Argentina's Electric Utility Will Improve Operations With Tariff Reforms, But Regulatory Risks Persist

Key Takeaways

• Tariff normalization and international funding plans are set to boost revenue, enhance liquidity, and reduce financial expenses.
  
• Operational efficiencies and strategic growth focus on infrastructure and renewables aim to improve margins and diversify revenue.
  
• Dependence on regulatory tariff changes and high debt levels could strain financial stability, adverse economic conditions risk profitability and revenue, especially in Argentina.

Catalysts

Empresa Distribuidora y Comercializadora Norte Sociedad Anónima is involved in the distribution and sale of electricity in Argentina.

• The normalization and adjustment of tariffs, with increases planned through November and a comprehensive 5-year tariff review process set to enhance regulatory confidence, are expected to significantly boost revenue and improve EBITDA and net income.
  
• Edenor's ability to successfully return to international markets for funding, such as the recent $184 million issuance with an improved debt profile, is likely to enhance its liquidity and reduce future net financial expenses.
  
• Efforts to improve operational efficiencies, including the reduction of energy losses through technology and AI, could positively impact operating margins and contribute to future earnings growth.
  
• The ongoing investment program focused on infrastructure and service quality improvements, supported by strong capital expenditure plans, is aimed at increasing operational resilience and long-term revenue growth.
  
• Strategic focus on expanding into growth areas such as energy generation, renewables, and potentially critical minerals and acquisitions may provide diversification and significant future revenue opportunities.

Empresa Distribuidora y Comercializadora Norte Sociedad Anónima Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Empresa Distribuidora y Comercializadora Norte Sociedad Anónima's revenue will grow by 70.0% annually over the next 3 years.
• Analysts are not forecasting that Empresa Distribuidora y Comercializadora Norte Sociedad Anónima will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Empresa Distribuidora y Comercializadora Norte Sociedad Anónima's profit margin will increase from 12.7% to the average US Electric Utilities industry of 9.4% in 3 years.
• If Empresa Distribuidora y Comercializadora Norte Sociedad Anónima's profit margin were to converge on the industry average, you could expect earnings to reach ARS 434.2 billion (and earnings per share of ARS 496.23) by about February 2028, up from ARS 120.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.5x on those 2028 earnings, down from 17.3x today. This future PE is lower than the current PE for the US Electric Utilities industry at 17.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 24.69%, as per the Simply Wall St company report.

Empresa Distribuidora y Comercializadora Norte Sociedad Anónima Future Earnings Per Share Growth

Risks

• The dependency on regulatory authorities for tariff increases presents uncertainty, as delays or changes in government policies could affect expected revenue growth and EBITDA increases.
  
• Energy losses remain a concern, as the company's effort to reduce them has only achieved a marginal reduction, impacting net margins and profitability.
  
• There is significant reliance on the Argentine market, and any unfavorable economic conditions or regulatory changes within the region could adversely affect revenue and net margins.
  
• The company's high level of debt, with international ratings still relatively low (CCC+ and CCC), poses a risk to financial stability and could lead to increased interest expenses, affecting net income.
  
• The impact of subsidy reductions and rising energy costs could strain operating margins if not sufficiently offset by tariff adjustments.

Valuation

• The analysts have a consensus price target of ARS2700.0 for Empresa Distribuidora y Comercializadora Norte Sociedad Anónima based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ARS4631.4 billion, earnings will come to ARS434.2 billion, and it would be trading on a PE ratio of 10.5x, assuming you use a discount rate of 24.7%.
  
• Given the current share price of ARS2375.0, the analyst price target of ARS2700.0 is 12.0% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.