Fundamental analysis of NATURGY

NATURGY ENERGY GROUP, S.A.

CIF A08015497 Spain Energy Electricity Gas IBEX35 seen 1021 times Analysis date 11 May 2020

NATURGY ENERGY GROUP, S.A. better known a few years ago as Gas Natural, is a company in the energy sector with a presence in 28 countries and 18 million customers. Its business has 3 legs:
  • Gas, in which it participates in its different stages: Supply, Transport, Distribution, Storage and Distribution.
  • Electricity: Generation, distribution and marketing
  • Renewables: Generation, distribution and marketing
According to their 2018-2022 strategic plan, they expect to reach 1.8 billion in profits. These plans are usually quite optimistic, shall we say?


The goal of this analysis is to understand what the NATURGY ENERGY GROUP business is like, how it is managed and if it is an option to incorporate it into a Buy&Hold focused portfolio. We usually divide the analysis into 3 sections to better organize ourselves: the balance sheet, the income statement and the final valuation.


All the data shown in this analysis has been obtained from the CNMV website and you can consult many other company ratios on this page. Also, if you have been interested in this analysis, you will find others like this one here


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1 Balance Sheet Analysis

To begin with, we will outline the capital structure of NATURGY ENERGY GROUP, S.A., that is, what it spends the money on (and how much) as well as to whom it is owed (and how much). We will calculate some ratios and see their progression over time. We are going to organize it in the following points:
  • 1.1 Asset analysis
  • 1.2 Analysis of liabilities and equity
  • 1.3 Indebtedness
  • 1.4 Safety margin
  • 1.5 Liquidity/Treasury
  • 1.6 Working capital



1.1 Asset analysis

The structure of the assets will indicate the degree of immobilization of the resources of NATURGY ENERGY GROUP, S.A. That is, how much of its total assets are fixed assets (real estate, investments, goodwill, etc). In this case:
Immobilization = Fixed Assets / Total Assets = 78,64%



Inmovilization

Immobilisation remains more or less constant over the years, which means that the proportion of assets has not changed much.


We are going to break down the asset according to time, so we will make visible which part is current asset and which part is fixed asset. Its variation over time can give us information on profound changes in the company:


Breakdown of Total Assets

In this graph we see something else. The amount of assets has been decreasing over the last 5 years and is apparently caused by a drop in non-current assets. If we break down each of them we will see it more clearly:


Breakdown of Fixed Assets

Indeed, fixed assets have declined in recent years, but are now stable. The decline affects virtually all items, but mainly decreases in property, plant and equipment and goodwill. This is a decrease of 7 billion euros in the value of assets. Translated into something more understandable, it refers to the book value of traditional power generation plants (nuclear, coal and gas). Although Naturgy sells this as a simple adjustment to the accounts, it is actually a throwing away of 2 years of profits. It is good for the company to regularize the value of its assets, as it should, but it is not good for it to declare a loss. In the last two years it has stabilized assets, we will continue to monitor it. The current composition of the fixed assets is as follows:


  • Tangible fixed assets (65,11%)
  • Other intangible assets (13,94%)
  • Goodwill (9,90%)
  • Deferred tax assets (4,72%)
  • Non-current financial assets (2,28%)
  • Investments accounted for using the equity method (2,26%)
  • Other assets Non-current (1,80%)



We do the same with the current assets:


Breakdown of Current Assets

The current assets present more variation being 2 items the main protagonists:
  • Customers by sales. It is quite stable over time, if we also see the graph of customer turnover, we can say that Naturgy's business is stagnant in terms of ability to generate revenue through customers.
  • Cash shows quite a bit of variation, with years of drastic reduction. In any case, it seems that in the last few years it has increased.



The current proportion of current asset items is as follows:
  • Customers by sales (44,51%)
  • Cash (30,56%)
  • Stocks (9,06%)
  • Other debtors (8,06%)
  • Other current financial assets (3,79%)
  • Current tax assets (3,20%)
  • Non-current assets held for sale (0,83%)



1.2 Liability Analysis

In this section we will see the structure of the liabilities of NATURGY ENERGY GROUP, S.A., which gives us information about the origin of the resources available to the company. It tells us where the money comes from and to whom it is owed. To find out the proportion of the capital belonging to the company compared to that belonging to others, we have the following formula:
% Equity = Own Capital / Total Capital = 33,97%



Own capital

Naturgy's equity has been falling since 2017. We will investigate what this is due to.


