Fundamental analysis of IBERDROLA

IBERDROLA, S.A.

CIF A48010615 Spain Energy Electricity IBEX35 seen 1480 times Analysis date 02 June 2020

Iberdrola is a company with more than 170 years of history that has different businesses focused on energy and electricity. On the one hand, it is dedicated to the production of electricity using renewable sources (wind, mini-hydraulic, thermosolar, photovoltaic, biomass, etc). On the other hand, it is present in the network business, which is in charge of the construction, operation and maintenance of lines and transformation centres. Finally, it also focuses on electricity production with conventional (non-renewable) plants and marketing to the end user.


The EBITDA by business is as follows:
  • Nets 46%
  • Generation and customers 28%
  • Renewables 26%
The best known areas are those that produce the least amount of EBITDA. For more information we recommend visiting the company's website, where you will find much more information.


The objective of this analysis is to understand what IBERDROLA, S.A.'s business is like, how it is managed and whether it is an option to be incorporated into a Buy&Hold 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 ratios of the company in this page.


In addition, you can find other analyses like this in our analysis list.


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1 Balance Sheet Analysis

To begin with, let's take a look at the capital structure of IBERDROLA, 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 IBERDROLA, S.A.'s resources. That is, how much of its total assets are fixed assets (real estate, investments, goodwill, etc). In this case:
Immobilization = Fixed Assets / Total Assets = 88,92%



Inmovilization

Iberdrola's immobilization is quite high, reaching 90% and remaining stable. It is logical, you have to take into account that your business needs expensive installations.


We are going to break down the asset by 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

As we can see, the assets are growing quite a lot, which is a good thing, we are interested in companies that are growing. In addition, the asset that has grown the most in proportion is the fixed one. Let's see if this growth is healthy or if it has produced unwanted debt. First we will break down each of the items, starting with the fixed assets:


Breakdown of Fixed Assets

A graph that shows that Iberdrola maintains the proportion of games in its assets. If this ratio has worked well in the past, it will work well in the future. This is the current ratio:


  • Tangible fixed assets (65,52%)
  • Other intangible assets (11,23%)
  • Goodwill (7,49%)
  • Deferred tax assets (5,23%)
  • Other assets Non-current (4,87%)
  • Non-current financial assets (3,55%)
  • Investments accounted for using the equity method (1,80%)
  • Real estate investments (0,31%)



We do the same with the current assets:


Breakdown of Current Assets

The current asset shows more variation, both in proportions and in absolute value. In general we can say that current financial assets have disappeared and in their place the item of clients, stocks and cash has been growing. In general it is positive. This is the current proportion of the items that make up current assets:


  • Customers by sales (45,71%)
  • Stocks (21,00%)
  • Cash (15,59%)
  • Other current financial assets (8,10%)
  • Other debtors (7,26%)
  • Current tax assets (2,35%)



1.2 Liability Analysis

In this section we will see the structure of IBERDROLA, S.A.'s liabilities, 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 = 38,57%



Own capital

Equity has remained constant in recent years at below 40%. This is a relatively high figure, although it is not indicative per se of good health.


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

The liabilities seem to grow while maintaining constant the proportions of their items, let's see in detail each of them. First the net worth:


Breakdown of Equity

Net worth grows in a linear fashion over the years. In this case, the composition has been changing, making the item of minority interests increasingly representative to the detriment of reserves. This is not particularly good, as equity is increasing, but in fact it is not Iberdrola's, it consolidates them in its accounts as they are controlled companies. If we subtract the minority interests, we are left with a virtual net worth that would have stagnated since 2015. The most important items that make it up are:
  • Share premium (31,08%)
  • Reserves (20,57%)
  • Minority interests (20,16%)
  • Results of previous years (19,51%)
  • Issued capital (10,11%)
  • Profit attributable to the parent company (7,22%)



We continue with the current liabilities:


Breakdown of Current Liabilities

Current liabilities have increased in recent years, mainly influenced by debts with credit institutions. In the last 5 years they have grown by just over 2500 million euros. Later on we will see if it affects financial expenses. The most important items that compose it are:
  • Short term debts to credit institutions (46,00%)
  • Suppliers (26,65%)
  • Other creditors (15,70%)
  • Other current liabilities (6,02%)
  • Current provisions (3,45%)
  • Current tax liabilities (1,27%)
  • Other short term financial liabilities (0,92%)



As for the fixed liabilities:


Breakdown of Fixed Liabilities

Fixed liabilities remain proportionally more stagnant, although if we look at it, debts to credit institutions represent a fairly large amount. Again, we will see if this leads to bearable financial costs.


