Equity research – EDP Renováveis

Universidade do Minho Escola de Economia e Gestão Rafael Alexandre Videira Serra Equity Research – EDP Renováveis May 2023 Equity Research – EDP Renováveis UMinho|2023 Rafael Alexandre Videira Serra Universidade do Minho Escola de Economia e Gestão Rafael Alexandre Videira Serra Equity Research – EDP Renováveis Masters Project Master in Management Work done under supervision of: Professora Florinda Silva May 2023 DIREITOS DE AUTOR E CONDIÇÕES DE UTILIZAÇÃO DO TRABALHO POR TERCEIROS Este é um trabalho académico que pode ser utilizado por terceiros desde que respeitadas as regras e boas práticas internacionalmente aceites, no que concerne aos direitos de autor e direitos conexos. Assim, o presente trabalho pode ser utilizado nos termos previstos na licença abaixo indicada. Caso o utilizador necessite de permissão para poder fazer um uso do trabalho em condições não previstas no licenciamento indicado, deverá contactar o autor, através do RepositórioUM da Universidade do Minho. Licença concedida aos utilizadores deste trabalho Atribuição-NãoComercial-SemDerivações CC BY-NC-ND h tt p s ://cr ea t iv ec o mm o n s .or g/ li c e n s e s /b y - nc - n d /4 . 0 / EDPR MASTER IN MANAGEMENT 1 Acknowledgments I would like to thank Professor Florinda Silva for her help and mentorship. I appreciate the flexibility to conciliate my work and this project. It was a pleasure to do this work with her and I am grateful for her availability. A big thanks to my family, for their never-ending love and support and for enduring my absence in the last few months. This work wouldn’t be possible without my girlfriend, she helped me in every stage of this project. A huge thank you to her. A word of appreciation to all my work colleagues that covered for me when I had to focus more on my project and understood my focus on finishing this task. A thank you to all my colleagues that helped with this project. Finally, thank you to every other teacher and university remember that helped me reach this stage. EDPR MASTER IN MANAGEMENT 2 Statement of Integrity I hereby declare having conducted this academic work with integrity. I confirm that I have not used plagiarism or any form of undue use of information or falsification of results along the process leading to its elaboration. I further declare that I have fully acknowledged the Code of Ethical Conduct of the University of Minho. Disclaimer This Equity Research Report was prepared for academic purposes only by Rafael Alexandre Videira Serra, a student of the Master in Management at the University of Minho. The report was supervised by a faculty member acting merely as an academic mentor. Neither the author of this report nor the supervisor are certified investment advisors. This report should be read as a pure academic exercise of a master student. The information used to produce this report is generically available to the public from different sources and believed to be reliable by the student. The student is the sole responsible for the information used in this report, as well as the estimates and forecasts, application of valuation methods, and views expressed. The UMinho and its faculty members have no unique nor formal position on those matters and do not take responsibility for any consequences of the use of this report. EDPR MASTER IN MANAGEMENT 3 Resumo O presente projeto consiste num relatório Equity Research da EDP renováveis, S.A (EDPR). A EDPR é uma empresa portuguesa de produção de energia limpa solar e eólica, tanto onshore como offshore , que opera internacionalmente sediada em Madrid, Espanha. O relatório procura estimar o preço por ação para o final de 2023 usando para isso uma avaliação baseada no método de fluxos de caixa descontados e no método de dividendos descontados. O valor alcançado por ação foi de 26.09€ usando o método de fluxos de caixa e 20.26€ usando o método de dividendos descontados, o que equivale a uma valorização de 29.39% e 0.49% respetivamente perante o valor de dia 1 de Maio de 2023 de 20.16€. Com estes valores em conta a recomendação final é a de comprar. Foram realizadas estimativas de 2022 a 2027 para todos os dados financeiros da empresa, incluindo o balanço e a demonstração de resultados. Todas as estimativas são baseadas em rácios e/ou taxas de crescimento históricas calculadas de 2017 a 2021, podendo algumas estimativas estarem baseadas também em decisões passadas e futuras presentes no plano de 2021-2025 de investimentos. O relatório também procura investigar mais sobre a empresa, o seu mercado e a sua indústria, tentando descobrir futuras oportunidades e ameaças e fazer uma análise da presente situação de incerteza no mercado devido a diversos fatores como a guerra e o aquecimento global. Este relatório foi finalizado no dia 28 de Maio de 2023, tendo sido a informação financeira extraída até Janeiro de 2023. Palavras-chave: Equity Research, energias renováveis, avaliação financeira, avaliação de empresa EDPR MASTER IN MANAGEMENT 4 Abstract The present project conducts an Equity Research report of EDP renováveis, S.A (EDPR). EDPR is a Portuguese clean energy company with solar and wind generation, both onshore and