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Hera on stock exchange
Sustainability and growth strengthen Hera’s equity story

Hera’s share price has performed well since the beginning of 2021, also compared to the performance of benchmark indices.

Equity markets have maintained a positive tone even after the start of the normalisation of monetary policy that the Fed announced on 16 June, despite the volatility induced by inflationary fears and, more recently, by the growing infections due to variants of the virus.

In the last few months, Hera has strengthened its equity story in terms of sustainability, also leveraging on prestigious external recognition: after 2020’s inclusion in the Dow Jones Sustainability Index World, the score obtained with the ESG Evaluation by S&P Global Ratings on 21 July 2021 places the Company among the top 15 utilities internationally. This has cemented the features underlying the equity story of Hera, as a credible Company that can boast solid fundamentals. Its results have remained resilient even in the face of the difficult operating environment generated by the pandemic, while in the phase of exit from the crisis they are demonstrating a remarkable ability to accelerate growth.

Moreover, Hera’s stock benefitted from a remuneration that was more generous than that announced in January, at the presentation of the new Business Plan: the dividend paid on 7 July 2021 resulted into a 3.7% yield on the 2020 year-end price.

The strong growth shown by the half-yearly figures approved by the BoD today does not appear to be reflected in current market prices and, since it exceeds analysts’ expectations, in their valuations either. This opens up new scope for potential rerating of the stock.

Let’s explore these aspects talking to Jens Hansen, who is the Head of the Group Investor Relations.

How has Hera stock performed in 2021?
Since the beginning of the year, the price of Hera shares has risen more than 15% in absolute terms, while strongly outperforming the Italian utility index. Hera share price has also outperformed the FTSE MIB, the index of Italian blue chips, which in 2021 has succeeded in gaining traction from stocks fitting with the “reflation trade” investment theme, as the economy prepares to emerge from the pandemic-induced crisis.

What factors are driving global equity markets?
In general, equity markets have shown a positive tone in 2021, buoyed by the significant resources that expansionary monetary and fiscal policies have deployed to help boost the economy. Progress on vaccination campaigns exceeded the forecasts prevailing at the beginning of the year, leading investors to expect that a rapid recovery in investment and consumption, which had long been subdued, could take place as economic activity reopened. Therefore, analysts’ estimates of corporate Earnings per Share have been gradually revised upwards, which has meant that although the indices have reached new highs, valuations in terms of multiples, for example when looking at the Price Earnings ratio, have remained at reasonable levels.

Apparently, utilities have not been a favoured sector for investors in 2021…
As early as the beginning of February, we saw that utility prices had been adversely affected by the surge in bond yields that occurred on fears of inflationary pressures. Eurozone rates then quickly returned to lower levels as the European Central Bank reassured the markets that it would remain dovish beyond the health emergency. The strong correlation between utility stocks and bond yields, in a bond-proxy sense, remains evident. Having said that, I believe the stock market has always made a selection among stocks, even within the sector, based on the different growth prospects of individual companies.

Since mid-June, there seems to have been some change in the scenario…
We are observing a certain volatility in the equity markets, which are very focused on analysing the impact of macroeconomic variables on individual sectors. So far, on the one hand, inflation has mainly been interpreted as a transitory phenomenon, due to the disruptions that the pandemic has created in supply chains. On the other hand, Central Banks seem intent on not stopping bond repurchases until they see signs of a firmly recovering economy, with higher levels of employment. The fact remains that we have seen a recent turnaround by the Fed. Since on 16 June the US central bank announced that it was embarking on a process of monetary policy normalisation, which will involve two interest rate hikes by 2023, market volatility has actually increased, although investors remain in fundamentally positive sentiment.

What does this mean for stock market prospects?
Certainly, actively managed portfolios have recently seen a rotation toward more defensive stocks, which are able to maintain good margins even in the face of possible inflation peaks, either because they can count on “pricing power” based on strong market position or because they have indexed revenues. This has also led to new interest in specific segments of the utility sector.

Is the fear of inflation peaks during an economic recovery the only element that creates uncertainty in equity markets?
I would say no. The volatility is really due to the fact that on the one hand there are fears that an overheating of the economy will lead to rising interest rates, while on the other hand there are fears that the variants of the virus, if there were an explosion of infections, would slow down the process of completely removing anti-Covid restrictions, in fact penalising the strength of the recovery: this would instead lead to the need to keep interest rates at very low levels.

How has this situation been reflected in Hera share price?
In an environment strongly influenced by macroeconomic factors, I believe that Hera sound fundamentals were only partly incorporated into the share price. We were certainly able to leverage on the solid fundamentals confirmed by the Business Plan presented in mid-January as well as the healthy results presented for the 2020 financial year and the first quarter of 2021. The decision to increase the dividend per share envisaged in the Plan by 0.5 euro cents, with carryover effects on subsequent years, also reinforced the visibility and attractiveness of the remuneration that Hera can offer its shareholders. We have been recognised as a leading multi-utility at global level for our virtuous ESG profile: after entering the Dow Jones Sustainability Index, World and Europe, in 2020, we were awarded an ESG Evaluation of 81 points out of 100 by S&P Global Ratings on 21 July 2021, which places us among the top 15 companies internationally. Our equity story has therefore certainly strengthened on the sustainability front. Several asset managers with a long-term approach have recently taken the opportunity of weaknesses in the share price to enter the capital of Hera. But I believe that the scale of the growth in these half-year results that we are releasing today is likely to attract the attention of additional investors, because the scope for future increases in earnings per share reinforces the stock’s appreciation potential.

Currently, what is the consensus target price?
The consensus target price of the seven analyst that cover the Hera stock is close to 4 euro, as it basically remained unchanged since the release of first-quarter results, with six out of seven recommendations that indicate a Buy or an expected outperformance. The prices at which the stock has been trading over the past two months, in the 3.40-3.70-euro range, suggest that especially the more conservative valuations will be revised upwards considering the strong growth shown by the half-year results published today.

 

Jens Klint Hansen
Jens Klint Hansen
28 July 2021
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