ENERSIS Target Price: CLP 180 Recommendation: Hold Risk: Medium November, 12th 2012 Sector: Electricity & Energy Analyst: Sergio Zapata sergio.zapata@corpgroup.cl T: +562 660 2243 Company Information Ticker: ENERSIS CI Equity Closing Price (CLP/share): 161.5 12M Price Range: 151.8 196.9 Daily Vol 12M (CLP mn): 3,734 Shares (mn): 32.651,2 Market Cap (USD mn): 10,993 Shares / ADR: 50 24M Stock Performance 120 110 100 90 80 70 IPSA ENERSIS 60 nov-10 jul-11 mar-12 nov-12 Initiating Coverage Investment Thesis and Recommendation We are starting coverage of ENERSIS stock, giving to Hold recommendation (Medium Risk) and introducing a 2013YE target price of CLP 180 per share (USD 17.7 per ADR). This target implies a 11.5% increase over current price and a total return of 15.0%, including dividend payment to 2013YE. Our valuation considers the current outlook on its generation and distribution brands, including new expansion projects and the new scenario regarding to energy prices. Generation business. The lower operational figures expected for its subsidiary Endesa in 2012E could show a recovery trend in 2013, mainly due to Chilean operations benefiting from beginning operations of Bocamina 2 (350 MW, coal). By 2014YE we expect El Quimbo (400 MW, reservoir) starting up in Colombia. Both projects could increase by 5.6% the current installed capacity of this business. Regarding Brazilian subsidiaries, we do not expect any significant change on their operational scenario, maintaining the performance seen this year so far. Distribution business. Our base scenario considers the distribution tariffs process could end on lower margins for its subsidiaries. In 2013 Chilectra could show a 5.9% EBITDA decrease followed by a moderated recovery during the next periods. In a similar way, Codensa could report a 7.5% EBITDA contraction in 2015E, but still have the best EBITDA margin of all Enersis distribution subsiriaries. We expect a minor reduction on Edelnor s margin in 2014E due to the positive effect of the increase estimated for its physical sales. Regarding Edesur, we do not expect any significant change on the pricing regulatory framework which could explain the contracting trend over its results in the analysis period. Ampla could show an attractive increase of its results in 2013E due to energy demand increase related to FIFA Football World Cup and the Olympic Games to be held in 2014 and 2016, respectively. Finally, Coelce could be benefited on the favorable trend of its client base and energy physical sales. Operating figures in 2012E could show a contraction at EBITDA s level. Consolidated figures could be affected by generation business decrease of its subsidiary Endesa and in a minor way- by the estimated contraction on Endesa Brazil results. Both effects could reverse operational figures increase that could show distribution business. By 2013E Endesa s recovery results could boost the consolidated expansion of the operating figures. Valuation. Enersis stock currently shows a 2013E EV/EBITDA multiple of 5.3x, below the historical average of the last three years of 6.5x, which is explained by the lower stock price seen the last moths and the expected recovery on its operating results expected in 2013E. Risks Operating scenario. Hydrological seasons, energy and fuel prices or energy sales levels different to the expected could affect our valuation on the generation & distribution business, our target price, and recommendation. We highlight that an Argentinian significant change on energy prices could increase Edesur s valuation, with a positive effect on our vision. Regulatory framework. Some Enersis generation & distribution subsidiaries operate renewable concessions. If they do not renew them by any reason or a significant change is applied to them, it could impact our valuation, target price and recommendation. Macroeconomic scenario. Enersis subsidiaries operating results are related to local economic situation, which impact on activity level and energy demand. In addition these figures are translated to Chilean pesos. Unexpected changes on relative current exchanges could affect operational figures, target price and recommendation. ENERSIS Initiating Coverage Sergio Zapata M. November 12th 2012