offshore, which operates internationally and is based in Madrid, Spain. The report aims to estimate the price per share for the end of 2023 using a Discounted Cash-flows (DCF) valuation and a Dividend Discount Method (DDM). The value estimated with the DCF was 26.09€ euros per share and with the DDM was 20.26€, which is equivalent to an appreciation of 29.39% and 0.49% respectively compared with the value on 1 May 2023 of 20.16€. With this values in mind the final recommendation is to buy. Estimates were made for all the company's financial data from 2022 to 2027, including the balance sheet and income statement. All estimates are based on ratios and/or historical growth rates calculated from 2017 to 2021 and some estimates may also be based on past investment decisions. The report also seeks to investigate more about the company, its market and industry, trying to find out future opportunities and threats and make an analysis of the present uncertain market situation due to various factors such as war and global warming. This report was finalised on 28 May 2023, with financial information extracted up to January 2023. Keywords: Equity Research, energias renováveis, avaliação financeira, avaliação de empresa EDPR MASTER IN MANAGEMENT 5 Index Resumo ........................................................................................................................................................ 3 Abstract ....................................................................................................................................................... 4 List of figures .............................................................................................................................................. 6 Company description ................................................................................................................................. 7 A quick rundown of 2022 ............................................................................................................................. 7 Company Overview .................................................................................................................................... 8 Basic Information ......................................................................................................................................... 8 Business Description .................................................................................................................................... 9 Products and Services ................................................................................................................................. 9 Key Drivers ................................................................................................................................................ 11 Environmental, Social & Governance ..................................................................................................... 11 Governance ............................................................................................................................................... 11 Environmental ........................................................................................................................................... 12 Social ........................................................................................................................................................ 13 Industry Overview and Peer Companies ................................................................................................ 13 Industry Overview – A Run down ................................................................................................................ 13 Industry Overview – Major events ............................................................................................................... 14 Peer Companies ........................................................................................................................................ 16 Investment Risks ....................................................................................................................................... 18 Investment Summary ............................................................................................................................... 19 Forecasting and Valuation ...................................................................................................................... 19 Forecasting ................................................................................................................................................ 19 Valuation ................................................................................................................................................... 20 Growth ...................................................................................................................................................... 22 Firm Value ................................................................................................................................................. 22 Financial Analysis ..................................................................................................................................... 