Snam Rete Gas Company Update Hold Price: 3.6 24 February 2006 Sector Market Cap Free Float Reuters Code 12-Mth Range Utilities 7,125m 45.9% SRG.MI 3.30-3.98 Key Data 2004 2005 2006E 2007E Market Price ( ) 3.7 3.5 3.6 3.6 Stated EPS ( ) 0.27 0.27 0.22 0.25 Adj. EPS ( ) 0.27 0.27 0.22 0.25 BVPS ( ) 2.97 2.04 1.89 1.77 Div/share ( ) 0.20 1.17 0.17 0.18 P/E 13.8 13.0 16.3 14.8 Adj. P/E 13.8 13.0 16.3 14.8 P/BVPS 1.3 1.7 1.9 2.1 Div. Yield Ord 5.4% 33.5% 4.8% 4.9% EV/EBITDA 7.0 8.1 9.0 9.1 EV/EBITA 10.5 12.0 13.9 13.2 [EV/CE]/[ROCE/WACC] 1.0 0.9 1.1 1.0 [P/BV]/[ROE/COE] 0.9 1.3 1.5 1.4 No. Issued Shares (m) 1,955 1,955 1,955 1,955 Source: Company data, UBM estimates Stock Performance 4.00 3.80 3.60 3.40 3.20 3.00 2.80 Source: Datastream PRICE RELATIVE TO MIBTEL SNAM RETE GAS M A M J J A S O N D J F 1 mth 3 mth 12 mth Absolute % 0.6 0.6 6.1 Relative % -5.2-9.2-11.7 Average Trading Volumes: 10,588.3(000s) Short of Catalysts The presentation of the new business plan has had no impact on our EFV of 3.7 per share, as the negative news regarding the capex breakdown by investment type offsets the potential from the new cost savings target. A combination of the limited downside (the stock is trading in line with its end-2006e equity RAB) and the limited potential upside justifies our Hold rating. Over the next few days, however, we would recommend exploiting any temporary weakness in the stock price (caused by the lack of catalysts and the disappointing news on dividends). Snam RG s 2006-2009 capex plan amounts to 3.5 billion, vs. the 3.3 billion projected in our former model. This was somewhat disappointing, as investors had pinned their hopes on a massive upgrade in the capex plan in response to the new Italian gas scenario (strict demand/supply balance; need for new infrastructure investments). Moreover, the new capex breakdown by investment type translates into a c. 0.02 reduction in our valuation per share. The management is working on reducing controllable fixed costs by a cumulative 12% over the second regulatory period (October 2005-September 2009). This compares to the cumulative 8% reduction projected in our former model with a positive impact on our valuation of c. 0.02 per share, thus offsetting the negative effect of the new capex guidelines (breakdown by investment type). The Company announced a FY2005 DPS (to be paid in May 2006) of 0.17, which is lower than both our 0.175 estimate and market consensus of c. 0.18. From FY2006 onwards, the management has assured that its DPS should grow at least in line with the inflation rate until 2008. These guidelines are substantially in keeping with our former projections (an annual 0.175 per share) but lower than market consensus, which pointed to a fast growing DPS and a higher starting point for FY2005. The buy back plan of up to 800 million (within the limit of 10% of share capital), which was approved by the shareholders' meeting in November, will begin in March. Half of this programme is expected to be completed by end-2006. Sergio Molisani +39 02 7292 9306 sergio.molisani@ubm.unicredit.it
Snam Rete Gas 24 February 2006 UniCredit Banca Mobiliare FY2005 results at a glance As shown in Figure 1, Snam RG s FY2005 results were in line with UBM expectations and market consensus and are therefore unlikely to constitute a driver from the stock. Figure 1. Snam RG - Results vs. UBM Estimates (IFRS) 2004A 2005A 2005E Total Revenues 1,803 1,806 1,807 EBITDA 1,453 1,451 1,453 Net Profit 538 524 524 Net Financial Debt 2,874 4,819 4,838 Source: Company Data and UBM estimates Capex plan: better but not enough Snam RG has set its 2006-2009 capex plan at 3.5 billion. This is in line with the 2005-2008 investment programme and slightly more than the 3.3 billion projected in our former model. This was somewhat disappointing, as investors had pinned their hopes on a massive upgrade in the capex plan in response to the new Italian gas scenario (strict demand/supply balance; need for new infrastructure investments such as the development of the import pipeline and new LNG plants). The management has revised up its medium to long term projections regarding gas demand (see Figure 2) but has also clearly stated that there is no direct correlation between volumes and capex, as the latter is dependent on where Italy s new entry point for gas will be. Figure 2. Expected Gas Demand in Italy (bcm) Sep-05 2005E 2010E 2015E 83/84 90-92 101-103 Feb-06 2005A 2010E 2015E Source: Company Data 86.1 95 106 Hence, according to the management, an upward revision of the capex plan is likely if 3-4 of the new LNG projects currently under consideration in Italy are realised. As