Investing.com -- Shares of Naturgy Energy Group (BME:NTGY) rose on Friday after J.P. Morgan upgraded its rating on the stock to "neutral" from "underweight," citing improving earnings prospects and recent underperformance relative to its sector peers.
The analysts flagged two main drivers behind the upgrade: a compelling earnings momentum expected in the coming years and a belief that current valuations have largely priced in key risks, such as limited liquidity and potential stake sales by major shareholders.
J.P. Morgan analysts anticipate Naturgy will benefit from strong European gas prices, tight global LNG market conditions, and resilient power prices, which are expected to drive earnings growth between 2024 and 2026.
The brokerage forecasted that Naturgy’s full-year 2024 results, set to be announced in February 2025, could exceed the company’s guidance of at least €1.8 billion in net income by approximately 10%.
Additionally, an updated strategic plan is likely to position Naturgy’s medium-term net income at around €2-2.1 billion—substantially above the Bloomberg consensus of €1.6-1.7 billion.
The analysts placed Naturgy on a "Positive Catalyst Watch," indicating a belief that the upcoming strategic plan presentation could act as a catalyst for the stock.
Despite this optimism, concerns remain regarding the potential sale of a combined 42% stake held by major investors Rioja (a joint venture between CVC and the March family) and GIP.
The possibility of these holdings being sold in the market over the next two years prompted the analysts to apply a 10% discount to their fair value assessment of the company.
Naturgy's earnings potential is supported by its exposure to strong gas prices, with the TTF forward price for 2025 comfortably above €40 per megawatt-hour.
This favorable pricing environment is expected to boost margins in the company’s Energy Management business, despite Naturgy's relatively modest natural long gas position due to its hedging policy.
Furthermore, high gas prices have driven up Iberian power prices, while robust hydroelectric output in Spain is expected to provide additional earnings momentum through the company’s renewable energy portfolio.
Naturgy's regulated network operations in Spain and Latin America, which account for more than half of its EBITDA, also stand to gain. In Spain, ongoing regulatory reviews are expected to result in higher allowed returns for electricity networks in 2026 and gas networks in 2027.
In Latin America, the company has seen improvements in operating conditions, thanks to regulatory reforms that have brought pricing to more sustainable levels.
Additionally, better macroeconomic conditions in Argentina have provided a further tailwind. J.P. Morgan analysts believe the market has yet to fully appreciate the earnings potential of Naturgy's Latin American operations.
J.P. Morgan maintained its price target for Naturgy at €25 per share but noted this now includes a 10% discount for liquidity risks, reflecting the challenges posed by potential stake sales.
The analysts said that Naturgy represents an attractive investment in regulated utilities with strong free cash flow and modest growth potential, though its commodity-linked businesses, such as global gas supply and Spanish power generation, remain exposed to volatility.