23 References ................................................................................................................................................ 24 Appendices ................................................................................................................................................ 26 EDPR MASTER IN MANAGEMENT 12 Figure 11 - Global Temperature Anomaly (ºC compared to the 1951-1980 average) Source: NASA Figure 12 - Evolution of global eletricity demand by region (left) and regional shares (right), 1990-2025 Source: World Economic Forum The second one is the Appointments, Remunerations and Corporate Governance Committee. It assists and reports to the Board of Directors in matters related to the appointments, reelections, dismissals, evaluation, and remunerations of the members of the Board of Directors and Management Team members. It also affects the Corporate Governance Structure of the EDPR and its efficiency. As of February, 2023, its composition was the following: António Gomes Mota, who is the Chairperson, Rosa García and José Félix Morgado Environmental EDPR is a leading company in renewable energy, so as such they commit to producing clean and green energy contributing to a reduction to the impact and lessening future increases of climate change (Figure 11). Its core business activity inherently implies the reduction of emissions. Wind and solar energy have zero carbon emissions, protecting valuable air and water resources. In 2021 EDPR has avoided 18.3 megatons of CO2 (EDPR, 2023).The company compromises to (EDPR, Environmental policy, 2023): • Protect the environment and to incorporate it at the different stages of development, construction, operation, and decommissioning of infrastructure. • Manage environmental risk properly with energy responses planned in the event of an accident. • Promote R&D in environmental processes. • Comply with applicable environmental legislations. • Use transparency in the communication to the stakeholders, specialty local communities. • Raise awareness regarding the environment. Regarding climate change EDPR strives to achieve carbon neutrality by reducing the direct and indirect greenhouse gas emissions during all steps of EDPR’s activity, in other hand, the company is trying to maximize the resilience of its assets to climate change (EDPR, Environmental policy, 2023). By producing renewable energy, EDPR is contributing to the world’s fight against climate change and reinforcing its commitment to the United Nation’s SDG 13: take urgent action to combat climate change and its impacts (EDPR, 2023). EDPR promotes a circular economy where the resources are used efficiently throughout the value chain which strengthens its commitment to the United Nation’s SDG 12: ensure sustainable consumption and production patterns (EDPR, 2023). By minimizing losses in biodiversity throughout its operations, EDPR contributes to the United Nation’s SDG 15: protect life on land (EDPR, 2023). EDPR MASTER IN MANAGEMENT 13 Figure 13 - Installed global renewable energy capacity by technology Sources: Our World in Data and IRENA Figure 14 - Per capita energy consumption from solar, 2021 Sources: Our World in Data and BP Statistical Review of World Energy To achieve all this EDPR created six principles that guide the company to a sustainable development: • Economic and social value • Eco-efficiency and environment • Innovation • Integrity and good governance • Transparency and dialogue • Human capital and diversity • Access to energy • Society and citizenship Social EDPR contributes to the objective of consolidating a positive health and safety culture, as those who contribute to the development to the company are seen as a key value and a priority. The company’s commitment to ensure high safety standards for employees and contractors is based on the United Nation’s SDG 8. This makes EDPR an increasingly safe place to work, prioritizing the safety and well-being of all stakeholders. EDPR invests in activities that will positively impact the promotion and development of the following four main areas: Culture & Art; Social inclusion, Sustainable ways of living & Access to energy; Natural heritage & Biodiversity and Renewable Energy & Energy Efficiency (EDPR, 2023). Industry Overview and Peer Companies Industry Overview – A Run down New policies in major energy markets help propel annual clean energy investment, these polices can become a huge opportunity for growth. Thanks to the US Inflation Reduction Act, by 2030 annual solar and wind capacity additions in the United States grow two-and-a-half-times over today’s levels coupled with the increasing sales of electric cars in the market will propel the industry to new heights (Figure 12, 13 and 14). Rapid development countries like China and India will be another great opportunity, it is expected for China to peak its consumption of coal and oil before the end of this decade and to start shifting to clean energy. India makes further progress towards its domestic renewable capacity meeting two-thirds of the countries demand for electricity. Japan’s Green