Austrian Renewable Ambitions Clash With Declining Profits And Mounting Debt

Key Takeaways

• Significant capital investment in hydropower and renewables may impact revenue growth due to high initial costs before returns materialize.
  
• Regulatory challenges and tariff changes in Europe could affect net margins amid large-scale investments in grid and renewable energy expansions.
  
• Strategic investments in hydropower, renewables, and grid expansion, coupled with effective hedging, could improve VERBUND's margins, earnings, and revenue stability amid market changes.

Catalysts

Generates, trades, and sells electricity to energy exchange markets, traders, electric utilities and industrial companies, and households and commercial customers.

• VERBUND's strategic focus on expanding hydropower and new renewable energy projects in Austria and other target markets could require significant capital investment, potentially impacting revenue growth due to high initial costs before realizing returns.
  
• With the electricity market normalizing post-Ukraine war price hikes, anticipated decreases in electricity prices from hedged power generation may negatively affect VERBUND's revenue projections and overall earnings.
  
• The expansion into the Spanish renewables market, particularly in solar, is met with challenges like low or negative power prices and high PPA competition, potentially impacting net margins due to pricing pressure and capacity constraints.
  
• The substantial increase in net debt, which rose by 34.8% in 2024, indicates a significant cash outflow that may burden future earnings, especially if the anticipated returns on expanded capacities do not materialize as quickly as expected.
  
• Regulatory challenges and potential tariff changes within Austria and the broader European market present uncertainties that could adversely affect VERBUND’s net margins and operating income, given the large-scale investments planned for grid and renewable energy expansions.

VERBUND Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming VERBUND's revenue will decrease by -6.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 25.7% today to 21.7% in 3 years time.
• Analysts expect earnings to reach €1.1 billion (and earnings per share of €3.31) by about November 2027, down from €1.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €1.3 billion in earnings, and the most bearish expecting €991 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.7x on those 2027 earnings, up from 14.9x today. This future PE is greater than the current PE for the GB Electric Utilities industry at 20.7x.
• 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.

VERBUND Future Earnings Per Share Growth

Risks

• VERBUND's investment in Austrian hydropower generation, expansion of the high-voltage grid, and development of new renewable energy sources like wind and PV aim to enhance the security of supply and could stabilize or increase future revenue.
  
• Strategic focus on increasing efficiency and flexible generation capacities in hydropower, combined with substantial Capex investments in the grid and renewable projects, positions VERBUND to potentially improve margins as they adapt to market volatility.
  
• Despite reduced EBITDA in Q3 2024, VERBUND raised its full-year guidance based on better-than-expected business development, suggesting a positive outlook that might lead to improved earnings.
  
• VERBUND's hedging strategy and the continued influence of higher-than-pre-war wholesale electricity prices could shield the company from adverse price effects, potentially aiding in maintaining steady cash flows and margins.
  
• The continuing improvement in their sales segment, driven by lowering procurement costs and strategic measures to enhance profitability, points to potentially stronger future revenue and earnings.

Valuation

• The analysts have a consensus price target of €67.71 for VERBUND 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 €87.2, and the most bearish reporting a price target of just €58.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €5.3 billion, earnings will come to €1.1 billion, and it would be trading on a PE ratio of 23.7x, assuming you use a discount rate of 5.1%.
  
• Given the current share price of €71.8, the analyst's price target of €67.71 is 6.0% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.