As with the assets, we will break down the items that make up each part of the liabilities. We will start with a grouped chart and then break it down:


Breakdown of Liabilities

Current liabilities are fairly stable, unlike equity and non-current liabilities, which show some variations. Let's break down each of them.


We start with the net worth:


Breakdown of Equity

Equity is affected by the adjustment in the value of the assets and has not been recovered at the moment. The pre-2018 graph was very healthy, perhaps at the expense of not being too rigorous. On the other hand, there is the item Other, which before was almost negligible and now significantly reduces the value of equity. In this item we include several interesting things:
  • Another accumulated overall result. It goes from subtracting 1 billion in 2017 to subtracting 1.2 billion in 2019.
  • Interim dividend. It goes from distributing 330 million euros to distributing 750. It does not seem healthy to us to double the remuneration to the shareholder in 2 years when there have been precisely very strong losses.
  • Own shares and equity holdings. It goes from being an almost worthless item to subtracting another 320 million euros.



This is why we believe that Naturgy's equity is deteriorating. The most important items composing it are:
  • Reserves (47,85%)
  • Share premium (27,25%)
  • Minority interests (24,51%)
  • Profit attributable to the parent company (10,02%)
  • Issued capital (7,04%)



We continue with the current liabilities:


Breakdown of Current Liabilities

Current liabilities remain reasonably constant over time. It does not grow in absolute terms, nor do the debts that generate financial expenses, so this is a good figure.


The most important items that compose it are:
  • Suppliers (46,85%)
  • Short term debts to credit institutions (33,85%)
  • Other creditors (8,92%)
  • Other current liabilities (4,71%)
  • Current provisions (4,38%)
  • Liabilities linked to assets Non-current assets for sale (0,70%)
  • Current tax liabilities (0,50%)
  • Other short term financial liabilities (0,10%)



We completed the liability analysis with the fixed liability:


Breakdown of Fixed Liabilities

Non-current liabilities fall from the beginning of the historical series. In general, all items fall except a slight increase in long-term bank debt. We can say that this is a positive figure, this is the current breakdown:
  • Long-term debt with credit institutions (76,07%)
  • Deferred tax liabilities (10,97%)
  • Provisions Non-current (5,70%)
  • Grants (4,38%)
  • Other non-current liabilities (2,89%)



1.3 Debt Analysis

Once we have seen the composition of the balance sheet in general terms, we are going to review some key figures. A very important concept in the valuation of a company is the debt, since a company that does not have debts cannot go bankrupt. The progression of the debt ratio tells us how big a company's debts are in relation to its equity:
Indebtedness = Outside Capital / Equity = 194,35%



Indebtedness

Debt appears to be under control, pending the outcome of its relationship with EBIT and the financial expenses it generates. However, in the last few years it has begun to rise, and must be kept under observation.


The average debt in the sectors/activities where we classify it are:
  • Energy (202,17%)
  • Electricity (219,21%)
  • Gas (239,63%)
  • IBEX35 (880,00%)
It is therefore in the average for the sector/activity in Spain and well below the IBEX35 average.


Indebtedness on EBIT

The debt over EBIT remains constant if we ignore the axe of the 2018 losses. That's a good sign.


1.4 Safety Margin

In order to operate properly, companies normally need their fixed assets to be covered by their own capital plus long-term debts. This is known as the safety margin. Otherwise it would mean that part of the company's fixed assets (offices, land, machinery, financial assets...) have to be paid for with short-term debt, which can be quite dangerous. This is not something that has to be complied with yes or no, but it is a sign of good health.
Safety Margin = Fixed Assets / (Equity + Fixed Liabilities) = 106,60%



Margin of Safety

Naturgy's safety margin remains above 100%, therefore a good sign.


1.5 Liquidity/Treasury

Liquidity = Current Assets / Current Liabilities = 132,07%
If we represent him over time:


Liquidity

Liquidity must always be close to 100%, otherwise there may be problems in paying debt maturities or short term payments. In the case of NATURGY ENERGY GROUP, S.A., it has correct liquidity, nothing to celebrate, but it indicates that it can cope with short-term debts.


1.6 Working capital

The working capital indicates the amount of current assets that are financed with permanent resources. The higher it is, the fewer financing problems there will be if there are quarters with less turnover. To evaluate working capital we relate it to current assets and sales:
Working Capital on assets = (Net Worth - Fixed Assets) / Current Assets = 24,29%
Working Capital on sales = (Net worth - Fixed assets) / sales = 9,26%



Working Balance

Naturgy's working capital remains positive.


