Scherbaums Börse: Eon still has a lot of work to do

As fate would have it, the traffic light coalition presented its coalition agreement this week and, among other things, promised an early phase out of coal.

This is likely to be accompanied by major changes in the German energy market.

Exactly in the same week, the DAX group Eon held its capital market day and recorded the medium-term goals of the energy company for its shareholders.

In view of the declared climate policy of the new traffic light coalition, the Eon Group is also in the focus of the energy transition.

The company is responsible for the operation, maintenance and expansion of the energy networks.

While Eon is mainly concentrating on sales, the Essen-based company has left the production of electricity from renewable energies, but also coal, to its competitor RWE.

Therefore, the industry competitor is more directly affected by the coal exit plans.

For its part, Eon supplies around 50 million customers and maintains the largest distribution network in Europe.

The importance of the distribution grids is shown by the fact that the electricity generated from wind and sun is rarely needed where it is actually generated.

In addition to new energy storage solutions, the expansion of the electricity and gas networks is also required for the energy transition to be successful.

Billions for the energy transition

At its “Capital Markets Day 2021” the group outlined how it would like to position itself in the future.

Eon wants to invest around 27 billion euros in the energy transition by 2026.

22 billion euros of this is budgeted for the expansion of the energy network, while 5 billion euros are to flow into the expansion of the customer solution business.

Thanks to the planned investments, Eon wants to increase EBITDA in its core business, i.e. excluding PreussenElektra and nuclear power activities, by an average of 4 percent per year to around 7.8 billion euros in 2026.

There were also other interesting figures for shareholders to hear: earnings per share from the core business are expected to increase by 8 to 10 percent to 90 cents by 2026, while the dividend is expected to grow by up to 5 percent per year until 2026.

A dividend of EUR 0.49 per share is targeted for 2021, after EUR 0.47 in the previous year.

Capital market day does not create a "wow effect"

The elimination of the COVID-19 effects of the previous year should also ensure this increase. In the first nine months of the 2021 financial year, sales increased by 11 percent year-on-year to EUR 48.1 billion. Among other things, Eon benefited from the cooler weather in 2021 compared to the previous year. Adjusted EBIT in the core business increased by 29 percent to 3.1 billion euros in the first nine months. Group-wide, adjusted EBIT was around 3.9 billion euros, while adjusted consolidated net income doubled compared to the previous year to 2.2 billion euros. For the full year, adjusted EBIT of EUR 4.4 to 4.6 billion is expected with an adjusted consolidated net profit of EUR 2.2 to 2.4 billion.

On the part of the analysts, the Capital Markets Day apparently did not have a “wow” effect.

Deutsche Bank has left the rating for Eon according to the presented medium-term targets with "buy" and a price target of 12 euros, but the forecast for earnings per share for 2026 was somewhat disappointing compared to the consensus estimate based on 2024, it said.

In the meantime, DZ Bank has downgraded the Eon share from “buy” to “hold” and reduced the fair value from 13.00 to 11.70 euros.

The group did not manage to set itself apart from the competition in terms of dividends and profit growth.

According to DZ Bank, there are better investment opportunities in the sector.

Share price with volatile sideways movement

The Eon share is currently quoted at 11 euros, which is more of an agony than a smile among veteran shareholders. After the Eon share price hit a record high at EUR 44.70 in 2008, a long-lasting decline followed. By 2016, the prices collapsed by 87 percent to 6 euros. After a stronger price recovery to just under 11 euros by the end of 2017, the price turned into a volatile sideways trend that has persisted to this day.

If you want to read price fantasy due to the sober chart technique: With a breakout above the 2020 high at 11.60 euros, the four-year consolidation could be ended.

In this case, there would be further profit potential in the medium term up to the 2014 year high of 15.50 euros.

Nevertheless, the bottom line was that the Eon share was a long-term loss maker in the portfolio for many.

Looking at the decade, the Dax paper has lost an average of 5.3 percent per year.

Over a 20-year perspective, the minus averages 2.6 percent per year.

With these poor results, the relatively high dividend yield of 4.3 percent should not be any consolation, especially since Eon has repeatedly cut dividends in the past.

Is RWE the better alternative?

Anyone who would still like to have a Dax supplier share in their depot could take a look at the competitor RWE - at least as far as the pure price development is concerned. While the Eon share has moved more or less sideways in recent years, the share price of competitor RWE has been on a clear upward trend for years. Since the 2015 low of around nine euros, the price has almost quadrupled at times, making the stock much more promising for investors recently.

In the long term, however, RWE was not a good choice either.

This can be seen from the fact that, despite the price rally of recent years, the share is currently only trading just above the price level of ten years ago.

Still, at the moment, an RWE share seems to be what a utility share should be in volatile stock market times - a solid investment.

Eon still has a bit of convincing to do in this context.