CEZ shares were close to CZK 900 on Monday. At these prices, they look cheap, even with the introduction of electricity…

CEZ shares are very popular among investors and are among the most frequently traded titles on the Prague Stock Exchange. While in the first half of the year CEZ experienced growth of tens of percent, which was mainly caused by the increase in the price of power electricity, the summer was more in a negative mood, when the share price was subject to a number of negative factors, including those about extraordinary taxation by the government.

CEZ shares under pressure

Electricity price cap

On Friday, September 2, proposals regarding the regulation of the energy market began to leak to the public at . Apparently , the European Commission supports an EU-wide cap on electricity prices for plants with low production costs, i.e. nuclear plants, renewable energy sources, and there is also mention of lignite plants. Nuclear and RES make up the majority of CEZ's product mix, with production from these sources accounting for around 60% of the company's total output. From this perspective, CEZ would therefore be significantly affected by regulation.

Over the weekend, more information was leaked, according to which a price cap of EUR 200/MWh is reportedly in play. According to Jan Raška of Fio banka, this would indicate that CEZ would sell its power electricity at a price of around EUR 130/MWh next year . In the current analysis, Fio banka's analysts estimate a selling price for next year of close to EUR 150/MWh and a price of around EUR 130 in the longer term.

Price development of CEZ shares since the beginning of the year

The forthcoming windfall tax and its impact

The sectoral tax, or what politicians often refer to as the Windfall tax, has been a much-discussed and highly controversial topic among Czech economists and capital market investors in recent weeks. Countries such as the UK, Hungary, Italy and Spain have already introduced the tax or are preparing it for this year. The Czech Republic is no exception, where all smaller government parties support the measure, but some conservative ODS politicians are opposed.

The disadvantage of this tax is the very dangerous definition of unearned profits. The others are clearly an unnecessary blow to the Czech capital market and a possible breach of trust in the Czech tax system, resulting in a reduction in the amount of (not only) foreign investment in the energy sector in the Czech Republic.

A windfall tax could slightly increase state revenues, which could offset the short-term costs associated with state financial assistance to households to cope with the energy crisis and the overall war in Ukraine. However, this does nothing to address the biggest problem with our state budget, the structural deficit.

However, there is hope that the introduction of windfall taxes will not happen after all. In fact, the European Commission has warned that the electricity price capping measure I mentioned at the beginning of this article is incompatible with the windfall tax. For CEZ, the Brussels proposal would probably be the more favourable option.

The government should decide on the introduction of the windfall tax by around 10 September.

A bet on cheap CEZ shares

Since this year's June highs of just over CZK 1,200, the price of CEZ shares has fallen by a total of 25%, and by more than 12% over the past month.

"From my perspective, even if electricity prices are regulated, CEZ is cheap at these prices. But there must not be a special tax that would eat up 2/3 of the profits. I don't believe that will really happen." Michal Semotan said in an expert outlook on the investment website on Monday.

CEZ now trades at 12.44 times its earnings over the past 12 months. The big attraction of CEZ is the high dividend. This could approach CZK 100 per share, according to the latest projections, if the Ministry of Finance, as the majority shareholder, has 100% of 2022 net profits paid out.

DISCLAIMER: All information contained herein is for informational purposes only and is in no way an investment recommendation. Always do your own analysis. Source.

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Over the weekend, more information was leaked, according to which a price cap of EUR 200/MWh is reportedly in play. According to Jan Raška of Fio banka, this would indicate that CEZ would sell its power electricity at a price of around EUR 130/MWh next year . In the current analysis, Fio banka's analysts estimate a selling price for next year of close to EUR 150/MWh and a price of around EUR 130 in the longer term.

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