2 Analysis of the Income Statement

When studying the income statement, we will calculate the following ratios and their progression over time:
  • 2.1 Analysis of income, expenses and profit.
  • 2.2 Return on Equity (ROE) y Return on assets (ROA)
  • 2.3 Margin on sales



2.1 Analysis of income, expenses and profit.

We start with net profit and FGO (funds generated by operations):


In Fundamental Analysis we like to show the FGO together with the net profit, which is the money the company has managed to earn. In order to calculate it, we add the amortizations to the net profit and thus avoid possible adjustments by decreasing this concept. Some companies may be forced to make up the profit in this way if they have not done particularly well.
FGO = Net Profit + Depreciation



Profit vs Funds from Operations

The FGO does not follow the profit curve because the regulation of the value of the assets was made by charging the depreciation account. The reading we got is that, on the one hand, such regulation did not affect the ability to obtain money, as the company claimed. But on the other hand, profit is totally stagnant.


Inevitably, for a company to make money it needs income, so let's see what they look like:


Sales

Naturgy's income has also been stagnant for 7 years, even showing a slight drop.


Another piece of information that is usually interesting is the breakdown of expenses:


Expenses

The positive side of this is that expenses have also remained stable over time. Otherwise it would have been very difficult for the company.


In addition to the operating costs, we have to take into account the financial costs. A company can have a very large debt, but if the expenses it generates are bearable with the EBIT there is no problem. Therefore, we will represent both data:


Financial Expenses vs EBIT

The financial expenses represented together with the EBIT tell us that they are bearable but not negligible. Every year, 1 billion of EBIT goes directly to pay interest on loans, which is no small thing. It is curious that it is a company with a low debt ratio, but with high financial expenses.


2.2 Return on equity (ROE) y Return on assets (ROA)

The ROE, or Return on equity, measures the profits of NATURGY ENERGY GROUP, S.A. by comparing them with its own funds. It is a way of measuring the profitability and the quality of the business management. It only makes sense to see it this way when it is a sustained ROE over time. A high ROE in an isolated financial year can be caused by an increase in debt, which gives a greater capacity to buy assets and therefore an increase in profit. The problem comes later, when that debt has to be paid off and expenses skyrocket:
ROE = Net Profit / Equity = 13,28%



ROE

The SWR is acceptable and historically stable. With the decrease in net worth the ROE rises, we must see how this ratio behaves in the coming semesters. As an example, the average ROE in the sectors/activities in which we classify Naturgy is the following:
  • Energy (3,33%)
  • Electricity (9,39%)
  • Gas (13,30%)
  • IBEX35 (7,68%)
Therefore, it has an above-average ROE.


ROA = Net Profit / Assets = 3,40%



ROA

2.3 Margin on Sales

We are going to calculate the margin on sales of NATURGY ENERGY GROUP, S.A., that is to say, what proportion of sales ends up being a constant and significant profit:
Margin on Sales = Net Profit / Sales = 6,08%



Beneficio over Sales

Naturgy's profit on sales remains stable at 5%. It's a somewhat low ratio, but it's enough.


We can also see how the margins of NATURGY ENERGY GROUP, S.A. behave. On the one hand, we have the operating margin, which tells us what proportion of sales ends up being EBIT. On the other hand, the operating margin tells us what proportion of sales ends up being profit before tax.


Margins

Margins are also stabilized, with the exception of fiscal year 2017.


3 Dividend and general valuation




Currently, NATURGY ENERGY GROUP, S.A. has 984,122,146 shares in circulation, with a treasury stock of 1.97%. It has EPS of 1.42 and is currently paying a dividend of 1.06 per share per year, i.e. a payout of 74.48%. Maybe a little high so that there's something left over to reinvest in the business. In conclusion, at current prices (16.64 euros) it gives a dividend yield of 6.37%, the book value is 14.20 euros per share and the PER is 27.73. We believe that Naturgy is a company that does not have problems, far from it, but we do not find it particularly attractive to invest in. It has been in business for 7 years with frozen income and its assets are worth less and less. Whoever invests in this company is not mistaken, it will continue to receive dividends and the company will continue to exist for many years to come. However, it is not a "Thoroughbred" that ensures a strong return to the shareholder, with good business and impeccable management. We think that Naturgy is one of a kind.


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Balance, Income Statement, Cash Flow...
Employees 527 (52.60% women)
Profit -347.3M €
Earnings per share 0.4 €
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