Water Shortages And Austrian Regulations Will Erode Value

Key Takeaways

• Climate-related water shortages, regulatory constraints, and rising competition threaten VERBUND's long-term earnings stability and market position.
  
• Distributed energy adoption and elevated capital costs challenge future volume growth, profitability, and investment returns.
  
• Strong policy support, electrification trends, and major renewable investments position VERBUND for stable growth, protected margins, and enhanced investor appeal in low-carbon energy markets.

Catalysts

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

• Prolonged and severe water shortages, as demonstrated by the persistently low hydro coefficient well below historical averages, threaten to become a structural issue due to climate change. This significantly increases the unpredictability of hydro output and exposes VERBUND's core earnings and revenue to long-term downside risk.
  
• The rapid acceleration of distributed and decentralized energy technologies, such as rooftop solar and battery storage, undermines the long-term demand for centralized hydro and large-scale renewables. As a result, long-term volume growth assumptions for VERBUND's generation face ongoing pressure, reducing both revenue expansion and net margins.
  
• Increasing regulatory intervention, including persistent or escalating windfall profit taxes and operational constraints, is expected to erode profitability and restrict cash flow. With Austria's government extending extraordinary taxation and ongoing regulatory uncertainty, VERBUND's long-term earnings visibility is materially diminished.
  
• Intensified competition from new entrants, especially as tech and oil majors increase their presence in renewables and flexibility solutions, puts long-term pricing power and market share at risk for VERBUND. This threatens to compress gross margins and stall topline growth despite rising electricity demand overall.
  
• Massive grid and renewable buildouts necessitate elevated capital expenditures at a time when high interest rates are inflating the cost of capital. This combination risks reducing investment returns and impairing future free cash flow, leaving the company vulnerable to financial underperformance if electricity prices or regulatory frameworks do not compensate for these higher financing costs.

VERBUND Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on VERBUND compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming VERBUND's revenue will decrease by 23.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 20.7% today to 22.5% in 3 years time.
• The bearish analysts expect earnings to reach €848.5 million (and earnings per share of €2.44) by about July 2028, down from €1.8 billion 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 26.6x on those 2028 earnings, up from 12.8x 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 5.59%, as per the Simply Wall St company report.

VERBUND Future Earnings Per Share Growth

Risks

• Acceleration of the global energy transition and strong EU decarbonization policies are driving sustained demand for renewable electricity, providing VERBUND with a multi-year growth runway and supporting future top-line revenue growth.
  
• Continued expansion in electrification of European transport, heating, and industry is expected to grow electricity consumption, broadening VERBUND's addressable market and potentially increasing both revenues and net margins over time.
  
• VERBUND's large scale investments in hydro, wind, and grid infrastructure-including substantial new pumped storage capacity and grid upgrades-are likely to increase production volumes and operational efficiency, which should boost EBITDA and earnings stability.
  
• The regulatory environment is supportive of domestic, low-carbon energy providers due to increasing needs for energy security and localized power generation, which may safeguard VERBUND's market share and lead to regulatory advantages that protect or grow net profits.
  
• EU carbon pricing mechanisms and rising investor demand for ESG-compliant assets are likely to enhance the profitability and valuation of VERBUND as a renewable-centric utility, contributing to improved net margins, easier access to green financing, and potential share price appreciation.

Valuation

• The assumed bearish price target for VERBUND is €55.3, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of VERBUND'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 €87.2, and the most bearish reporting a price target of just €55.3.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €3.8 billion, earnings will come to €848.5 million, and it would be trading on a PE ratio of 26.6x, assuming you use a discount rate of 5.6%.
• Given the current share price of €65.1, the bearish analyst price target of €55.3 is 17.7% lower.
• 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.