Insider Barometer

Why stock in energy giant RWE will shrug off Innogy's woes

Luftbild Gersteinwerk Werne Stockum Wolkenschatten auf Bockum RWE Power AG Kraftwerk Gersteinwerk
RWE is steaming about Innogy's performance. Source: Imago

It’s been more than a month since stock in Innogy, the green power subsidiary of German utility RWE, bumped sharply lower after a profit warning. Despite spinning off its renewables business in 2016, RWE still holds a 77 percent stake in Innogy. So whenever the latter comes out with bad news, it becomes a problem for its erstwhile parent, too.

On December 13, then-boss Peter Terium announced that Innogy was cutting its operating profit forecast for 2017 to €2.8 billion ($3.42 billion) – a drop of €100 million. If that wasn’t enough to unsettle investors, his pronouncement that 2018 earnings would soften further sealed Mr. Terium’s fate. Just days after the warning, the beleaguered CEO left the company.

The financial markets also punished RWE, which relies heavily on fat dividends from its subsidiary. Stock prices in both companies are roughly 15 percent lower since the profit warning. In RWE’s case, many analysts felt that investors overreacted, especially since the utility confirmed its own earnings outlook for the current year. Moreover, Innogy has pledged to adopt a stricter savings plan while leaving unchanged the dividend policy that benefits RWE.

That’s enough for Commerzbank Wealth Management to predict that RWE’s stock price will rebound, and for US investment bank Goldman Sachs to keep the stock on its “Conviction Buy List.” Sam Arie, an analyst at Swiss bank UBS, says that RWE could be a top performer in the utility sector this year. The view inside RWE appears just as optimistic: In January, five supervisory board members purchased shares worth €121,000, at a price of between €17.40 and €17.87.

The 2018 profit warning sealed the fate of its then-boss, Peter Terium.

“The total volume of the purchases admittedly isn’t remarkably high, but there were repeated purchases at lower prices last year,” notes Olaf Stotz, a professor at the Frankfurt School of Finance & Management. “Evidently, the company’s executives are confident about prospects.”

Despite the tumble in its stock price after Innogy’s profit warning, RWE was one of the biggest gainers in the DAX last year, with a jump of almost 44 percent. According to Bloomberg, analysts expect that the company’s share price will average €21 over the next 12 months, an increase of more than 19 percent.

They are more cautious when it comes to Innogy, however. Most analysts have it at a hold rating and don’t see much potential in its average target price of €34.30. One of the green power group’s supervisory board members appears to disagree, however, at least long-term: Ulrich Grillo recently bought €32,500 in Innogy stock, at €32.50 per share.

Now without a CEO, Innogy remains ambitious nonetheless. As its executives look for ways to cut administrative costs, they’re also trying to grow the company in other areas. Their latest deal is with project developer Primus Energie on a pipeline involving 23 wind farms in the state of Thuringia, with a combined capacity of 400 megawatts of electricity – as much as an entire block in a gas or coal-powered plant.

At a press conference earlier this month, the message from Innogy’s renewables chief, Hans Bünting, was one of optimism. “We have ideally positioned our renewable energies business,” he said. “And we are consistently looking for new opportunities for recoverable growth – also in new markets.” That includes a wind power deal in the US, announced in hopes of soothing the markets after last month’s profit warning.

Despite the tumble in its share price after Innogy’s profit warning, RWE was one of the biggest gainers in the DAX last year.

A new chief executive is the main ingredient in the company’s recipe for a comeback. While that search continues, its head of human resources, Uwe Tigges, is serving as interim boss – and leading the company’s cost-cutting drive, a strategy demanded not just by Innogy’s own supervisory board, but also majority shareholder RWE. In announcing Mr. Terium’s departure, Innogy, which was spun-off in the spring of 2016, said there was a need for “greater emphasis on cost discipline and a more focused growth and investment strategy.” Previously, RWE’s boss Rolf Martin Schmitz had written a letter to Innogy’s CEO demanding just that.

Mr. Terium’s own spending policies were controversial, particularly in light of RWE’s long-term efforts to control costs in its power generation business. Innogy’s former CEO dedicated hundreds of millions of euros to digital endeavors and transforming the company’s culture. He also pursued large-scale investments in start-ups and paid out considerable sums to consultants.

In future, the company plans to prioritize investment in its core business: renewable energies, grids and distribution. Chief Financial Officer Bernhard Günther said the company would focus on “delivering sustainable growth in line with Innogy’s financial goals,” and that it was “fully aware of the importance that the capital market attaches to a stable and attractive dividend and appropriate debt.” Even after its own stock price swooned, Innogy is still the most highly-valued energy group in Germany, with a market capitalization of €18.4 billion – greater than that of its larger one-time parent, RWE, which is valued at €10.7 billion.

Andrea Cünnen covers the bond markets for Handelsblatt. Amanda Price translated and adapted this story into English and Jeremy Gray prepared it for Handelsblatt Global. To contact the author: cuennen@handelsblatt.com

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