In a market report, Citi analysts said they don’t believe the premium on Iberdrola (OTC:) (BME) shares is justified by solid earnings growth and high-quality assets.
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According to Citi, here are the reasons they argue that Iberdrola has an unreasonable premium:
- Operational problems have consistently led to suboptimal profits in the US while capital costs have risen.
- The UK chain’s operating RoRE (return on regulatory capital) is below average, supported by funding and tax.
- Limited financial transparency.
With the acquisition of a minority stake in Avangrid (NYSE:) and a significant increase in capital expenditures in the US and UK networks, Citi believes operational support is becoming increasingly important. However, in reviewing Iberdrola’s operating history, Citi notes persistent underperformance, with actual earnings rarely meeting forecasts.
Citi’s report said it was still trying to find a rationale for Iberdrola’s current stock valuation relative to the sector. Their own valuation aside, the market’s SOTP (sum of the parts) valuation technique, which assigns a separate value to each business segment, asset or subsidiary, indicates that Iberdrola shares are trading at a premium of around 60% to their implied value. market value. .
Citi reiterates its Sell rating with a slight increase in target price to EUR 9.6 per share (from EUR 9.5).
Accordingly, Citi is updating its forecasts and estimates to reflect current commodity prices, exchange rates and interest rates, as well as first-quarter 2024 results. They forecast earnings per share (EPS) growth of 3% in 2024.
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