usual, we expect short-term disappointment to prevail over long-term expectations. In our opinion, further negative newsflow comes from the capex breakdown by investment type. As shown in Figure 3 and Figure 4, the management has stated that: c. 73% of the capex plan is in the C-F category vs. the 80% level indicated in October 2005. c. 40% of the capex plan is in the E-F category vs. the 50-55% level indicated in October 2005. Figure 3. Snam RG Incentives for New Capex in the Second Regulatory Period Duration Extraremuneration* Allowed Depreciations Allowed Opex** A Investments for replacement 0 0% yes no B Investments for network safety, service quality and market 5 1% yes no support (not aimed to build new capacity) C Investments for development (aimed to build new capacity) of 7 2% yes no regional network D Investments for development (aimed to build new capacity) of 10 2% yes no national network E Investments for development (aimed to build new capacity) of 10 3% yes yes national network linked with import capacity F Investments for development of entry capacity at border 15 3% yes yes Source: AEEG data *100% capacity spending (60% capacity and 40% commodity in the first regulatory period) **Soon after the spending (after the full operational activity in the first regulatory period) Figure 4. Snam RG - Capex by Investment Type Investment Category b+c+d+f Weight on total capex Company s guidelines in Feb 2006 73% Company s guidelines in Sept 2005 80% Investment Category e+f Company s guidelines in Feb 2006 40% Company s guidelines in Sept 2005 50-55% Source: UBM on Company Data The changes in the capex breakdown have a negative impact of c. 0.02 per share on our valuation. Cost-savings: more aggressive targets Over the second regulatory period (October 2005- September 2009), the management aims to reduce controllable fixed costs by a cumulative 12% in real terms. These guidelines are: An upgrade on the previous target given in September 2005 when the management was confident of (at least) matching the target set by the regulator (-2% per year in real terms). Our 2
UniCredit Banca Mobiliare Snam Rete Gas 24 February 2006 former estimates were substantially in line with these projections. Achievable despite a growth scenario in terms of gas injected in the network (+10% to c. 94 Bcm in 2009 vs. 85 Bcm in 2005) and transport infrastructure (+6% and +28% the Km of network in operation and the MW of compression power over the plan horizon respectively). The new guidelines have a positive impact of c. 0.02 per share on our valuation, thus offsetting the negative potential impact of the new capex guidelines (breakdown by type of investment). Dividends: disappointing for the consensus After the 1 extraordinary dividend per share paid in November 2005, the Company announced the following: The proposal of a 2005 DPS (related to 2005 net profit and to be paid in mid-2006) of 0.17 per share. This fell short of both our estimates ( 0.175 per share) and market consensus (equal or higher than 0.18 per share). The shareholders meeting will be held on 27 and 28 April, in first and second call respectively. The stock will trade ex-dividend from 22 May 2006 and the dividend will be payable as of 25 May 2006. Its commitment to DPS growth that is at least equal to inflation until 2008. These guidelines are substantially in keeping with our former projections (an annual 0.175 per share) but lower than market consensus, which pointed to a fast growing DPS with a higher starting point for 2005. We have aligned our estimates to the Company s guidelines assuming a 2% inflation rate. Buy-back: short-term support for the stock The buy back plan of up to 800 million (within the limit of 10% of share capital), which was approved by the shareholders' meeting of Snam RG in November, will begin next March. Half of this programme will be completed by end-2006. We have aligned our former projections ( 400 million equally spread over 2006-2007) to the Company s guidelines. Investment considerations The presentation of the new business plan has no effect on our EFV of 3.7 per Snam RG share, as the potential from the new cost savings target is offset by the negative newsflow regarding the capex breakdown by investment type. The poor downside risk (the stock is trading in line with its end-2006 equity RAB of 3.65) and the limited potential upside are the main reasons behind the reiteration of our Hold rating. We would recommend exploiting any temporary weakness in the stock price over the next few days (caused by the lack of catalysts and the disappointing news on dividends). 3