Transformation (GX) and Korea’s desire to create a nuclear and renewable energy mix gives a huge new opportunity for the industry. EDPR MASTER IN MANAGEMENT 14 Figure 15 - Projected US renewable energy investment under the inflation reduction Act Source: Wood Mackenzie Figure 16 - Renewable capacity additions in China, European Union, the US and India, 2019-2023 Source: IEA Figure 17 - China's cumulative installed capacity for power generation) Source: S&P Global Commodity Insights Russia’s invasion of Ukraine has sparked a global energy crisis bringing the natural gas spot purchases above the price for the barrel of oil, while oil increased to 90% of the upward pressure on the energy costs were brought by coal and gas prices that hit record high prices (International Energy Agency, 2022). Industry Overview – Major events US Inflation Reduction Act In August 2022 the US congress passed the Inflation Reduction Act (IRA) that seeks to improve the US economic competitiveness, innovation, and industrial productivity. To achieve this the act contains $500 billion to, between others, boost clean energy which takes the biggest share of this act investment with a value of $250 billion (McKinsey & Company, 2022). The IRA will reduce renewable energy costs, accelerating the clean energy transition (Figure 15) giving out loans and reducing tax for businesses that aim to perform this transition. The clean vehicle tax credit will continue to drive the electric car market therefore increasing the necessity for energy all around the country putting companies in a good position to invest in this market and taking full opportunity of this act to keep grow (United States Enviroment Protection Agency, 2023). Rapid growth of China Although China is the biggest consumer of coal in the world, making up for two thirds of its electricity supply, they are investing in clean energy. In 2022 the clean energy production went up by 8.5% tied to a 17.5% clean energy consumption in the country (China Electricity Council, 2023). The China Electricity Council reports to be committed to securing a sustainable energy future for China employing many programs and initiatives to achieve that goal. The proportion of renewable energy in the energy mix of China continues to increase followed by changes to laws and regulations (Figure 16). China is introducing the green power certificates which are electronic ID cards for renewable energy companies. They will be used to calculate and verify renewable energy power generation, each accounting for 1000 kWh (Kilowatt-h) of electricity. It is estimated for China to reach 51% of non-fossil energy power generation by 2025 (Figure 17) (China Electricity Council, 2023). Although China is the biggest user of fossil fuels for energy production its renewables capacity addictions are huge as well, being more than the US and the EU together (Figure 16), going from 65.3 GW in 2019 to 141.78 GW in 2023 while the US and EU EDPR MASTER IN MANAGEMENT 15 Figure 18 - Euro vs US gas prices 2020-2025 Source: Refinitiv, Eurostat, HWWI and ECB Figure 19 - Energy Prices 2021vs2022 Source: Refinitiv, Bloomberg and ECB Figure 20 - Russia's share in euro area energy and gas imports Source: Eurostat and ECB together go from 49.61 GW to 77.19 GW in 2023 (International Energy Agency, 2022). Japan’s GX Japan has plans for a green transformation of its economy and society. For this the government has defined five key initiatives that will achieve 150 trillion JPY (approximately $1 trillion) investment: • Growth-oriented carbon pricing: introducing systems to fulfil its international commitments and to ultimately grow the economy. • Integrated regulatory/assistance promotion measures. • New financing method: expanding the use of transition financing globally, particularly in Asia, while using a combination of private and public financing. • International development strategy, including formation of Asia Zero Emissions Community. • Development of GX League: a forum for cooperation between companies, government, and academia. These key initiatives will be deployed into 5 key markets (energy, transport, built environment, industry, finance) with different targets. In the energy sector Japan has the main targets of reaching 36%- 38% of renewable energy in the country and to install 10 GW of 10 GW of Offshore Wind Power and 104-118 GW Solar Power by 2030 (GR Japan, 2023). Russia’s invasion of Ukraine The invasion of Ukraine is leading the world into its first global energy crisis built on top of an already fragile balance after the covid pandemic. This event, although situated in Europe, will have global implications that will be felt for many years to come. Russia is the world’s largest exporter of fossil fuels and a fundamental supplier for European energy production industry making up for one fifth of all energy consumed in Europe. There are efforts in place to build some infrastructure to diversify sources of imports but the covid pandemic showed an increase of Russian gas demand in Europe. As the war continued to develop many policies and sanctions were applied to Russia, like the Versailles meeting in March where it was decided to “phase