Renewable Energy And E-Mobility Investments Drive Growth But Declining Margins Challenge Utility's Outlook

Key Takeaways

• Expanding renewable energy capacity and e-mobility investment could drive revenue growth and improve margins amid rising electric vehicle adoption and renewable energy share.
  
• Divestment of non-core assets, including the sale of a German subsidiary, seeks to streamline operations and potentially enhance earnings and margins.
  
• Declining revenues, decreased energy sales, and strategic investment plans heighten financial strain, impacting EVN's overall earnings and financial health.

Catalysts

Provides energy and environmental services for private and business customers, and municipalities.

• EVN's commitment to expand its renewable energy capacity significantly by 2030, including new wind and PV projects, is likely to drive future revenue growth and improve net margins due to the increasing share of renewables in energy generation.
  
• The strategic focus on e-mobility and investment in charging infrastructure points to future revenue growth potential, given the rise in electric vehicle adoption, which could also enhance net margins given higher-margin utility services.
  
• A projected increase in annual CapEx to €900 million, largely dedicated to stable, regulated activities in Lower Austria, is expected to enhance long-term earnings stability and asset base growth, which could buffer against market volatility.
  
• The sale of the German subsidiary WTE and its international project business could streamline operations and potentially unlock value, positively impacting net margins and earnings through divesting non-core assets and focusing on the energy business.
  
• Recovery expectations for EVN KG’s energy supply business, with a forecasted turnaround to positive earnings, indicate potential future EBIT growth, improving the overall contribution to the group's earnings profile.

EVN Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming EVN's revenue will decrease by 0.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 14.3% today to 13.2% in 3 years time.
• Analysts expect earnings to reach €436.6 million (and earnings per share of €2.45) by about January 2028, down from €471.7 million 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 16.1x on those 2028 earnings, up from 8.7x today. This future PE is greater than the current PE for the GB Electric Utilities industry at 11.6x.
• 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 5.07%, as per the Simply Wall St company report.

EVN Future Earnings Per Share Growth

Risks

• Revenue has declined by 13.6% due to lower wholesale electricity prices and decreased use of key assets like the Theiss power plant, which affects overall earnings.
  
• There is a significant impact from reduced network tariffs and decreased energy sales volumes in Southeast Europe, which could negatively influence revenue from this region.
  
• EVN's international project business faced a decline in revenue, partly due to completed projects, impacting their earnings potential moving forward.
  
• An impairment loss on receivables in the international project business and negative one-off effects have reduced overall net margins.
  
• The ongoing high capital investment plan, while strategic, may increase net debt levels and financial strain, potentially affecting net margins and overall financial health.

Valuation

• The analysts have a consensus price target of €34.0 for EVN based on their expectations of its future earnings growth, profit margins and other risk factors. 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 €29.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €3.3 billion, earnings will come to €436.6 million, and it would be trading on a PE ratio of 16.1x, assuming you use a discount rate of 5.1%.
• Given the current share price of €22.9, the analyst's price target of €34.0 is 32.6% 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.