Shares of Naturgy Energy Group climbed on Friday following J.P. Morgan’s decision to upgrade the stock from “underweight” to “neutral.” The upgrade was driven by improving earnings prospects and the stock’s recent underperformance compared to its sector peers.
Analysts highlighted two key reasons for the shift: an anticipated acceleration in earnings growth over the coming years and the view that current valuations have already accounted for key risks, including limited liquidity and potential stake sales by major shareholders.
J.P. Morgan expects Naturgy to benefit from elevated European gas prices, tight global LNG market conditions, and stable power prices, which are projected to support earnings growth between 2024 and 2026.
The brokerage also predicted that Naturgy’s full-year 2024 results, due in February 2025, could surpass the company’s guidance of at least €1.8 billion in net income by around 10%.
Naturgy’s updated strategic plan is expected to project medium-term net income in the range of €2-2.1 billion, significantly exceeding the Bloomberg consensus estimate of €1.6-1.7 billion.
J.P. Morgan analysts placed the stock on a “Positive Catalyst Watch,” signaling their belief that the forthcoming strategic plan presentation could serve as a positive trigger for Naturgy’s share performance.
However, concerns persist regarding the potential sale of a combined 42% stake held by major shareholders Rioja (a joint venture between CVC and the March family) and GIP. The possibility of these holdings being offloaded in the market within the next two years led analysts to apply a 10% discount to their fair value estimate for the company.
Naturgy’s updated strategic plan is expected to project medium-term net income in the range of €2-2.1 billion, significantly exceeding the Bloomberg consensus estimate of €1.6-1.7 billion.
J.P. Morgan analysts placed the stock on a “Positive Catalyst Watch,” signaling their belief that the forthcoming strategic plan presentation could serve as a positive trigger for Naturgy’s share performance.
However, concerns persist regarding the potential sale of a combined 42% stake held by major shareholders Rioja (a joint venture between CVC and the March family) and GIP. The possibility of these holdings being offloaded in the market within the next two years led analysts to apply a 10% discount to their fair value estimate for the company.
Naturgy’s earnings potential is bolstered by its exposure to robust gas prices, with TTF forward prices for 2025 remaining well above €40 per megawatt-hour. This favorable market environment is expected to enhance margins in its Energy Management division, despite the company’s relatively modest net long gas position due to its hedging strategies.
Elevated gas prices have also driven Iberian power prices higher, while strong hydroelectric output in Spain is expected to provide additional support for earnings through Naturgy’s renewable energy assets.
The company’s regulated network operations, which contribute over half of its EBITDA, are also positioned for growth. In Spain, ongoing regulatory reviews are likely to result in higher permitted returns for electricity networks by 2026 and gas networks by 2027. In Latin America, regulatory reforms have improved pricing sustainability, while better macroeconomic conditions in Argentina have further bolstered operations. J.P. Morgan analysts believe the market has yet to fully recognize the earnings potential of Naturgy’s Latin American business.
J.P. Morgan maintained its €25 price target for Naturgy, factoring in a 10% discount for liquidity risks associated with potential stake sales. The analysts view Naturgy as an attractive opportunity in the regulated utilities sector, offering strong free cash flow and steady, albeit modest, growth prospects. However, they cautioned that its commodity-linked segments, including global gas supply and Spanish power generation, remain susceptible to market volatility.
