In a market report, Citi analysts said they do not believe that the premium on Iberdrola (OTC:IBDRY) (BME) shares is justified by its stable profit growth and high-quality assets.
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According to Citi, these are the reasons why they claim that Iberdrola has an unjustified premium:
- Operational challenges consistently generating suboptimal returns in the U.S., just as capital expenditure is increasing.
- Operational RoRE (Return on Regulatory Equity) of the UK network below average, supported by financing and taxes.
- Limited financial transparency.
According to Citi, with the acquisition of a minority stake in Avangrid (NYSE:AGR) and a significant increase in capital expenditure in the U.S. and UK networks, operational delivery is becoming more important. However, when analyzing Iberdrola's operational history, Citi observes consistent underperformance, with actual returns rarely meeting the forecasts.
Citi's report states they still struggle to find a justification for Iberdrola's current share valuation relative to the sector. Leaving aside their own valuation, a market-based SOTP (Sum of the Parts) valuation technique that assigns a separate value to each business segment, asset, or subsidiary indicates that Iberdrola's shares trade at a premium of around 60% over their implied market value.
Citi reiterates its Sell rating, with a slight increase in its price target to EUR 9.6 per share (from EUR 9.5).
Thus, Citi updates its forecasts and valuation to reflect current commodity prices, exchange rates, and interest rates, as well as the first quarter 2024 results. They foresee a 3% higher earnings per share (EPS) for 2024.
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