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.

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