Renewable Expansion Will Face Cost Pressures Yet Offer Resilience

Key Takeaways

• Expansion in renewables and networks faces pressure from lower market prices, volatile output, high investment needs, and regulatory uncertainties, which may limit margin and earnings growth.
  
• Emerging distributed energy trends, increased costs, and climate-related risks threaten traditional revenues and could hinder the company's ability to achieve stable long-term profitability.
  
• Declining sales, weak renewables, high investments, stricter regulations, and reduced diversification pose significant risks to revenue growth and earnings stability.

Catalysts

Provides energy and environmental services in Austria, Bulgaria, North Macedonia, Croatia, Germany, and Albania.

• While EVN is continuing with a robust expansion of its renewable energy portfolio and grid infrastructure, the company faces persistent headwinds from lower electricity market prices and volatile renewable generation volumes, which may suppress revenues and limit net margin expansion despite long-term electrification and decarbonization policy support.
  
• Despite ongoing regulatory and EU policy incentives for grid and renewable investments, heavy annual capital expenditures expected until 2030 could result in higher indebtedness, which may erode net earnings through increased interest expense and depreciation over time.
  
• Although the global trend toward electrification and rising demand for distributed network services could support volume growth, rapid adoption of distributed energy resources such as household solar is already reducing electricity sales volumes for EVN, threatening the stability of revenues from traditional supply business segments.
  
• While company diversification into water, wastewater, and heating networks offers greater earnings resilience, persistent regulatory uncertainties-such as tightened windfall profit taxation and ongoing exposure to regulatory tariff resets in core and emerging markets-may continue to limit reliable long-term earnings growth.
  
• EVN's focus on digitalization and investments in smart infrastructure should provide future efficiency gains, but recurring climate-driven extreme weather events and higher grid reliability requirements are likely to drive up insurance, maintenance, and operational costs, applying downward pressure to net margins in coming years.

EVN Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on EVN compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming EVN's revenue will decrease by 2.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 13.3% today to 13.4% in 3 years time.
• The bearish analysts expect earnings to reach €422.7 million (and earnings per share of €2.08) by about September 2028, down from €453.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 12.4x on those 2028 earnings, up from 9.0x today. This future PE is greater than the current PE for the GB Electric Utilities industry at 10.4x.
• 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 5.53%, as per the Simply Wall St company report.

EVN Future Earnings Per Share Growth

Risks

• The ongoing trend of decentralization and the growing adoption of own photovoltaic generation led to a decline in electricity sales volumes, which could erode future revenues and squeeze net margins if reliance on traditional grid supply continues to decrease.
  
• Persistent weakness in renewable generation volumes due to unfavorable wind and water conditions, combined with falling electricity market prices, has resulted in lower earnings contributions from renewable assets, putting pressure on segment earnings and overall group net profit.
  
• Heavy capital expenditure requirements, with annual investments planned at about €900 million until 2030 and rising net debt, increase the risk of margin dilution and higher interest costs, which could weigh on net earnings if returns on new projects do not materialize as expected.
  
• Tightening regulatory environments, such as the reenactment and tightening of Austria's windfall tax on electricity generation, create uncertainty on the group's future earnings and may cap upside to net results, particularly if energy prices recover or if further regulatory measures are introduced.
  
• The recent divestment of the international project business reduces geographic diversification and exposes the company more acutely to local regulatory and market risks in its core regions, potentially restricting revenue growth and increasing vulnerability of group earnings.

Valuation

• The assumed bearish price target for EVN is €25.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of EVN's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €40.9, and the most bearish reporting a price target of just €25.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €3.2 billion, earnings will come to €422.7 million, and it would be trading on a PE ratio of 12.4x, assuming you use a discount rate of 5.5%.
  
• Given the current share price of €22.95, the bearish analyst price target of €25.0 is 8.2% 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.