Uniper, the fossil fuel utility spun out of Germany's E.ON (EONGY) in September, has been initiated at a buy rating by Goldman Sachs, which is predicting that a doubling of the business's dividend and a possible bid will drive gains of more than 20% in the next year.
"We see three key reasons to expect outperformance," noted Goldman analysts Alberto Gandolfi and Baptiste Cota. "1) We estimate its cash flows will double by 2020, allowing the company to double its dividends and distribute 25% to 30% of its market cap by then; 2) It could become an M&A target in our view - its main shareholder, E.ON, has stated its intention to divest (while others have stated their intentions to acquire generation assets) ... 3) Longer term, it should benefit from significant tightening of German power generation."
Uniper shares traded Friday at €13.52, leaving them 23% below Goldman's target price of €16.60.
"Uniper trades on c.10x 2017/18E net earnings...and on an EV/EBITDA of c.6x," noted Goldman. "This is 30%-40% below the sector average and its close peers."
Uniper owns and operates fossil fuel generation plants across Central and Northern Europe and a carbon fuel trading unit. It was carved out of E.ON and listed on the Frankfurt exchange in September, enabling the German parent to focus its attentions on renewable energy. E.ON retains 46.65% of Uniper, which CEO Johannes Teyssen has said he plans to sell.
Goldman expects Uniper to post EBITDA of about €2.1 billion for 2016 and adjusted operating cash flow of €216 million. Those earnings will dip to about €1.46 billion in 2017 as assets are sold, according to the investment bank, while adjusted cash flow will increase to €252 million due to a lighter tax burden and targeted cost savings.
Uniper has committed itself to paying between 75% and 100% of adjusted cash flows in dividends, equating to a yield of about 4.7% this year, rising to 5.3% in 2018 and 7.7% by 2020, according to Goldman's forecasts.
Possible bidders for Uniper include fellow German utility RWE (RWEOY) , which recently spun off its renewable operation Innogy, Finland's Fortum and Czech-based EPH, each of which has indicated that they are on the hunt for new generation assets.
"Uniper's share prioce is below our SOTP (sum of the parts) based valuation of €17 per share," noted Goldman. "An industrial buyer might be willing to value the company on this long-term basis."