EVN AG – Cheap stock and good news

In an interview, Steve Romick from FPA said something like” You can have either good news or cheap stocks”.

In the case of “core value” stock EVN AG it seems you can have both.

In the half year report issued today, they report significantly higher profits (1.16 EUR per share against 1.04 EUR previous period).

And this despite only so-so numbers from electricity generation.

The “kicker” comes from one of the famous “extra assets” EVN is hiding on its balance sheet, a company called “RAG”, short for “Rohölaufsuchungsgesellschaft”. This Austrian “on shore” oil upstream company seems to do quite well:

The main reason for this improvement was the increased income from investments in equity accounted investees, in
particular the higher earnings contribution from RAG, which rose by EUR 21.0m.

It looks like my valuation in my previous (German) replacement value analysis was much too conservative.

In the last few years, Q3 and Q4 for EVN were :

2008: -0.04 EUR per share
2009: +0.52 EUR
2010: -0.05 EUR
2011: +0.015 EUR

So if we assume a flat H2, we have a P/E of 8.3 which I find is still cheap compared to the quality of the Balance sheet.

Additionally they announced a 1 mn shares repurchase program (~0.55% of outstanding stock). Not much, but increases the total “shareholder yield” which we know now from O’S seems to be an important factor in the long run.

The stock chart doesn’t look pretty, but in this case I don’t care too much as the fundamentals are still strong:

All in all, EVN seems to be the cheap boring stock, howver with good news. So “strong hold” for the time being.

By the way, I think Verbund is now interesting as well. So I am actually considering adding some Verbund stocks to the portfolio as well.

7 comments

  • @memyselfandi007

    First of all I want to thank you for your great blog. It is the best blog on European stocks I know about. Keep it up! Weiter so!

    I agree that EVN is quite cheap, but there are two negatives about EVN worth keeping in mind. The main shareholder is the federal state Lower Austria (51 %). As Austrian investores we have quite bad experiences with state owned enterprises, encouraging corporate waste. We do not have to go back 20 years to give examples such as “Voest-Supergau” or the AMAG collapse. I just want to point at the Skylink desaster of Vienna Airport (Flughafen Wien). Vienna, Lower Austria and Austria also own 50 % of Flughafen Wien. The Verbund case is suspect, too. The free use of water power and old depreciated power plants should enable it to earn much more than they really do. The benchmark for electricity prices in Europe is natural gas, pegged to oil (expensive!!). So free use of water should be extremely cheap compared to gas, oil and other fossil fuels. The Republic of Austria also owns 51 % of Verbund – only coincidence??

    But back to EVN. I was not happy with their waste management ventures in Eastern Europe. Therefore I put EVN on the “too hard pile”. At least I require a quite high margin of safety.

    Last but not least, there is also another positive about EVN. They own 12.6 % of Verbund, which is worth approximately EUR 400 million at current prices, nearly a quarter of EVN’s own market cap. You mentioned that also in one of your former postings. (https://valueandopportunity.com/2010/12/28/portfolio-ab-dem-01-01-2011/)

    LittleWarren

    • Hi LittleWarren,

      thank you for your comment. It is always interesting to hear the local view point. I agree that a majority Government stake is not the best thing, on the other hand many utility companies screw up without a majority Government shareholders.

      Utilities always have the problem that their fate is directly linked to Government plicies and regulation.

      How do you think is the situation in Austria ? Is the Governement / rgeulator “friendly” to EVN and Verbund (and OMV by the way) or is there a risk of “German style” change in lwa ?

      MMI

      • “German style” actions that happened to E.On and RWE are an unlikely threat in Austria (this was kind of expropriation in my opinion in the German case). However, behind the scenes and one or two years ago, there was a discussion about “fees” for the use of water for power generation. This would affect Verbund much more than EVN.

        More likely is that those government dominated enterprises do not behave in the best interest of shareholders, for example by tolerating inefficiencies and too high cost structures or by pursuing unprofitable projects only in the interest of regional politicians or parties. I do not really fear permanent loss of capital with an investment in EVN, but it could well be a value trap trending only sideways for years. But this risk is mitigated by cheap valuation and a healthy dividend that is paid to the investor for waiting for a revaluation of the stock. At the moment, do not really see a catalyst for this to happen, but sometimes value is a catalyst itself.

        Best wishes from Austria,
        LittleWarren

  • Hi,
    I think utilities are undervalued, too.
    Why do you think EVN ist better than RWE, Iberdrola, Enel etc.? I would buy RWE preferred shares if i had to buy one of them, because I know them best.

    • Martin,

      I like EVN better mainly due to

      – extra assets, no goodwill
      – better regulatory environment
      . simply more boring

      PIIGS are too exciting for me in this area…..

      MMI

  • And verbund is definitely no “hot potato” 😉

  • Statler&Waldorf

    Hi,interesting i also like Verbund.
    One of my favorite stocks in my universe. The focused generation of hydropower ( nearly 90%) is extremely interesting for the future. After the longterm downtrend the valuation becomes interesting for investors. The stock is not cheap, but good assets have a price all times.

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