ENERSIS Target Price (CLP): 180 Recommendation: Hold Company Description Profit & Loss Statement (CL 2010 2011 2012e 2013e 2014e - It is one of the main electric sector players in Latam Sales 6,563,581 6,534,880 6,599,783 6,904,890 7,144,459 and it is controlled by Endesa España w hich ow ns Gross Margin 3,041,935 2,996,446 2,896,061 3,054,802 3,095,163 60%. Gross Margin % 46.3% 45.9% 43.9% 44.2% 43.3% - Thruogh its subsidiaries Enersis participates on Operating Income 1,704,301 1,566,311 1,572,509 1,702,974 1,721,991 energy distribution & generation business w ith operations in Chile, Argentina, Brazil, Colombia and Operating Margin % 26.0% 24.0% 23.8% 24.7% 24.1% Peru. EBITDA 2,261,691 2,127,368 2,039,756 2,186,187 2,210,706 - In 2011 its EBITDA reached US$4.4 billions. EBITDA Margin % 34.5% 32.6% 30.9% 31.7% 30.9% Distrubtion business -w hich represented 44% o it- Net Financial Expenses -267,121-231,798-262,299-318,901-318,901 had a client base of 13.7 millions customers and Non-Operating Result (257,605) (232,933) (278,059) (341,947) (341,565) phisical energy sales of 69,550 GWh. Generation Net Income 1,100,688 872,541 855,124 884,668 897,277 business operates 14,812 MW of installed capacity Controller's 486,227 375,471 368,990 393,677 399,289 and registered 64,840 GWh of energy sales during Net Margin (Controller) % 7.4% 5.7% 5.6% 5.7% 5.6% 2011. EPS (USD/acc) 14.89 11.50 11.30 12.06 12.23 Ownership (Sep-12) Balance Sheet (CLP mn) 2010 2011 2012e 2013e 2014e Provida; 02% Bco Chile (3os); 03% Otros; 23% Citi (3os); 11% Endesa Latinoame rica; 61% Cash & Equivalents 961,355 1,219,921 880,448 851,278 797,789 Other Current Assets 1,376,913 1,306,044 1,335,155 1,373,826 1,411,322 PP&E 6,751,941 7,242,731 7,318,631 7,325,203 7,331,375 Other Non-Current Assets 3,915,636 3,965,175 3,549,950 3,646,434 3,886,155 Total Assets 13,005,845 13,733,871 13,084,184 13,196,741 13,426,642 Financial Debt 3,680,554 3,943,438 3,490,404 3,490,404 3,490,404 Total Liabilities 6,491,817 6,837,717 6,271,131 6,174,506 6,201,956 Total Equity 6,514,028 6,896,154 6,813,053 7,022,236 7,224,686 Minoritary Interest 2,778,483 3,000,425 2,912,492 2,912,492 2,912,492 EBITDA 2011 Breakdown (%) Flujo de Caja (CLP mn) 2010 2011 2012e 2013e 2014e Perú 11% Colombia 25% Chile 30% Operating Income 1,704,301 1,566,311 1,572,509 1,702,974 1,721,991 Adjusted Taxes -488,462-470,472-490,005-521,083-526,120 Depreciation & Amortization 557,391 561,057 444,525 483,213 488,715 Capex 0 0-276,008-708,940-622,831 Δ Working Capital 14,922 (10,019) 7,800 20,017 (5,462) Free Cash Flow 1,788,151 1,646,877 1,258,821 976,182 1,056,294 Brasil 32% Argentin a 2% Equity Raised (Purchased) 0 0 0 0 0 Dividends 151,607 243,113 187,734 184,495 196,838 Debt Issuance (Repayment) 0 0 0 0 0 Comparables P/E EV/EBITDA Ratios 2010 2011 2012e 2013e 2014e ENDESA 18.5 10.8 Stock Price (CLP) 217 183 162 162 162 COLBUN 184.5 26.4 P / E (x) 14.6 15.9 14.3 13.4 13.2 ECL 21.1 10.1 Liabilities / Equity (x) 1.0 1.0 0.9 0.8 0.8 GENER 26.3 12.1 EV / EBITDA (x) 6.7 6.2 5.8 5.3 5.3 ENERSIS 16.4 5.7 EBITDA / Financial Expenses (x) 5.2 4.6 4.6 5.0 5.1 Source: CorpResearch, Bloomberg, Company Financial Reports Net Financial Debt / EBITDA (x) 1.20 1.28 1.28 1.21 1.19 ROA (%) 3.7% 2.7% 2.8% 3.0% 3.0% ROE (%) 13.0% 9.6% 9.5% 9.6% 9.3% Dividend Yield (%) 2.0% 3.4% 3.1% 3.5% 3.7% ENERSIS Initiating Coverage Sergio Zapata M. November 12th 2012 2
Generation business We estimate a recovery on 2013E results due to Chilean operations, which could be boosted by the start-up of Bocamina 2 Weaknesses on Argentinian operations, which have 26% of Endesa s total consolidated capacity but contribute only 5% to the EBITDA The lower expected 2012 results for its subsidiary Endesa (due to Chilean operations, affected by lower sales prices and higher costs structure) could show a recovery in 2013 due to an improvement on Chilean operations. The aforementioned could be related to Bocamina 2 (350 MW, coal, located on Coronel, VIII Region, 500 km southern of Santiago) starting up. This facility could provide efficient energy generation with a high load factor plant (we estimate it could increase 6.2% Chilean operations installed capacity and contribute with a 12.5% of the energy generated during 2011). As a