The new Plan to 2025 expresses a clear equity story, based on the growth acceleration of both EBITDA and Earnings per Share. It also leverages the high visibility of the factors that drive an increasingly green path.
Investors will have new elements to evaluate the Hera stock, starting from the 2025 targets, which also envisage a higher remuneration through dividends following higher expected earnings, while the financial profile remains solid.
Even beyond the Plan horizon, Hera has clearly indicated that its growth path is perfectly in line with EU policies, with both decarbonisation and increasingly responsible management of resources being at the top of the agenda.
We discuss these topics with Jens Hansen, Head of Investor Relations at Hera.
Hera vs. FTSE MIB (base 4 January 2021=100)
How do you expect that investors and analysts will perceive the new Plan to 2025?
Looking first at the preliminary results of FY 2021, which represent the starting point of the Plan to 2025, the financial community will find a performance that went far beyond the targets that we originally indicated at EBITDA level. Based on the preliminary figures, the healthy level expected of Net Profit will allow the Board of Directors – when meeting for the approval of the 2021 Annual Report – to propose a 2021 dividend of 12 euro cents per share, up 9% compared to 2020.
If we look beyond 2021, management stability – which ensured a consistent and trustworthy execution of Hera’s strategy over the years – certainly provides credibility to the future growth indicated in the Plan.
This Plan’s growth is also very visible, as it is driven by a thorough capital allocation, with development investments focused in the business areas that provide the highest prospective returns.
In this Plan, the targets to 2025 reflect the clear strategy that Hera has designed to provide, on one hand, the sustainability that policy makers and customers require and, on the other hand, attractive returns to shareholders.
What does Hera offer to investors with this Plan, in terms of remuneration through the dividend?
Planned investments are dedicated to fuel a strong cash generation. The growth expected at the level of EBITDA and EBIT is expected to result in an even more dynamic growth at the bottom line, given a careful financial and fiscal management. And it is precisely the 5.7% growth rate in Earnings per Share that is expected to result in a similar dividend development. Therefore, Hera is committed to a more generous distribution of earnings over the Plan’s period than in the previous Plan, starting from the level of 12 cents that will be proposed for 2021. As a result, the Company plans to increase the DPS each year over the Plan period, until it reaches 14.5 cents in 2025: this policy continues to provide a “floor” to dividends.
What interpretation will investors give to longer-term targets?
From the Plan they will be able to see very clearly that over time the weight of Shared Value EBITDA increases, from 40% in 2020 to 55% in 2025, to reach 70% in 2030. This is not an unrealistic ambition, as we have adopted, since last year, the methodology of the “Science Based Target initiative” in determining the new 2030 target of 37% reduction in Scope 1+2+3 emissions.
Today sustainability is seen as a risk for many listed companies, given the ambitious objectives that the European Union has set itself in the decarbonisation process. How does Hera deal with this challenge?
It is widely recognised that utilities are among the companies most impacted by ESG risk. For Hera, however, sustainability it is neither a new opportunity nor a threat. We have no network infrastructure or any kind of assets that are challenged by the net-zero targets. We don’t have to set new policies to reduce emissions, because we have been on this path for 20 years, right from the beginning. In fact, the Plan is very much focused on the benefits that will be captured by Scope 3, i.e., improvements that Hera will stimulate or facilitate in the consumption of its customers. Also, EBITDA growth is heavily driven by sustainability-focused businesses, as indicated by the objective just mentioned, that about 55% of 2025 EBITDA will be at Shared Value.
Does this Plan have a different risk profile compared to the previous one?
Even though the new Plan envisages higher growth rates, the risk profile does not change. We invest mainly in areas where we have a strong position and count on solid competitive advantages, with expected returns that are not only attractive in terms of size but also very visible.
For this reason, we expect that the impacts of the investments will produce slightly improved effects on the ROI, which rises from 8.6% to 8.7% over the Plan’s period, even though approximately 60% of Hera’s invested capital is in regulated businesses, which, as we know, have been penalised by the recent WACC cuts set by the Regulator. These pandemic years have even more clearly pointed out Hera’s ability to produce sound results, also when it comes to challenging scenarios; even when waste volumes fell as some industrial clients were forced to stop their operations, Hera’s financials proved to be resilient. On the other hand, with the progressive removal of restrictions, we experienced a recovery in volumes that is far greater than that of the Italian GDP.
However, the plan sees Hera investing in several innovative businesses. Can this increase the risk profile?
I would say no. Hera’s selling proposition is not focused on new services with still uncertain returns. Although we increasingly aim to reap the benefits of technological innovation, we operate in established businesses that we know in depth. Even those businesses where our presence is more recent, as in the case of biomethane, we already have a plant in operation. Where we are creating a frontier initiative, as in the case of the plant that we have under construction for the treatment of plastic waste, which will make it possible to obtain recycled products with properties similar to those of virgin polymers of fossil origin, we still leverage the technology developed by Maire Technimont, a world leader in the sector.
Based on all these premises, we can define the Plan as “net zero risk”. The path that Hera follows to become “net zero carbon” is clear and straightforward. It does not envisage attempts or even experiments, but highly visible investments.
The growth indicated in this Plan is higher than that of the previous Plan. Does this depend on a more optimistic approach?
Although the growth pace is significantly higher than in the previous Plan, these forecasts remain conservative, as always in Hera’s history. Just consider that, although M&A remains a cornerstone of the growth path, the 300-million-euro increase expected at EBITDA level is basically achievable organically.
What is the current average target price level?
Following the release of nine-month results, we experienced a general upward revision of both estimates and valuations of the analysts that cover the Hera stock. That resulted in an increase of the mean target price from 3.93 to 4.25 euro, with a range between a low of 3.9 euro and a high of 4.80 euro. Even considering the lowest target price, at recent share prices the upside potential is well above 10%. The picture of recommendations remains very positive, with the vast majority of analysts that suggest buying the Hera shares or expect an outperformance of the share price.
| Broker | Rating | Target Price (€) |
| Banca IMI | Buy | 4.80 |
| Equita Sim | Hold | 3.90 |
| Intermonte | Outperform | 4.30 |
| Kepler Cheuvreux | Buy | 4.10 |
| Mediobanca | Outperform | 4.30 |
| Stifel | Buy | 4.10 |
| Average | 4.25 |
With the release of strong 2021 preliminary results and the significantly improved Plan’s targets to 2025, the market will have new elements to assess the potential returns that Hera stock offers at current price levels, and how these prospective returns are associated with a low risk profile.
What kind of equity story does Hera present today?
Despite Hera share is widely underrated – as indicated by the gap with the pre-Plan consensus target price of 4.25 euro – we are not a value stock. We are not a yield play either, despite the 2021 dividend has been revised upward three times in the last year and despite future dividends are growing, in line with the new earnings profile. Instead, we are a growth story, with features that come out reinforced by the new 2025 targets.
