UK confirms ‘windfall tax’ for energy firms: Iberdrola, one of the most exposed

IberdrolaUK confirms windfall tax for energy firms; Iberdrola one of the most exposed

Banc Sabadell | The UK has confirmed the creation of a temporary tax on the windfall profits of energy companies (including oil and gas), with which it would raise 5 billion pounds (6 billion euros). The tax charge will be up to 25% on profits.

At the same time, there will be compensations with tax exemptions on 90% of investments. In the Spanish press, and contrary to what other media (Bloomberg or Financial Times) have indicated, it is suggested that the tax would also apply to electricity companies.

Valuation:

There has been speculation about this tax over the last few weeks. With the details still to be confirmed, and if it will also apply to electricity firms, out of our universe of coverage Iberdrola would be the most exposed. In any event, the company has very little exposure to the Generation and Commercialisation business there (c. 8% EV, c.8% total Profit After Tax in a normal year). On the Generation side, it only has renewable technology and that would imply c. 8% of global renewable production and 4% of total production. Of the 7 TW which Iberdrola produces in the UK, 4 TW have a bilateral contract with retail and another 2 TW would not go via the pool either given that they are under the CFD system. On the Commercialisation side, Iberdrola sells c.18 TW, of which they need to buy 13 TW in the market. Putting the two businesses together (as they currently report), average Profit After Tax from 2017 would be very much reduced (c. 150 M euros) and generation on its own even less (c. 250 M euros).

Recommendation: Buy, Target Price 11,98 euros/share.

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