out our dependency on Russian gas, oil and coal imports as soon as possible” which has led to a fast and uncontrolled rise of energy prices all around Europe (Figure 18 and 19), which by nature, helped energy companies grow their profit margins substantially (International Energy Agency, 2022). EDPR MASTER IN MANAGEMENT 16 Figure 21 - EDP Min and Max stock prices 2018-2023 Source: Eikon Database Figure 22 - Endesa Min and Max stock prices 2018-2023 Source: Eikon Database Figure 23 - Iberdrola Min and Max stock prices 2018-2023 Source: Eikon Database Figure 24 - REC Min and Max stock prices 2018-2023 Source: Eikon Database 2022-2023 winter made many predictions true, Europe had one of the worse energy crises, making many countries to rethink their energy infrastructure and production leading to a more friendly outlook to clean and nuclear power. Even though clean and nuclear power would divert Europe from taking Russian gas and oil, Russia’s influence on the energy sector extends beyond oil and gas (Figure 20), many of the minerals and metals that are vital for clean energy transitions are produced by them. Russia produces around 20% of the world’s Class 1 nickel, needed to make batteries, accounts for over 40% of global uranium enrichment capacity and it is the world’s second largest global producer of cobalt and aluminum, and the fourth‐largest producer of graphite all of which are needed to build solar, wind and nuclear power production infrastructure (International Energy Agency, 2022). The dependency of Russia for raw materials coupled with the increasing sanctions will undoubtedly raise costs for the industry. Peer Companies The Entidade Reguladora dos Serviços Energeticos (ERSE) in 2022 reported EDP to be the power supplier with biggest market share losses in Portugal, losing 96 000 customers. The principal peers in the market are the parent company EDP Energias de Portugal SA (Figure 21) and the main competitors, Endesa SA (Figure 22), Iberdrola SA (Figure 23), Red Electrica Corporacion SA (Figure 24), Naturgy Energy Group SA (Figure 25), and Enagas SA (Figure 26). We can analyse the competitiveness of the market using Porter’s Five Forces (Appendix 13): • Bargaining power of the suppliers – LOW • Barriers of entry – MODERATE • Threat of substitutes – MODERATE • Bargaining power of the buyers – HIGH All these factors create a highly competitive market where energy companies are always trying to reach the smaller price to appeal to clients that don’t have loyalty periods in their contracts and with many and easier substitutes in fossil and nuclear energy. For EDPR it is important to keep in mind international companies that are devoted to value creation and heavily focused on investments in the renewable energy market, companies like EDPR MASTER IN MANAGEMENT 17 Figure 25 - Naturgy Min and Max stock prices 2018-2023 Source: Eikon Database Figure 26 - Enagas Min and Max stock prices 2018-2023 Source: Eikon Database Nextera Energy, Brookfield Renewable, Clearway Energy and Solaredge Technologies (The Motley Fool, 2023). NextEra Energy NextEra Energy is one of America’s largest capital investors being recognized in 2023 as No.1 in their industry on Fortune’s list of “World’s most admired companies” (Fortune, 2023). With more than $50 billion in planned investments for 2022 and together with their affiliated entities they are the world’s largest generator of renewable energy from the sun and wind being as well a leader in battery storage. They have, as well, seven commercial nuclear power plants in three American states giving it an edge over EDPR in terms of power generation (NextEra Energy, 2023). NextEra Energy has proven that it can create value for its shareholders by generating a return of 945% over the last 15 years (NextEra Energy, 2023) and with an above-average growth rate they have been boosting their dividends for more than 25 consecutive years. The company expects that its earnings will continue to increase at the rate of 6%-8% through 2025 based on its investment mindset (The Motley Fool, 2023). Brookfield Renewable Brookfield Renewable is a Canadian “pure-play” renewable power platforms, having a portfolio consisting of wind, solar and storage facilities all over the world. They are structured with investment in mind and they proud themselves of having a broad and flexible investment portfolio with a target of delivering 12%-15% total returns and 5%-9% annual energy distribution growth (Brookfield, 2023). They achieve this targets with their extensive pipeline of renewable energy development projects and additional acquisitions giving them one of the best dividend stocks of a energy company (The Motley Fool, 2023). Clearway Energy Clearway Energy is an American based company with over 5.500 net MW of wind and solar generation projects, this value is complemented with over 2.000 MW of energy generated by gas facilities. They have a goal of providing their investors with a sable and growing dividend income (Clearway Energy, 2023). SolarEdge Technologies SolarEdge Technologies diverts a little bit from EDPR in the way that it is a Israeli company that develops and sells optimized inverter system, they