BofA Securities initiates Elia Group at ‘underperform’, citing growth uncertainty

Investing.com — BofA Securities has initiated coverage on Elia Group (EBR:), Europe’s fastest-growing electricity transmission system operator, with an “underperform” rating and a price objective of €86, representing an 11% downside from its share price of €96.60. 

While Elia’s rapid expansion in electricity grid investments positions it as a key player in Europe’s energy transition, BofA analysts raised concerns over several financial and operational challenges that could impede its growth.

The primary concern flagged by BofA analysts is Elia’s €30.1 billion capital expenditure program planned for 2024-2028, which will drive a substantial increase in its regulated asset base, projected to grow at a 21% compound annual growth rate. 

To finance this investment, Elia is expected to raise between €4 billion and €4.5 billion in equity, leading to uncertainty regarding earnings per share growth. 

Depending on how the capital is raised, the projected EPS growth could range from a modest 5.5% to 10.6% for 2024-2028. 

BofA sees this financing strategy as a major overhang on Elia’s stock, making it less attractive compared to peers in the sector.

Another key issue flagged by BofA is the limited value creation potential in Elia’s core markets—Belgium and Germany—where regulatory returns on equity are among the lowest in Europe. 

Both countries’ regulatory frameworks are set until 2027-2028, limiting the potential for upgrades to allowed returns, further constraining profitability. 

While Elia is outperforming its cost of equity in both markets, BofA estimates that a portion of the outperformance in Germany is due to non-cash accounting factors, such as capitalizing borrowing costs, rather than real economic gains. This limits the value that can be extracted from its investments.

The prospect of further capital raises beyond 2028 adds to the uncertainty surrounding Elia’s long-term outlook. 

As per BofA analysts, the company’s substantial investment plans in Germany, particularly in offshore wind connections, indicate that capital expenditure needs will remain elevated even beyond the current planning horizon, potentially requiring additional equity funding. 

This ongoing need for capital injections could weigh on the stock and prolong investor uncertainty.

BofA also flags the fact that Elia’s valuation looks stretched relative to peers. 

The company is currently trading at a premium of around 19% on an enterprise value-to-regulated asset base basis, which BofA views as unjustified given the limited scope for value creation through regulatory returns in Belgium and Germany. 

This premium valuation, coupled with high uncertainty around future financing, leads BofA to view Elia’s stock as overvalued.

Shares of the company were trading 1.3% lower on Monday.