result, we expect a displacement of diesel and possible even LNG plants due to their generation costs being at least twice those of coal. This would impulse EBITDA and EBITDA margin 2013E expected recovery reaching USD 900 mn (+36% YoY) and 39% (+10,6 pp YoY), respectively. Regarding to Colombian operations, project El Quimbo project (400 MW, reservoir) is under development and we expect it could start up in 2014YE, increasing by 13.8% the current installed capacity and its generation would represent 16.7% of Emgesa s production in 2011. For Brazilian subsidiaries we do not estimate any relevant changes in their operational scenario, so they could maintain in 2013 the performance seen so far. In the case of Argentinian subsidiaries, we point out their delicate operational status and subsequent valuation. According with Endesa s reported figures and our estimates, in the period 2008-2012E Costanera and El Chocon could contribute only USD 500 mn out of USD 10,200 mn EBITDA earned by Endesa, representing 4.9% of its EBITDA despite being 26% of its total installed capacity. Moderate historical installed capacity expansion which added 8.1% in the period 2006-2011 Projects under development could increase by 5.1% the current capacity On the other hand, between 2006 to 2011 generation business has incorporated 1,116 MW of new capacity, which represents 8.1% of total installed capacity in 2006YE. Enersis reached a total of 14,812 MW by 2011YE. Considering the aforementioned 750 MW of new projects in Chile and Colombia, these facilities could increase 5.1% the installed capacity expected at 2014YE related to 2011YE. This would set the 2015E generation mix to 58.2 hydro, 41.3% thermal and 0.5% eolic. Enersis: Consolidated Installed Capacity 2006-2016 (MW) 20.000 16.000 Chile Argentina Brazil Colombia Peru 12.000 8.000 4.000 0 2006 2008 2010 2012E 2014E 2016E Source: Company Reports, CorpResearch ENERSIS Initiating Coverage Sergio Zapata M. November 12th 2012 3
Distribution business Lower distribution tariffs settled in Chile could affect Chilectra s results expected in 2013E. In the next periods they could show a moderate recovery Our base scenario considers downward distribution tariffs revisions could end in lower operational margins in comparison with the current tariffs. Chilean tariffs revision is scheduled to be finished within next weeks and the new prices will remain valid from November 2012 to October 2016. Our valuation on Chilectra s assets considers a 6% reduction at Distribution Added Value (VAD). This would explain a 5.9% EBITDA decline in 2013E. Nonetheless, we expect a moderate recovery in the periods following 2013. In a similar way Codensa could show a 7.4% annual contraction for its 2015E EBITDA. In spite of this we highlight that Codensa s EBITDA margins could still be the highest of all Enersis distribution subsidiaries. Edelnor could show a moderate decline on its 2014E operating results despite the increase trend of its energy sales. Current distribution level prices in Argentine could cause a continuous and progressive decline on Edesur s operating figures In the case of Brazilian operations, Ampla could show an attractive increase of its results in 2013E due to energy demand increase related to FIFA Football World Cup and the Olympics Games to be held in 2014 and 2016, respectively. Finally, Coelce could be benefited on the favorable trend of its client base and energy physical sales. Enersis: Margen EBITDA 2006-2016 (%) 60% 45% Chilectra Edesur Codensa Edelnor Ampla Coelce Total Enersis: EBITDA per unit sold 2009-2017 (USD per MWh) 100 75 Chilectra Edesur Codensa Edelnor Ampla Coelce Total 30% 50 15% 25 0% 2008 2010 2012E 2014E 2016E 0-15% Source: Company Reports, CorpResearch -25 2009 2011 2013E 2015E 2017E Source: Company Reports, CorpResearch Regarding Edesur, we do not expect a significant change on the regulatory framework in the short time. This could explain the continuous and progressive decline on its results for the period under analysis. Based on Enersis reported figures the average energy sale price average USD 35 per MWh in the last four years. In comparison, distribution prices to final customers of the other Enersis subsidiaries reached to the range average of USD 100 to USD 150 per MWh during the same period. ENERSIS Initiating Coverage Sergio Zapata M. November 12th 2012 4
