The Plenitude Powerhouse

We are a global long-short fund manager, and in respect of both the long and the short side of the portfolio we are looking at business fundamentals and a catalyst to highlight those fundamentals. One our long positions is Eni SpA, which is testament of what we look for in a long: long term growth with industry tailwinds and cheap valuations. While we also own ENI for our positive outlook on the oil sector, cheap valuation and macro reform in Italy as a tailwind, this wire will focus on the recently announced IPO of the clean energy business, named Plenitude.

Eni Spa (ENI.IM, pronounced E.N.I) is one of the world’s major oil and gas suppliers involved in exploration, development, production, and trading activities across the globe. Headquartered in Rome, Italy, with a current market cap of €43 billion, Europe accounts for most of Eni’s revenue and serves more than 5,400 service stations and 10 million electrical power consumers.  Eni has four reporting segments: Gas & Power, Exploration & Production, Refining & Marketing and Chemicals.

Last week Eni SpA (Eni) announced the biggest structural move so far in response to the trend to reduce carbon emissions and shift to renewable energy. Eni plans to sell 30% of the retail and renewable power business via an IPO, called Plenitude in 2022. Eni will remain a majority holder and retain a 70% stake, unlocking hidden value and drive a re-rating of the stock as well as leaving plenty of value creation for existing shareholders such as participation in growth in the renewables sector and capital return to shareholders from future sell downs. We expect at least 40% upside from current levels based on micro & macro expectations plus the Plenitude IPO catalyst.

Oil major peers like Shell and BP have so far gone the route of “green-washing”, selling off carbon assets or keeping them in-house arguing legacy fossil fuel assets help fund decarbonisation. Thus, leaving ENi as a first mover despite pressure from activists at other major oil companies to do the same.

Plenitude offers an attractive growth profile with renewables business compounding at >30% this decade and forecasted at approximately 20% between 2025- 2030. Financial stability is provided by the Retail cashflows and the access to “green funding” from a no debt base, along with the integration benefits by way of its continuing relationship with the parent, Eni. Plenitude will attract ESG focused and oil sector restrictred investors to participate in this growing market and generational shift.

Management expects Plenitude to be financially independent with its own balance sheet and hold an investment grade credit rating. Management targets EBITDA to more than double from €0.6 billion in 2021 to €1.3 billion in 2025. The company will start 2022 with no net debt and is planning to gear up to 3-4x net debt / EBITDA by 2025, equivalent to €4bn of debt or 55% of the planned CapEx outlays. The CapEx plan of €7.3 billion with a yearly average of EUR €1.8 billion between 2022 and 2025, will be financed in part by the cash flow from retail activities and in part by debt. 80% of CapEx will be allocated to growth of the renewables business.

The Retail Energy business sells gas, electricity, and energy services to 10 million residential and commercial customers, with targets of 11.5 million by 2025 and more than 15 million by 2030. A boost to power sales growth will come by marketing renewable generation to corporates through long-term power purchase agreements, and to consumers by building a green premium proposition. The business offers a full range of products addressing “prosumers” (solar PV, storage, heat-pumps, wall-box) and management think the increased integration of the energy systems and the growing customer awareness and consciousness towards green offering represent an opportunity to extract additional value. Management targets EBITDA of €800m by 2025 for this segment.

The Renewables business, which includes solar, onshore & offshore wind power generation has a large growth opportunity ahead. The business will operate 1.2GW in 2021 with a target of 6GW by 2025 and 15GW by 2030. Conveniently, 70% of the renewable project pipeline overlaps with their retail presence. The renewables business will be able to leverage on existing access to customers where renewable generation will reach 25% of the electricity sold to retail customers by 2025, leaving significant runway ahead thereafter. Management targets EBITDA of €400m by 2025 for this segment, and will start from break even this year.

The e-mobility business is one of the fastest growing and most integrated electric vehicle charging players in Europe, and a lucrative attraction to investors focused on the EV market. Plenitude has around 6,500 charging points installed in Italy at premium locations in the largest cities and has secured locations for a further 6,500 charging points. The growth plan will shift internationally on building a network of fast and ultrafast charging points. Plenitude takes advantage of public policies such as the funds provided by Next-generation EU. This will allows to reduce the CapEx outlays to achieve target numbers of charging points or to accelerate the deployment of the network. Management targets EBITDA of €100m by 2025 for this segment.

Comparing Plenitude to major pure renewable peers Orsted (Orsted.DC) and EDP Renováveis (EDPR.PL) that trade at 11x EV/EBITDA 2025 estimates, Plenitude’s estimated Enterprise Value is €13bn, assuming EUR 3.9bn in debt and a discounted 10x multiple.

Equity value for ENI’s 70% stake is €6.3bn or 15% of ENIs current market cap leaving plenty of value creation for shareholders beginning with de-leveraging current debt, participation in growth in the renewables sector and capital return to shareholders from future sell downs.

Core ENI looks extremely cheap. 6x 2022 P/E, fwd 3.3x EV/EBITDA and 7% dividend yield with optimal exposure in an expanding and inflationary period.

We have a price target for Eni of ~€16 representing 40% upside based on €2 value per share creation from the IPO, our bullish outlook for oil and recovery of the share price which is still 20% below pre-COVID levels.