According to the advanced estimate, the Czech economy added 0.3% qoq and 2.5% yoy in the third quarter. That means a deceleration from 0.7% qoq and 2.8% in the second quarter. The quarterly dynamics decelerated to less than half of growth in 2Q. Such a result was slighlty below our estimate as well as below the market forecast (in both cases 0.4% qoq and 2.6% yoy).

According to the advanced estimate, the Czech economy added 0.3% qoq and 2.5% yoy in the third quarter. That means a deceleration from 0.7% qoq and 2.8% in the second quarter. The quarterly dynamics decelerated to less than half of growth in 2Q. Such a result was slighlty below our estimate as well as below the market forecast (in both cases 0.4% qoq and 2.6% yoy).

The estimates are only preliminary, and the structure was not published. According to our estimates, household consumption slightly decelerated. The statistical office reported that both domestic and external demand contributed to the positive development. Industry decreased its growth dynamics compared with the first half of 2019, which is not surprising seeing as industrial output growth significantly weakened in 3Q. Employment dropped 0.2% qoq, corresponding with the gradual deceleration of the Czech economy.

The deceleration of the Czech economy was slightly larger than expected by the Czech National Bank, which had predicted 2.7% yoy. Without knowing the structure, the new data do not provide many reasons to change the minds of CNB board members. The key message is confirmation that the Czech economy is “finally” decelerating. Any hopes for no deceleration within a worsening external environment will be disappointed, but the surprise should be small. The data from the German economy released today were better than expected, but the truth is that the growth of the Czech trading partner remains weak.

CEZ reported its 3Q19 results this morning, which are at first glance are below market estimates. However, we believe the reported figures presented by CEZ cannot easily be compared with the market estimates. The reason is the change in the accounting for derivatives, which affected all quarters this year, not only 3Q itself. For this reason, we would rather consider the results achieved in the whole 9M of this year as the numbers better reflect the current situation. The results were positively impacted by the higher price of electricity. On the other hand, lower production at nuclear and coal-fired power plants was negative. CEZ adjusted its annual targets by lowering the upper end of the original spread.

CEZ reported its 3Q19 results this morning, which are at first glance are below market estimates. However, we believe the reported figures presented by CEZ cannot easily be compared with the market estimates. The reason is the change in the accounting for derivatives, which affected all quarters this year, not only 3Q itself. For this reason, we would rather consider the results achieved in the whole 9M of this year as the numbers better reflect the current situation. The results were positively impacted by the higher price of electricity. On the other hand, lower production at nuclear and coal-fired power plants was negative. CEZ adjusted its annual targets by lowering the upper end of the original spread.

Key trends in major segments: (1) In the traditional energy segment, CEZ generated 14.3 TWh, down from 14.6 TWh produced in the same period last year. Nuclear power plants generated 4.4% yoy less electricity due to the unplanned shutdown at Dukovany. Coal power plants even produced 11.9% (5.9 TWh) less yoy. This is due to technical problems at power plants. Production at gas power plants was substantially higher, but it couldn’t compensate for the decline in the two previous segments. As a result, CEZ reduced its estimate for full-year coal power plant production to 26.9 from 27.8 TWh. Nuclear power plant production is projected to decrease to 30.4 from 30.6 TWh, which comes as a positive surprise. Due to the long outage of Unit 2 at Dukovany, we would expect a significant decline. CEZ plans to produce 63.3 TWh for the whole year as against the previous 64.6 TWh. (2) In the new energy segment, CEZ should produce 2.2 TWh for the whole year, slightly lower than the previous estimate of 2.3 TWh. (3)EBITDA for 3Q19 reached CZK 9.8bn (-17% yoy). The market consensus was set at CZK 11.5bn. However, these two figures are not comparable in our view due to a change in the accounting of derivatives. For this reason, we will compare the results achieved in 9M. For 9M19, EBITDA is CZK44.7bn (+6% yoy). This exceeded both our estimate (CZK44.1bn) and market expectations (CZK43.6bn). The yoy growth was positively influenced mainly by higher electricity prices. On the other hand, the return of CZK1.3bn to SZDC (rail operator) for ordered but not consumed electricity was negative. However, this was expected, and it is not a surprise for the market.

Debt:At the end of 3Q19, CEZ had net debt of CZK155.6bn. This is an increase from CZK143.2bn in the first half of the year. This is besides due to the payment of dividends. Debt as measured by the net debt / EBITDA indicator is 2.8x (2.6x in 1H19 and 3.1x at the end of 2018).

Management outlook:With regard to the achieved results and expectations by the end of the year, CEZ management has adjusted its annual targets. EBITDA should be in the middle of the original range and reach CZK58bn (originally CZK57-59bn), as well as net profit of CZK17-18bn (originally CZK17-19bn). The reason for the adjustment at the upper end is the return to SZDC. Achieving the objectives is conditional on the smooth functioning of power plants, especially nuclear power plants. Net profit will serve as a basis for the calculation of the dividend. According to current dividend policy (payment of 80-100% of net profit), the projected full-year target indicates a dividend in the range of CZK31.6-33.5 per share. This means gross dividend yield of 6.1-6.5%. Prices of pre-sold electricity for the coming years correspond to our estimate, when we expect CEZ to sell electricity in 2020 for €44 per MWh and in 2021 €47.

Potential impact on our estimates and recommendations:Given the return of SZDC and the longer shutdown at Dukovany, which we did not expect in our June analysis, our estimates seem too optimistic. Still, we think that CEZ will fulfill its projection. However, we see a risk that the dividend will be lower than our expectation of CZK35. Investments connected with the construction of a new nuclear source will be negligible over the following 10 years (CZK2.5-4bn in total). We believe the stock price still reflects the exaggerated risk of financing an unprofitable project, because in the final phase there may be a different more economically acceptable alternative to the current old nuclear resources. We continue to keep our Buy recommendation with a target price of CZK717 per share in force.

Main risks:Unplanned shutdowns of conventional power plants and a drop in electricity prices.