Snam Rete Gas 24 February 2006 UniCredit Banca Mobiliare SNAM RETE GAS 2004* 2005 2006E 2007E Market Data Price Ord 3.7 3.5 3.6 3.6 No. Issued Shares 1,955.0 1,955.3 1,955.3 1,955.3 Total Market Cap 7,280.4 6,833.8 7,125.2 7,125.2 Key Figures Total Group Revenues 1,809.0 1,806.0 1,747.3 1,850.3 yoy % change 2.4% -0.2% -3.3% 5.9% EBITDA 1,453.6 1,451.0 1,388.5 1,474.3 yoy % change 3.6% -0.2% -4.3% 6.2% EBITA 969.8 975.0 904.1 1,012.0 yoy % change 4.6% 0.6% -7.3% 11.9% Group Net Profit 526.2 524.0 437.7 482.4 yoy % change -3.6% -0.3% -16.5% 10.2% Adj. Group Net Profit (excl. Goodwill) 527.4 524.0 437.7 482.4 Adj. Group Net Profit 527.4 524.0 437.7 482.4 Net Capital Employed 8,716.1 8,814.3 9,059.1 9,677.0 Shareholders' Equity 5,815.1 3,995.3 3,700.7 3,463.1 Net Financial Debt (Cash) 2,901.0 4,818.8 5,358.2 6,213.7 Free Cash Flow 613.0 410.4-207.0-535.5 Operating Ratios EBITDA Margin 80.4% 80.3% 79.5% 79.7% EBITA Margin 53.6% 54.0% 51.7% 54.7% After-tax ROIC 6.2% 6.1% 5.6% 6.0% Asset Turnover 0.2 0.2 0.2 0.2 EVA Spread 1.0% 1.9% 1.4% 1.9% Leverage Debt/Equity 0.50 1.21 1.45 1.79 Debt/EBITDA 2.00 3.32 3.86 4.21 Debt/Free Cash Flow 4.73 11.74-25.88-11.60 Debt/Total Capital Invested 0.31 0.50 0.55 0.60 Interest Cover 8.86 9.38 4.68 4.60 EV Ratios EV 10,209.3 11,690.8 12,522.1 13,387.7 EV/Sales 5.6 6.5 7.2 7.2 EV/EBITDA 7.0 8.1 9.0 9.1 EV/EBITA 10.5 12.0 13.9 13.2 [EV/CE]/[ROCE/WACC] 1.0 0.9 1.1 1.0 Per Share Data EPS 0.27 0.27 0.22 0.25 yoy % change -3.6% -0.3% -16.5% 10.2% Adj. EPS (excl. Goodwill) 0.27 0.27 0.22 0.25 Adj. EPS 0.27 0.27 0.22 0.25 Gross CFPS 0.52 0.52 0.47 0.49 Free CFPS 0.31 0.21-0.11-0.27 BVPS 2.97 2.04 1.89 1.77 DPS Ord 0.20 1.17 0.17 0.18 Per Share Ratios P/E Ord 13.8 13.0 16.3 14.8 Adj. P/E Ord (excl. Goodwill) 13.8 13.0 16.3 14.8 Adj. P/E Ord 13.8 13.0 16.3 14.8 P/Gross CFPS 7.1 6.8 7.7 7.5 P/Free CFPS 11.9 16.7-34.4-13.3 P/BVPS 1.3 1.7 1.9 2.1 Free Cash Flow Yield Ord 8.4% 6.0% -2.9% -7.5% Div. Yield Ord 5.4% 33.5% 4.8% 4.9% Source: Company Data, UBM estimates * ITA GAAP 4
UniCredit Banca Mobiliare Snam Rete Gas 24 February 2006 This document (the "Document") has been prepared by UniCredit Banca Mobiliare SpA ( UBM ). As a company of the UniCredito Italiano Group (the Group ), UBM is involved in several businesses that may relate to Snam Rete Gas SpA (the "Company"): - The Group issues Covered Warrants on the stock of the Company. - A director of the Group is also member of the Board of Directors of ENI SpA. UBM, including its parents or affiliates, may hold a position or act as market maker in financial instruments related to the Company. Also note that UBM may perform investment services such as repurchase agreements and stock lending involving the securities issued by the Company. Information, which is not reflected in the Document, may therefore be available to persons connected to UBM. The Document is for information purposes only and is not intended as an offer or solicitation of an offer to sell or to buy any financial instrument. The Document is being distributed by electronic and ordinary mail to professional investors and may not be redistributed, reproduced or published in whole or in part. Information, opinions, estimates and forecasts contained herein have been obtained from, or are based upon, sources believed by UBM to be reliable but no representation of warranty, express or implied, is made and no responsibility or liability is accepted by UBM as to their accuracy or completeness. The Document has been approved for distribution in UK by UBM London, regulated by the FSA for the conduct of Investment Business in the UK. It has not been approved for distribution to, or for the use of, private customers as defined by the rules of the FSA. The Document may not be distributed in USA, Canada, Japan or Australia. Copyright (c) 2004, 2005 UniCredit Banca Mobiliare S.p.A. ( UBM ). All rights reserved. Any unauthorized use or disclosure is prohibited. This report has been prepared and issued by UBM and/or one of its affiliates. Key to Investment Rankings: This is a guide to expected total return (price performance plus dividend) relative to the total return of the stock s local market over the next 12 months: Buy- expected to outperform the market by 10 or more percentage points; Accumulate - expected to outperform the market by 5-10 percentage points; Hold - expected to perform in line with the market, plus or minus 5 percentage points; Reduce - expected to underperform the market by 5-10 percentage points; Sell- expected to underperform the market by 10 or more percentage points. Most Recent Recommendations: 19 October 2005: Hold 09 November 2005: Hold 15 December 2005: Hold 5