BofA upgrades Enagas to neutral after stock underperforms sector and peer

Investing.com -- Analysts at BofA Securities, in a note dated Wednesday, upgraded Enagas S.A (OTC:ENGGY ) (BME:ENAG )., revising their rating to "neutral" from "underperform." This revision came after the stock had underperformed its Spanish peer, Red Eléctrica, and the sector by 900 to 1,250 basis points during the third quarter.

The analysts flag several factors that justified this upgrade, especially the recent €1.1 billion Tallgrass Energy disposal, which was seen as strengthening Enagas’ balance sheet and improving its earnings visibility.

While the disposal supports Enagas' financial standing, the upgrade was cautious. BofA noted persistent risks such as the ongoing arbitration over the Gasoducto Sur Peruano project, which remains a significant overhang. 

The uncertainty surrounding the company’s ambitious plans for Green Hydrogen infrastructure also tempers enthusiasm, as Enagas' ability to pivot successfully to this emerging market remains uncertain. 

The Green H2 sector is still in its infancy, and BofA analysts are holding back from including it in their valuation due to the lack of clarity on costs, timing, and potential subsidies.

The analysts increased their price objective for Enagas to €14.8 per share from €14.1, reflecting a 7% upside potential. This was based on a sum-of-the-parts valuation and included a more favorable outlook on Spanish regulatory returns, expected to improve by the end of the year. 

However, despite these positives, BofA cautioned that Enagas' future investment in H2 projects could lead to prioritization of capital expenditure over dividend distributions beyond 2026

Source: Investing.com