’s capacity is hydroelectric, so the favorable hydrological conditions enhance these assets and critically eliminate the need for natural gas or other supplemental energy supplies at a time when energy prices are very high. These hydrological conditions limited the negative effects on spot gas prices for ENIC as well as the addition of additional EBITDA from power generation from hydroelectric assets.
ENIC looks really solid now, and finances are recovering to levels that at the current pace are almost in line with pre-COVID levels. It also promises the return of the dividend, should these results look sustainable with the economy balancing out at these levels. With 2019 dividendsthe current yield would exceed 10%.
The problem is that the company still depends on constant hydrological conditions, which are not guaranteed in South America. Additionally, commodities cannot rebound, especially copper, which has secular support due to the EV transition. If copper and other commodities rise, the margin in PPA deals will decline as negative indexing returns, and we would be back to a disaster situation in 2021. With CPI seeming almost in the lead, demand could start to return to some of these leveraged commodities, particularly copper, with electronics sees a glut now it could be reversed.
Nonetheless, ENIC is still priced very low, and some of the political risks that have made the stock have melted. The strong socialist push was actually not popular, and the socialist constitution was pretty firmly rejected, meaning the Pinochet-era constitution is still in effect. This was not planned after the toll road protests. The socialist thrust is much weaker anyway than previously thought. Although still filled with unpredictable elements, ENIC looks good. At the current run rate, PE is actually less than 5x. Not bad at all.
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