The first-quarter 2024 report released today enhances the visibility of Hera’s ability to deliver an attractive return to its shareholders: the profitability growth, as measured by both ROI and ROE, supports an EpS increase of more than 12%, which is also matched by a dividend yield of around 4%. Shareholders will receive a payment of 14 eurocents on 24 June, as resolved by the Shareholders’ Meeting held on 30 April.

With the 2023-2027 Plan presented in January, management has outlined a clear path of continuous improvement in profitability over time as well as a dividend distribution policy that reflects the expected progress in earnings. Therefore, the prospect of attractive shareholder remuneration goes beyond the healthy results of the quarter, with an extension to the perspectives of the coming years.

Meanwhile, based on the targets included in the new Plan and the solid fundamentals confirmed by the 2023 annual results, Hera’s share price went up nearly 20% since the beginning of the year, outperforming the benchmark indices. Despite the rally, further room for potential appreciation still lies ahead, also proven by the consensus target price, which stands at 3.83 euro prior to the release of first-quarter results.

We delve into these topics in an interview with Jens Klint Hansen, Director of Investor Relations at Hera Group.

How has Hera’s stock performed in these first few months of the year?

The stock price, which traded at 2.972 euro at 2023 year-end, has risen significantly. Now it is up around 20%. An acceleration of the rally was experienced in the weeks following the presentation of the Plan on 24 January 2024, as both analysts and investors gave it a warm welcome. Having touched a high of 3.37 euro on 15 March, the share price retraced slightly when the whole stock market suffered from the weakening prospect of a cut in interest rates, following the release of still high inflation data. In the second half of April, the upward trend resumed, at a time when it seemed more likely to investors that the ECB, unlike the Fed, could make a rate cut as early as June.

Therefore, at this stage, leveraging on solid fundamentals and visible prospects, Hera clearly outperformed not only the sector index, the Italy All-Share Utility Index, which is now around the levels of the beginning of the year, but also outperformed the FTSE MIB, which continues to be driven by banking stocks, which are favoured by the high interest rate environment and with capitalisations that have a substantial weight on the index.

What are the pillars of Hera’s equity story right now?

Since the beginning of the year, with the new Plan, we have focused on value creation for shareholders. In a scenario where there is still a lot of uncertainty about the evolution of interest rates, it is key to demonstrate to the market that at Hera we are paying close attention to returns, both on invested capital and equity, by constantly comparing them with the evolution of the weighted average cost of capital. The search for opportunities that can provide attractive and visible returns is increasingly challenging in a high cost-of-money scenario. Therefore, at this stage our storytelling with investors is very focused on demonstrating that investments are decided according to stringent value creation criteria. This naturally involves a great deal of effort on the part of management: but it is a very serious, transparent, and market-friendly policy that is giving us satisfaction. The logic of value creation helped us a lot in having the sound FY23 results appreciated, and – I am convinced – it will also help us a lot in explaining this first quarter of 2024.

What is the current investors’ view on the utilities?

The sector has been heavily penalised lately, due to the inverse correlation it typically shows with interest rates. Regardless of whether individual stocks have proven to have intact cash-generating capabilities and solid credit ratings, utilities are now trading at multiples well below historical averages. I believe that a rerating of the sector in general will only start once the ECB announces a pivot in its monetary policy. At that point we will have not only the factor of undervaluation backed by Hera’s solid fundamentals, but also that of a generally rising multiple for the sector, which, combined, could drive a price hike for the stock.

Has the analysts’ consensus changed after the annual results?

After the Plan presentation, the brokers in coverage extensively changed their estimates and valuations, thus moving the consensus target price from 3.53 to 3.80 euro. 

The annual results we published on 26 March were on average in line with expectations. Therefore, only one broker revised its valuation upwards after that date: this slightly shifted the average target price from 3.80 to 3.83 euro.

Overall, analysts’ recommendations remain very positive, with five out of six analysts that suggest buying Hera shares and only one analyst that suggests holding the stock in one’s portfolio.

Despite the rise since the beginning of the year, Hera’s share price therefore still sees significant room for appreciation at recent levels of around 3.5 euro. 

What impact do you think this quarterly report will have on the share price?

With double-digit earnings growth, above Plan’s forecasts, ample flexibility to fund additional outperformance opportunities, and the expected payment of a dividend up 12%, we believe that the stock’s positive momentum can only consolidate and gain further strength, also on the back of the expectations of the next cut in interest rates.