RWE "hold"

07.06.06 - AC Research

LONDON, June 7 (newratings.com) ? Analyst Henning Wagener of AC Research reiterates his "hold" rating on RWE (RWE-EUR).

RWE is a leading DAX-listed utilities corporation.

According to AC Research?s research note dated June 6 and published this morning, the planned sale of RWE-owned British water corporation, Thames Water, could be somewhat more problematic than was originally expected. Britain?s "Sunday Telegraph" reported that Cheung Kong Infrastructure (CKI) Holdings, which is a part of the Hutchinson Wampoa Ltd conglomerate, would probably offer no bid for Thames Water. According to the report, CKI fears investment costs required for a financial reorganization of Thames Water could probably be significantly higher than originally planned, the analyst mentions. Until now, CKI had seemed to be one of the major parties interested in Thames Water, the analyst points out.

In the past, Thames Water has encountered some massive problems with respect to leaks within the water supply network, the analyst says. The possible withdrawal of one of the major parties interested in the acquisition of Thames Water must clearly be considered negative for RWE, according to AC Research. Thus, the sale of the British company might prove far more difficult than originally expected, which could have a negative impact on the sale price, the analyst mentions. Originally, the value of the RWE subsidiary was estimated at around £7 billion, AC Research says. Currently, it appears that three parties, namely Australian Investment Bank Macquarie Bank Ltd, financial investor Terra Firma Capital Partners, and Babcock & Brown, still remain interested in acquiring Thames Water, according to the "Sunday Telegraph."

At the current share price of ?64.50, RWE reaches a market capitalization of about ?36 billion, the analyst mentions. With a 2006 P/E ratio of about 14, the company?s stock still seems to enjoy a rather adequate rating, the analyst adds. Currently, apart from the sale of the water business to a financial investor, an IPO of this segment may also be a feasible alternative, according to AC Research. In general, the planned separation from this business basically seems to make sense due to the segment?s poor yield, the analyst says. The financial means realized through the sale could then be used to reinforce RWE?s core business, AC Research points out. Energy prices are likely to continue to rise over the next few years, the analyst mentions. Therefore, RWE?s earnings are also expected to grow, the analyst says.

AC Research reiterates its "hold" rating on RWE.