UBS sees restructuring potential in Enel, E.On, Engie

Declines in commodity prices and devaluation in emerging market foreign exchange will take their toll on European utilities this year, analysts at UBS said.

The resulting 2% drop in earnings forecast compared poorly with the 7% rise it expected for the market as a whole. Downward revisions to analysts’ profit forecasts would be particularly negative for large caps in the sector.

UBS said revisions to the latter would bring earnings forecasts down by 8% in comparison to -2% for the sector.

However, companies such as Enel, E.on and Engie might be able to avoid the wider sector’s fate if they undertook “major portfolio changes”.

Italy’s Enel had the option of integrating its fast-growing subsidiaries, E.On could ring-fence its nuclear liabilities and Engie might carry out a major rotation out of its structurally underperforming assets, analyst Alberto Gandolfi in a research note sent to clients.

If successfully implemented those high probability portfolio makeovers, together with their discounted valuations, could improve returns, which would benefit their share prices when the focus shifted towards the long-term trends and sum of the parts.

Its least preferred names were National Grid and Terna, given their premium valuations (greater than 11x earnings before interest, tax, depreciation and amortisation), all-time low interest rates, and some residual regulatory uncertainty.