Electrification And Offshore Wind Expansion Will Drive Long Term Grid Investment Potential

Catalysts

About Elia Group

Elia Group operates transmission system operators in Belgium and Germany, developing and managing high voltage grids and interconnectors that enable the energy transition across Europe.

What are the underlying business or industry changes driving this perspective?

• Execution of a record CapEx pipeline through 2028 in both Belgium and Germany, backed by a strengthened balance sheet and EUR 11.9 billion of available liquidity, is intended to steadily expand the regulatory asset base and support higher regulated revenue and earnings.
• Accelerating electrification in Europe, driven by industrial decarbonization, AI and data center demand, and transport and heating shifts, is pushing load growth beyond available capacity from 2028 onward. This structurally underpins long term grid investment needs and supports revenue visibility and return on equity.
• Rapid build out of offshore wind zones such as the Belgian Princess Elizabeth area and German Baltic projects, alongside new interconnectors like the planned Belgium U.K. link and Bornholm Energy Island, positions Elia Group at the core of cross border system integration. This supports asset growth, incentive payments and long term earnings expansion.
• Evolving regulatory frameworks, including the move toward a more dynamic cost plus model and a unified WACC in Germany and upcoming tariff discussions in Belgium, are intended to better align allowed returns and cost of debt with actual market conditions. This may reduce risk while supporting net profit and protecting margins as the asset base grows.
• Improved capital structure following the EUR 2.2 billion equity raise, additional long term debt facilities and potential hybrid or partnership options at subsidiary level are intended to lower funding risk for a very large investment cycle and help stabilize net margins as interest costs are managed against growing regulated remuneration.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Elia Group's revenue will grow by 21.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 12.3% today to 11.3% in 3 years time.
• Analysts expect earnings to reach €839.6 million (and earnings per share of €7.69) by about December 2028, up from €509.3 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €1.0 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 21.9x on those 2028 earnings, up from 21.8x today. This future PE is greater than the current PE for the GB Electric Utilities industry at 21.8x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.16%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Regulatory reforms in Germany and upcoming tariff negotiations in Belgium could result in allowed returns that are lower than investors expect to compensate for the very large CapEx program and perceived lower risk profile, which would weigh on long term earnings growth and net margins.
• Policy and permitting uncertainty around offshore projects such as the Princess Elizabeth Island, Bornholm Energy Island and later German offshore corridors could lead to delays, scope changes or reduced EU grants, slowing grid expansion and dampening revenue growth from an expanding regulatory asset base.
• Rising system costs and political pressure over electricity affordability in Germany and Belgium could force regulators or governments to curb or defer grid investment, or push more cost efficiency into the regulatory model, limiting revenue growth and compressing returns on equity.
• Persistent tightness and inflation in the high voltage equipment and construction supply chain, combined with contractor disputes on large projects, could drive cost overruns that are not fully passed through under evolving cost plus frameworks, eroding net profit and reducing return on invested capital.
• Less favorable policy support for renewables in the U.S. and potential downscaling of long term offshore wind ambitions in Europe could reduce the structural growth runway for new interconnectors and offshore assets, leading to lower than anticipated medium to long term revenue growth and earnings expansion.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of €115.0 for Elia Group 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 €131.0, and the most bearish reporting a price target of just €95.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be €7.4 billion, earnings will come to €839.6 million, and it would be trading on a PE ratio of 21.9x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of €102.0, the analyst price target of €115.0 is 11.3% higher.
  
• 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.