2013 EBITDA recovery could be boosted by generation business, which could contributed 65% of the total expansion Brazilian distribution business could benefited from the Football World Cup and the Olympic Games to be held in 2014 and 2016, respectively In a similar way to its subsidiary Endesa, Enersis consolidated results and EBITDA margin could show a recovery starting 2013. A boost to results could be expected due to Endesa s results, which explain 65% of the total increase in Enersis EBITDA increment. This positive scenario is related to Chilean operations, due to Bocamina 2 beginning operations. Distribution business could also show good results, mainly due to Brazilian subsidiaries. They could benefited of the expected increment at energy sales related to the two biggest world class sport event such us the FIFA Football World Cup and the Olympic Games to be held on 2014 and 2016, respectively. Enersis: EBITDA and EBITDA Margin estimate 6.000 4.800 EBITDA (US$ MM) EBITDA Margin (%) 75% 60% 3.600 45% 2.400 30% 1.200 15% 0 2008 2010 2012E 2014E 2016E Source: Company Reports, CorpResearch 0% ENERSIS Initiating Coverage Sergio Zapata M. November 12th 2012 5
Valuation We have valued the company using a DCF methodology and a sum of parts for its generation & distribution subsidiaries in Chile, Argentina, Brazil, Colombia and Peru. For the WACC calculation we considered a risk free rate of 5%, a beta of 1x, a 5.5% market premium and a target capitalization factor of 50%. At its current level, Our target price implies an EV/EBITDA 2013E multiple of 5.8x, which is lower compared with the current 3-year historical average of 6.5x. Despite we consider this average reasonable it is above the 3-year historical average observed in 2011 which reached 5.9x. Subsidiary Asset Value Equity PEV Chilectra US$ mn 1,596 1,628 1,613 Edesur US$ mn -1,315-1,373-898 Codensa US$ mn 3,581 3,013 655 Edelnor US$ mn 1,548 1,254 721 Holding US$ mn -1,065-1,065 Endesa Brazil US$ mn 9,008 7,498 3,728 Endesa Chile US$ mn 11,393 6,834 Target Equity US$ mn 11,588 Total Shares mn 32,651 Exchange Rate Dec-2013 CLP/US$ 507 Target Price Dec-2013 CLP/share 180 Current Price CLP/share 162 Potential Upside % 11.5% Dividend Yield Dec-2013 % 3.5% Total Expected Return % 15.0% ADR value (Dec-2013) USD/ADR 17.7 Source: CorpResearch Comparing distribution subsidiaries valuation by customers, Colombian and Peruvian operations could reach higher ratios between 1,100 and 1,000 dollar per client, while Chilean and Brazilian operations are in an intermediate range of 860-840 dollar per client, respectively. In our opinion, the differences in the ratios are mainly related to the profit by unit of energy sold and the electric losses on the distribution network. In a completely different way, we highlight the Argentinian subsidiary Edesur valuation, which is facing an adverse distribution price environment which not allows it to adequately cover the costs related to the distribution service. Operating figures reported by Enersis show that since 2008 Edesur is in a decreasing trend at EBITDA level, which turned from a USD 122 mn profits in 2008 to USD 33 mn losses in 2011. This situation could be explained by the gross margin, which had shown a 25% decrease since 2008 meanwhile SG&A costs had increased by 52% in the same period. In our opinion, only a major change in the regulatory framework in Argentina would be allows the company to reverse this situation, but we do not expect it to happens in the short term. ENERSIS Initiating Coverage Sergio Zapata M. November 12th 2012 6
