Good deal to grab or value trap? Opinions will certainly differ, because Romande Energie is a strange animal that is rather difficult to understand.
This company was born from the merger in 1997 of two century-old companies, the Société Romande d'Electricité (SRE) and the Compagnie Vaudoise d'Electricité (CVE).
Romande Energie is an energy production, distribution and marketing company, also active in energy services. Its head office is located in Morges, in the canton of Vaud.
In terms of size, Romande Energie is the 5th largest electricity distributor in Switzerland and the largest in French-speaking Switzerland. The group is active in the cantons of Vaud, Valais, Fribourg and Geneva and has 300,000 customers.
Other electricity companies listed on the Swiss stock exchange are BKW (Bernese Motive Power), Alpiq and Energiedienst.
Romande Energie currently produces approximately 15% of the electricity it distributes, which is very little compared to its main competitors. The rest of the customer supply is ensured by long-term supply contracts with large producers as well as by energy purchases on the electricity market.
In order to diversify and limit the influence of prices on the electricity market, Romande Energie has been acquiring companies active in building technology for some time. The latest acquisitions are the company Neuhaus (active in air conditioning and ventilation) and Thermoréseau (district heating).
Romande Energie holds 9% of Alpiq's share capital through a complex mechanism: It has a 29.7% stake in EOS Holding (Énergie Ouest Suisse), which itself holds 31.4% of Alpiq's capital. This indirect stake in Alpiq has proven to be a real pain in the neck in recent years, given that Alpiq regularly has loss-making financial years.
Romande Energie saw its net profit increase by 6.1% in 2017 to 120.5 million francs. The turnover of the Vaudois energy group fell by 4.5% to 575.3 million. The 2018 figures will be published on April 11, 2019.
With 83% of equity (at the end of 2017), the company has a rock-solid balance sheet. The net profit margin (20.8%) is excellent and the return on equity (6.2%) is correct, at least in years when Alpiq does not come and spoil the results...
At the current price of 1140 fr, the dividend yield is 3.2%. In addition, the dividend is growing regularly (+44% from 2011 to 2017) and the payout ratio of 32% is also very reasonable.
Despite a fairly large market capitalization of 1.3 billion, the liquidity of the securities is rather low and the spread often hovers around 1%. This is explained by the fact that the majority of the shares are in the hands of public authorities in the canton of Vaud and that the free float is only 20%.
Political uncertainties (in particular the complete opening of the electricity market), the participation in the lame horse Alpiq as well as the limited free float are of course negative elements. And yet, it is precisely thanks to these negative points that Romande Energie shares are available at a knockdown price: the 2019 PER is estimated at 10 and the PBR is only 0.67!
Such an anemic valuation could well represent an excellent investment opportunity from a value perspective. That is in any case the point of view of your humble servant and that is why I have just got my hands on a few stocks.
With Romande Energie, the atmosphere is electric. What power, what intensity, what tension, I'm amping up my words! Well, I'll leave you, but I'll keep you posted... 🙂
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But, bro, what's going on? Are you starting to invest in cheap stocks? Are you becoming cheap like me? It must be age :)
You are right when you say that it is a difficult title to define because I myself am hesitating between hot and cold.
It is true that the current PER is very cheap, but the average PER is 45.41 and the earnings per share are not very stable from year to year.
Undoubtedly, however, the price compared to the book value is really very interesting and it ensures a good base, as long as the fundamentals do not deteriorate. The F-Score (Piotroski), with 7, confirms that this is far from being the case (but we are still on the 2017 figures, we should see how for 2018).
Free cash flow was negative in 2017. The company tends to be very greedy in capital expenditures, which explains this. That is already significantly worse. The price to FCF is on average 30.26, so quite expensive.
On the other hand, if we look at the EBITDA / EV, we are at 13.9%, so it is an opportunity! The hot, the cold…. a bit normal for a company active in energy 🙂
It is true that the dividend yield is attractive and well covered compared to current profits, but it is not so compared to average profits and even less so compared to FCF.
There is another thing that bothers me at Romande Energie, it is the cash reserve which is monstrous. The current ratio is almost 5. It is wasteful and it is very often a bad sign.
On the other hand, it is indeed necessary to note several other interesting points, such as a superb gross margin, almost non-existent debt, general expenses under control and an increase in goodwill. There are slight whiffs of frankness, which is surprising given the valuation of the title.
Let's also note that the beta, with 0.17, places the title in the defensive category, but we kind of suspected that. It's always good to take in these times, but it doesn't prevent the action from being quite volatile, with 16.63%.
So there you go, I'm very conflicted! You've teased me a bit with this story I must say, but when I'm not 100% convinced I don't usually go there 🙂
Heh heh, I knew this title would tickle you, its contradictions make it not easy at all to understand. But with such a valuation I estimate the downward risk rather limited and the upward potential could reserve good surprises.
The stock's history is also quite schizophrenic: a rise of over 8000% (!!!) from 1993 to 2007, followed by a fall of over 50%. For the past few years, the EEG has been as flat as my jokes, which also makes me think that we may have hit rock bottom.
Indeed. I think that the valuation in relation to assets is not unrelated to this phenomenon.
Was the stock's fall after the major 1993-2007 rally due to the subprime crisis? And/or some other company-specific factor?
One thing is certain, is that after the general stock market turmoil of 2008, the EOS stock did not evolve like the others: it rather stagnated while the general trend of the post-subprime crash indices was positive.
The fall in the price after 2007 is not a phenomenon specific to Romande Energie. I am not an electricity market specialist, but I would say that Swiss producers found themselves in difficulty mainly because of the low electricity prices on the European market, partly due to the liberalisation of the European market, and partly following the subprime financial crisis, followed by the economic recession in the EU (2007-2008) which significantly slowed down demand for electricity.