Enel shares head north as investors welcome new business strategy

LONDON (ShareCast) - Italian utility giant Enel (Milan: ENEL.MI - news) shares gained 1.8% to trade at €4.33 as investors welcomed the group's new strategy which sees cost cuts increasing the dividend outlook. Enel, a component of the EuroStoxx 50 index of Europe's leading blue-chips, presented its capital markets day on Thursday, in which it offered a new strategy that focuses on efficiency, growth in capital expenditure and higher dividends. It also laid out plans to expand in Latin America and Africa by investing EUR8bn as it views the energy fundamentals in Europe as weak.

The company has countered falling revenue from weaker electricity demand in Europe with expense cuts and divestments such as an 8% reduction to cash costs and the completion a EUR1.4bn bond swap in January to reduce funding costs.

Enel said its forecast of an 8% reduction in cash costs mean the dividend payout will rise to 50% of adjusted net income this year from 44% in 2014, and gain 5 percentage points a year to reach 65% in 2018.

The company, which controls Spanish power group Endesa , said it would focus on a larger number of smaller projects rather than big traditional plants to stem risk. The latest revamp in strategy comes after Europe's power sector by a number of drivers including weak energy demand, low wholesale power prices and increased demand for renewable energy.

HSBC reiterated its 'overweight' rating on Enel and raised its target price to €4.80 from €4.70 on the back of the new strategy for the business. "The messages (from management) did not disappoint, providing a positive surprise in the dividend outlook. Likewise, the earnings outlook met expectations, offering some upside versus consensus by 2017," said the bank.

HSBC said the company's plans to focus new business plan on growth opportunities in the renewable and network segments and in the Latin America area makes sense but the market could be concerned about the successful delivery on the back of strong competition in the Latin America markets.

"The old strategy based on balance sheet repair seems to be over now, which provides more strategic options to the company," said HSBC. "Even though the free-cash-flow yield profile of the company would be affected by higher growth capital expenditure and greater dividend payments, we still see Enel offering appealing valuation metrics versus the sector," added HSBC.