Thursday 22 October 2015

Analysis of Verbund

Verbund, an Austrian electricity company

Company: Verbund

ISIN AT0000746409 | WKN 877738

Business: An Austrian electricity company. They stand on three pillars of which one is a very large one: Hydropower (90% of their produced electricity), Thermal Power and finally Wind Power. They also have five divisions which are: Power generation, Transmission, Power Trading, Electricity Distribution and Energy-related Services. They are currently owned to 51% by the Austrian government.

Active: Austria

P/E: 37.2 (P/E5: 12.4)

This company was analysed due to a request from Matthias posted on the Analysis Requests page. 

contrarian values of P/E, P/B, ROE as well as dividend for Verbund

The P/E is (due to a bad year) far too high for Verbund with 37.2 but the P/B is however excellent with 1.0. Still in does give a no go from Graham due to the lousy year in 2014. The earnings to sales looks low with only 4% and the ROE is awful with 2.7%. The book to debt ratio looks fully ok with 0.6 especially compared to other energy companies.
In the last five years they have had an awful yearly revenue increase of -3.1% which then gives us a motivated P/E of 8 to 10 which means that Verbund is today highly overvalued.
They pay a small dividend of 2.2% which on the other hand correspond to 80% of their earnings so they better push up their earnings in the future.

Conclusion: Graham gives a direct no to Verbund but I will stretch myself to say why not. Hydropower is excellent! Building new ones will due to the disruption of the environment become more and more difficult and the ones that are there will remain for a long time with well kept maintenance. Hydropower is a cheap electricity producing system that will vary based on rain and snow for each year. Still the moat is extreme and for this reason I would not mind Verbund. That the Austrian government is involved will probably lead to demand for acceptable dividends being paid out.

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Anonymous said...

There are 4 big issues for Verbund.
- The Gas plant Mellach, build in 2011 for 500mio before the price dropdown. Verbund is currently forced by law to keep this plant ready as backup for Graz. Which cost several millions per year.

-Verbund owns a big share of the austrian power grid. And wants to replace its 240kV lanes by a 380kv lane. Several enviromental checks and lawsuits by locals delayed the project but in the end it should be just a matter of time.
- Verbund still has many state employees which you can not lay off.

- The low current prices. Yet I think this will clear up midterm when the german coal and nuclear plant will be closed.

Considering these things Verbund is doing quite good today.

Fredrik von Oberhausen said...

Thank you for this additional information!

Well... From what i have seen with power gids... Once the improvement is made one can directly pass on the costs to the customers. It might be different in Austria though.

The state employees will decrease year by year so given time things will be fine.

I guess that will be the general comment for Verbund... Given time and all will be well again!

-Fredrik von Oberhausen

Matthias said...

Hello Fredrik,

I totally agree. In all four points will play for Verbund.
In one that has already happend. Federal Court has decided that Mellach is not required as backup anymore. Hence they can mouthball or sell it.