Proposal of Capital Increase Considering Enersis distribution & generation subsidiaries valuation, we have done a comparison as a mere exercise- with the average of the valuations given by the two studies contracted by the Enersis board. Subsidiary Average Corp dif dif % Fortaleza USD mn 154 175 21 Cachoeira USD mn 434 402-32 Cien USD mn 106 205 99 Ampla USD mn 336 339 3 Coelce USD mn 346 478 132 Emgesa USD mn 1,527 1,342-186 Codensa USD mn 1,345 803-542 Edelnor USD mn 229 226-3 Edesur USD mn 0-86 -86 Subtotal USD mn 4,476 3,884-592 -13.2% Other Subsidiaries USD mn 188 188 0 Total USD mn 4,663 4,072-592 -12.7% Source: CorpResearch We highlight the subsidiaries valuated represent 96% of total PEV (Proportional Equity Value) average of the two studies (without any discount). Comparing both figures, our valuation reached USD 3,884 mn, 13.2% below the average of USD 4,476 mn. If we consider the value of the other subsidiaries as equal to the average, our PEV of the total assets could reach to USD 4,072 mn, 12.7% lower the average of USD 4,663 mn. Now, considering a capital increase usually involves an implicit discount over the PEV, we will apply a discount on the fair value. In this example we have considered a discount in the range 20%-30%. This discount range is based on an expected profit of 15% to the IPSA index and the discounts seen in IPO carried out during 2011 2012. In this way, an attractive value for a minority shareholder to get in to the capital increase should be based on a reference PEV of USD 3,130 mn to USD 3,390 mn. Taking in account these assumptions; the money that minority shareholders should put in reaches the range of USD 2,035 mn to USD 2,205 mn. ENERSIS Initiating Coverage Sergio Zapata M. November 12th 2012 7
Glossary Term Definition / Translation Calculation EBITDA EBITDAR Earnings Before Interests, Taxes, Depreciation and Amortization Earnings Before Interests, Taxes, Depreciation, Amortization and Rents Operational Income plus Depreciation and Amortization Operational Income plus Depreciation and Amortization plus rent of fixed assets. It is used the at transport industries to reverse the rent of airplanes or ships. EV Enterprise Value Market capitalization plus Net Financial Debt plus Minority Interest EV/EBITDA Valuation multiple. While greater it is, more expensive it is the stock EV divided by Ebitda FCF Free Cash Flow Operational Income plus Depreciation and Amortization minus tax minus capital expenditures plus (minus) working capital variation. Free-float Margin Operational Ebitda Net Percentage of stocks that can be freely traded in the market Percentage of sales Percentage of stock that does not belong to controller s shareholders. Operational Income / Revenue Ebitda / Revenue Net Income / Revenue P/E Price / Earnings Market Price divided by EPS P/B Price to Book value ratio Market price divided by the accounting value of the stock. Dividend Yield The return in terms of dividends of investing in equities FCF yield Free Cash Flow Return. FCF / Market Price Dividends distributed in a year divided by the market price. ROA Return on Assets Net Income / Total Assets ROE Return on Equity Net Income / Accounting capitalization EPS Earnings Per Share Net Income / Shares outstanding YtD Year to Date Percentage variation year to date x Times Stocks recommendations are established according to the stock yield relative to the IPSA Index. We recommend Hold when we expect the share to have a yield in line with the IPSA; Buy, when the yield expected for the share is above to that expected for the IPSA; and Sell, when the yield expected for the share is below to that expected for the IPSA. We define a yield to be In line with the IPSA when it is within a range whose scope is equivalent to a third of the variation expected for the index, with a 5% minimum. ENERSIS Initiating Coverage Sergio Zapata M. November 12th 2012 8
CorpResearch Álvaro Donoso Director CorpResearch adonoso@corpgroup.cl Economic Research Sebastián Cerda Executive Director CorpResearch & Economic Studies scerda@corpgroup.cl Nicolás Birkner Senior Economic Analyst nicolas.birkner@corpgroup.cl Natalie Charles Investment Analyst natalie.charles@corpgroup.cl Juan Ortiz Economic Analyst juan.ortiz@corpgroup.cl Equities Research Cristobal Lyon Director of Strategies cristobal.lyon@corpgroup.cl Sergio Zapata Senior Analyst. Sector: Energy sergio.zapata@corpgroup.cl Vicente Meschi Senior Analyst. Sectors: Forestry, Banking vicente.meschi@corpgroup.cl Pedro Letelier Analyst. Sectors: Transport, Food & Beverages pedro.letelier@corpgroup.cl Josefina Guell Senior Analyst. Sector: Retail josefina.guell @corpgroup.cl Patricio Acuña Analyst patricio.acuna @corpgroup.cl ENERSIS Initiating Coverage Sergio Zapata M. November 12th 2012 9
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