have benefited from the accelerating growth of solar energy search worldwide and have expanded their services by an EDPR MASTER IN MANAGEMENT 18 Figure 27 - Long-term Investment 2017-2021 EDPR in euros Source: Eikon Database Figure 28 - Euro area annual inflation and its main components, April 2013 - April 2023 (estimated) Source: Eikon Database investment in storage, electric vehicle charging, batteries and other energy based grid services (SolarEdge, 2023). This investment was powered by the big influx of cash generated by the inverter business generating almost $1 billion net cash in 2022 allowing for big investments in the future. Investment Risks EDPR is an investment heavy company (Figure 27), and as such is exposed to a variety of financial risks and operational risks, namely the effects of changes in market prices, exchange rates, interest rates, the dangers of building the power plants and the issues with the supply of parts. Doing a PESTEL analysis (Appendix 12) gives a better picture of the main potential risks for EDPR: • Political – risks like government policies, trade restrictions and wars can impact or even negate the possibility to operate and to generate energy and income. • Economic – inflation rates (Figure 28) and disposable income of the families endanger EDPR because they create more competition in the market for lower prices and can impact the profitability of the company. • Social – population growth rate brings a ever growing demand for power and if one company doesn’t provide enough other sources will be found. • Technological – emerging technologies such as new ways to produce clean energy will endanger EDPR’s position if the company doesn’t keep up with the change. • Environmental – pressures from the public to not just produce energy from clean sources but to build those plants with sustainable materials and with these companies pressured to contribute to the fight against global warming can prove difficult to manage. • Legal – laws regarding how and where power is produced can be a risk as moving already situated plants can be difficult or impossible in some cases. The Board of Directors is responsible for defining general risk management policies and establishing exposure limits. The company seeks to mitigate currency fluctuations in net assets and net income, as it operates internationally, using currency derivatives and currency debt. EDPR's general policy is to finance its projects with the currency of the cash flows generated by the project to minimise fluctuations in exchange rates (EDPR, 2021). EDPR is currently exposed to US Dollar, Polish Zloty, Romanian Leu, Brazilian Real, British Pound, Canadian Dollar and Colombian Peso. 0 0.2 0.4 0.6 0.8 1 1.2 2017 2018 2019 2020 2021 Millions EDPR MASTER IN MANAGEMENT 19 Figure 29 - Average Growth in the Income Statement EDPR 2017-2021 Source: Eikon Database and my valuation Figure 30 - Net Income EDPR 2017-2027 (in thousands of euros) Source: Eikon Database and my valuation To cover the risk, the company uses financial debt expressed in USD and a Cross-currency interest rate swap in USD/EUR with EDP - Energias de Portugal, S.A. Operating cash flows are independent of fluctuations in interest rate markets. The interest rate risk management strategy seeks to reduce debt cash flows to market fluctuations, through financial instruments to cover cash flows associated with future interest payments, converting loans into fixed rates (EDPR, 2021). Investment Summary The forecasted price at the end of 2023 is 26.09€ corresponding to an increase of 29.39% over the current value (01/05/2023) for EDPR shares of 20.16€. With this value and keeping in mind with the current situation of turmoil in Europe and indecision of the future my recommendation is to BUY. Forecasting and Valuation Forecasting The forecast period chosen was 2023-2027. 2022 is being forecasted by not having sufficient historical data yet. The financial statements of the company were obtained from Refinitiv Eikon and the company’s annual reports for the period of 2017-2021. A more concise balance sheet and income statement was built to make the forecast easier. Income statement Several methods were used to forecast the income statement, the most used were an average of the year-to-year (YoY) growth for the 2017 to 2021 (Figure 29) period and some relevant ratios (Appendix 1 and 2). The revenues had historically shifted from positive to negative growth YoY and had been declining since 2017 so for the forecast I kept the changing YoY growth and that yearly decline. In 2027 the forecasted Revenues are 1 787 654.87 thousand euros (Figure 31). The Gross margin average for the historical period was of 83.79% getting a 1 497 940.40 thousand euros gross profit value in 2027. In the other operating expenses/income the company had an historical increase of the ratio over the revenues of 9%, so to forecast the ratio was increase by this amount every year. The minority expenses are related to holdings held by other companies and are directly related to the income after tax. EDPR MASTER IN MANAGEMENT 20 Figure 31 - Revenues EDPR 2017-2027 (in thousands of euros) Source: Eikon Database and my