Enagas – BME:ENA

17/04/20

Company Background

Enagas is a company dedicated to the operation and maintenance of gas infrastructures. Enagas receives a canon for the using of its infrastructures, underground facilities and regasification plants. It has its headquarters in Spain, but it also has a presence in eight foreign countries, the most important are the US, Mexico and Peru. 

76% of its benefit comes from Spain, and the rest comes from its participation in other companies.

As a consequence of a cut in the revenues (progressively up to 17%) from its regulated business in Spain due to a new regulation (2020-2026), Enagas took the decision of entering in the US. It along with Blackstone and GIC bought Tallgrass energy LP in 2019 ($6bn cap).

Some companies which are comparable with Enagas in Europe are Italygas, Snam Spa and Fluyx.

What is the business of the company?

Its business is quite simple, Enagas receives a canon for the using of its infrastructures, underground facilities and regasification plants. Consequently, there are two crucial factors to take into account the number of competitors and the amount of natural gas consumed in the area where it has its infrastructure. As Spain accounts for 75% of its business. Let’s break this analysis into two-part, national and international.

In Spain, Enagas’ business is a monopoly, it is regulated, as a consequence, its revenues are quite predictable and only varies depending on the consumption of natural gas.

Internationally, Enagas has participation in several gas companies, which are quite similar to Enagas. The demand for gas in each of its geographies varies depending on its price related to other alternatives and the weather. However, it tends to be quite stable overall.

What is its current situation?

As a consequence of a cut in the revenues from its regulated business in Spain due to a new regulation (2020-2026), which it will make diminish them progressively up to 17%. Enagas took the decision of giving the final step to enter in the US. It along with Blackstone and GIC bought Tallgrass energy LP to have presence in the US. It has entailed an investment of 1000M$, Enagas made a capital ampliation of 500 M€ to pay it. The coronavirus has affected Enagas because of the related diminishment of natural gas demand to produce electricity as a consequence of the shutdown of the industrial activity. However, the decrement in revenue is only forecasted to be around 6%.

How is it prepared for the future?

The use of natural gas is growing a lot, and Enagas is well-positioned in Europe where it has 6 out of the 22 gasification plants. The recent acquisition of Tallgrass will allow it to balance off the diminishment of revenues from the Spanish regulated market.

Valuation

I have valued the company following a DCF model, assuming these hypotheses for the next ten years:

  • COVID-19 will cause a decrease of 8% in demand for natural gas for 2020, after that it will completely recover the 2019 level in 2022. It will increase at 1.5% yearly until 2029
  • CAPEX will increase by 40% from 2019 due to the acquisition of 30% Tallgrass 
  • D&A will increase accordingly to the increment of CAPEX in 2019 onwards
  • The dividends due to international investment will increase from 250 Mill€ in 2020 to 300 Mill€ in 2023, after that they will increase by 1.5% per year.
  • Change Euro – Dollar will remain constant at 1.10
  • Spanish GDP down 8% in 2020
  • The ROIC obtained (6.89%) is bigger than the WACC (5.14%).
  • The terminal value calculation is an average of the perpetual growth and the EBITDA (10x) method

I have also compared the P/E ratio with companies in the sector holding the same percentage of debt

What are the main risks associated with investing in Enagas?

From my point of view, the most significant risk of this investment would be a change in the retribution received from its regulated business (highly improbable as it has just been fixed for the period 2020-2026).

Enagas obtains around 160 Mill € in dividends from emerging markets. Consequently, there is a risk associated with the devaluation of the currencies.

Due to its high dependence of Spain, an extreme slowing down of the Spanish economy (more than the 8% GDP contraction forecasted for 2020(, causing less industrial consumption of natural gas.

Results

We believe that at the current price of 18.56€/share, Enagas present an opportunity of 38% revaluation to 25.61€. Due to the company profile and the “secured” cash flows due to current regulation, we think this investment entails a lower risk than on average investing in the stock market.

Annex

Disclaimer: This analysis is not a buy recommendation. It is only my point of view about the expected FCF of the company in the future with the information I have.