EFTA01385529.pdf

> Energy, Materials & Industrials Deutsche Bank RWE — Martin Brouqh, BUY, close €17.5, €25 tgt, 43% upside • RWE is cheap. It trades on just 3.5x 2019E EBITDA after stripping out the Stripping out innogy stake, RWE is very cheap (figures in EURm, unless market value of its innogy stake, after an excessive sell-off over German otherwise stated) coal phase-out fears. RWE share price (E/share) • We see sources of upside potential to our target: RWE market value 10,709 - Securing compensation for the closed 3GW of capacity at the same RWE provisions less net cash and investments 7,148 rate as the 2015 deal would add €3/share to our tgt. We have assumed RWE market EV 17,857 no compensation and 3GW of lignite closures. Innogy share price (Elshare) 33 - There is further upside potential from possible further rises in power Value of RWE's innogy equity stake 14,082 prices. As power prices increase from the roll-over of hedges from Value of RWE EV less innogy stake 3,775 €27/MWh in 2019E to €36/MWh in 2022E, cashflows should increase RWE 2019E EBITDA ex innogy 1,062 by €300m pa (even after higher carbon allowance costs). Implied EV/EBITDA for RWE ex innogy (x) fl • Carbon reform still leaves structural surplus of allowances to 2030, Source: Deutsche Bank meaning the traded carbon price is now more likely to drop than rise. We therefore prefer fossil over clean generators. Cashflows (EURm) should rebound from 2019 • RWE is still attractive even after innogy's profit warning. It presents innogy as an investment so the financial impact is via lower likely dividend 12.000 ems cash flow (Em, RHS) —Capacity (MW, LHS) 1.400 revenues from innogy, diluting the effect of innogy's lower future profits. 1.200 10.000 - We have maintained our RWE DPS estimates despite the likely lower 1,000 8,000 - innogy distribution: the medium-term cashflow outlook is still attractive. 800 6,000 600 • Catalysts: clarity on German coal closure policy, any compensation for 4,000 closures, higher power prices or securing a control premium for an innogy 400 2,000 200 transaction could all provide upside. r0 sr CO O N gir CO O O N co Related DB Research: N O N O 0 O N O OS O O 0 CI 0 •cr O •cr 0 O vs- O O RWE: Value hit from innogy warning (Brought N • nr1 N N N N N N N N N N N N N N N Utilities 2018 Outlook: Five Trades (Brought Source: Dckssche Bank. esiirnalos Cknischs Bank Research' European Equity Focus - Jartta;y 2016 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0086815 CONFIDENTIAL SDNY_GM_00232999 EFTA01385529