valuation Figure 32 - PP&E EDPR 2017-2027 (in thousands of euros) In the end we forecasted a Net income of 1 140 550.65 thousand euros for 2027 (Figure 30), this is an increase of 74.01% compared to the historical 2021, this value is below the growth observed between 2021 and 2017 of 138%. Balance sheet In the balance sheet forecast different methods were used, again the historical growth is based on the 2017-2021 period. Some important ratios were calculated to help base the forecasting decisions (Appendix 3 and 4). One of the decisions made was that 2025 and 2027 would be investment years, having a greater growth on the property plant and equipment (PP&E), which was found using historical investment (2021 and 2018) and non-investment (2020 ,2019 and 2017) years as reference, the investment years were forecasted using an 8.1% growth and the others 0.52%. Furthermore in 2027, because of big accumulations in cash a decision was made to predict a further investment into PP&E and long-term investments of 30% and 30% of that year’s cash (Figure 32). The current portion of long-term debt was extracted Refinitiv Eikon based on the maturity of the company’s debt with the only value present being that of 2026. On the common stock dividends payable there was no information of the future planned dividend year, so I looked at the historical values and forecasted the dividend yield for the future years, keeping the shares outstanding the same (Figure 33). In the end the total assets value for 2027 was of 25 373 037.61 thousand euros, an increase of 15.17% over 2021, below the 36% historical increase between 2017 and 2021 (Figure 34). Valuation To perform the valuation, I used the discounted cash flow method, it “values the firm by discounting expected cash flows to the firm (FCFF), these are the residual FCFF after meeting all operating expenses and taxes, but prior to debt payments, at the weighted average cost of capital.” (Damodaran, Discounted Cash Flow Valuation) As a second approach I employed the Multi-Period dividend discount method (DDM) that is a variation of the dividend discount method that takes into account various periods and a final stock price calculated with the method above (CFA Institute, 2023). EDPR MASTER IN MANAGEMENT 21 Source: Eikon Database and my valuation Figure 33 - Dividend yield EDPR 2017-2027 Source: Eikon Database and my valuation Figure 34 - Total Assets EDPR 2017-2027 (in thousands of euros) Source: Eikon Database and my valuation To reach the cost of capital first it was necessary to estimate the cost of equity and cost of debt. To compute the cost of equity, it was used the CAPM formula with a risk-free rate of 2.209% corresponding to the yield value of the 10year Germany Government Bond (as of Jan 07, 2023) (Trading Economics, 2023). The market risk premium was reached using a weighted average of the equity risk premium of the markets which the company is most exposed to: USA (5.94%), EU (Germany) (5.94%), and Brazil (11.13%). The equity risk premium of each country of these countries was obtained from Professor Damodaran (Damodaran, Country and Equity Risk Premiums, 2023). The weights for each country were based on EDPR revenues in 2021 (Figure 36), the market risk premium calculated is close to 6.16%. To compute the beta, the equity betas of the peer companies of EDPR (EDP Energias de Portugal SA, Endesa SA, Iberdrola SA, Red Electrica Corporacion SA, Naturgy Energy Group SA, and Enagas SA) were retrieved from Eikon, along with the PSI 20 and IBEX 35 to get a base line for these markets (Appendix 10 and 11). With an average unlevered beta of 0.443 and a industry debt-toequity of 77,16% (Damodaran, Cost of Equity and Capital (US), 2023) the cost of equity is 6.82% (Figure 35). The cost of debt was computed based on a “synthetic” rating. According to Refinitiv Eikon combined credit risk tool the company has a rating of Baa2/BBB. This rating on the Professor Damodaran Ratings - Interest Coverage Ratios and Default Spread list has a default spread of 2.00%. After adding our calculated risk-free rate, the pre-tax cost of debt is 4.209%. Therefore, an after-tax cost of debt of 3.756%. Two weighted average cost of capitals (WACC) were used (Figure 37): • WACC high growth (Appendix 5) – Used on the discount factor and the present value of the company, this WACC uses the above mentioned unlevered beta. • WACC stable (Appendix 6) – Used on the terminal value calculation, this WACC uses the average unlevered beta for the industry (Damodaran, Cost of Equity and Capital (US), 2023) EDPR MASTER IN MANAGEMENT 28 Appendix 5 - WACC High Growth EDPR MASTER IN MANAGEMENT 29 Appendix 6 - WACC Stable growth EDPR MASTER IN MANAGEMENT 30 Appendix 7 - Valuation using Scenario 1 Appendix 8 - Valuation using Scenario 2 EDPR MASTER IN MANAGEMENT 31 Appendix 9 - Valuation using Scenario 3 Appendix 10 - Average Beta Calculation for the market Appendix 11 - Average Betas EDPR MASTER IN MANAGEMENT 32 Appendix 12 - PESTEL analysis EDPR MASTER IN MANAGEMENT 33 Appendix 13 - Porter's five forces Appendix 14 - DDM for Scenario 1 EDPR MASTER IN MANAGEMENT 34 Appendix 15 - DDM for Scenario 2 Appendix 16 - DDM for Scenario 3