EFTA Document EFTA01385529

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