The most important items that compose it are:
  • Long-term debt with credit institutions (53,75%)
  • Deferred tax liabilities (16,70%)
  • Other non-current liabilities (10,93%)
  • Provisions Non-current (10,69%)
  • Other long-term financial liabilities (5,43%)
  • Grants (2,50%)



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 = 159,29%



Indebtedness

Iberdrola's debt is quite reasonable, below the energy (202%) and the electricity (219%) sector average. The other side of the coin is the debt of the IBEX35 (880%), far above that of Iberdrola.


Indebtedness on EBIT

In the graph of debt over EBIT, there are peaks that were not seen in the graph of absolute debt. This is due to the fact that the EBIT has had significant variations. Currently, the debt is around 12 times the EBIT, not a disproportionate figure, but as we have said, we must see if it represents an acceptable financial expense.


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) = 94,88%



Margin of Safety

Iberdrola's safety margin is below 100%. This should make us more careful in understanding the company. In Iberdrola's case, its business is relatively predictable and it can risk more with short-term debt, but without going overboard. You have to be aware of this fact.


1.5 Liquidity/Treasury

Liquidity = Current Assets / Current Liabilities = 70,87%
If we represent it 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 IBERDROLA, S.A., it has a very fair liquidity, its short term assets do not give to pay short term liabilities. To alleviate this situation it does not have many options, it can sell assets or it can get into debt. What Iberdrola has been doing is financing itself with credit lines, as we can see in the graph of fixed and current liabilities. It is disguised in the debt ratio because the equity has risen to compensate for everything. However, as we have seen, the increase in equity is mainly due to the increase in minority interests and not to reserves or results from previous years. This is not to say that it is a major problem, but we do not consider it a particularly healthy situation. Iberdrola is keen to grow and is forcing the machine.


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 = -41,11%
Working Capital on sales = (Net worth - Fixed assets) / sales = -15,30%



Working Balance

The working capital is negative; it is a financial imbalance that should not be maintained for long. Like the lack of liquidity, it can lead to problems in paying debts if it does not find external financing.


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 Revenue, expense and profit analysis

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

Both profit and FGO are on the rise in the last 5 years, let's continue.


Inevitably, for a company to make money it needs revenue, so let's see how it looks:


Sales

Sales have shown some ups and downs and are currently at levels somewhat above 2013. We would like to see a sales graph with a more constant rise, but it could also be worse.


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


Expenses

The proportion of expenditure to different items does not seem to show significant variations. The procurement item is the largest.


In addition to the operating costs, we have to take into account the financial costs. A company may 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 costs are perfectly bearable and allow Iberdrola to continue to incur debt.


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

The ROE, or Return on equity, measures IBERDROLA, S.A.'s profits compared to 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 = 9,04%



ROE

Iberdrola's ROE is around 9%, not a bad figure, in the electricity sector average (9,39%) and above of energy one (3,33%). The average ROE of the IBEX35 is 7,68%.


ROA = Net Profit / Assets = 2,78%



ROA

2.3 Margin on Sales

We are going to calculate the margin on sales of IBERDROLA, S.A., that is to say, what proportion of the sales ends up being a constant and significant profit:
Margin on Sales = Net Profit / Sales = 9,35%



Beneficio over Sales

The profit on sales is almost 10%, not a bad figure either, it could be better but it is reasonable.


We can also see how IBERDROLA, S.A.'s margins 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

The margins Iberdrola works with are quite decent.


3 Dividend and general valuation




IBERDROLA, S.A. currently has 6,453,592,000 shares in circulation, with a treasury stock of 2.53%. It has a EPS of 0.53 and is currently paying a dividend of 0.34 per share per year, i.e. a payout of 64.42%. Iberdrola uses the scrip dividend format to pay out its dividend, which avoids paying out liquidity that it does not have and gives away new shares that come free (or almost). The positive side is that it has activated a share buyback plan for subsequent redemption, which solves the dilution of shareholders who choose the dividend in cash or sell rights. As a conclusion, at current prices (9.69 ' /b>) it gives a dividend yield of 3.51%, the book value is 7.31 ' /b> per share and the PER is 18.36. In view of the data we have shown, we can say that Iberdrola is in a fairly aggressive expansion process, forcing liquidity ratios to the maximum by using the credit lines to grow as much as possible. It is in a sector with a great future, seems to be reasonably well managed and we believe it can be bought on a measured basis. We think it is a bit expensive for the situation it is in, but the P/E is not as high as Vidrala and the book value tells us that it doesn't quote very far from what it's worth.


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Balance, Income Statement, Cash Flow...
Employees 744 (46.20% women)
Profit 3,611M €
Earnings per share 0.55 €
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