LATAM Expansions Will Offer Currency Hedge But Face Exchange Rate And Execution Risks

Key Takeaways

• Strategic project investments and upgrades in Peru, Colombia, and Brazil aim to boost revenue and growth through enhanced infrastructure and operational efficiency.
  
• Dollar-fixed foreign revenues provide a hedge against local currency depreciation, potentially stabilizing earnings and supporting strong cash flow management for dividends.
  
• Alupar faces operational, financial, and competitive challenges due to localization issues, currency risk, LATAM market intensity, and arbitration uncertainties, potentially impacting revenue and profitability.

Catalysts

Through its subsidiaries, engages in the transmission, generation, and development of electricity business in Brazil, Colombia, and Peru.

• Alupar's recent successful bids for projects in Peru and Colombia, totaling investments of $732 million through 2029, are expected to generate additional revenue of over $100 million, boosting future revenue.
  
• The company's strategy to advance existing projects such as ELTE and TNE in Colombia and Brazil by next year positions Alupar for increased infrastructure revenue and earnings growth as these projects become operational.
  
• Completion of the Pacatuba and Jaguaruana transmission lines should improve operational efficiency by reducing curtailments and the associated costs, likely enhancing net margins.
  
• Alupar’s foreign projects with revenue streams fixed in dollars, subject to U.S. inflation adjustment, offer a potential hedge against local currency depreciation and could stabilize or grow earnings, depending on currency fluctuations.
  
• The anticipated dividend distribution consistent with company policy, while maintaining new debt with favorable terms, suggests a strong cash flow management strategy that could support higher shareholder returns through dividends in the future.

Alupar Investimento Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Alupar Investimento's revenue will grow by 3.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 26.5% today to 21.1% in 3 years time.
• Analysts expect earnings to reach R$886.6 million (and earnings per share of R$3.06) by about February 2028, down from R$996.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting R$1.2 billion in earnings, and the most bearish expecting R$721 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.2x on those 2028 earnings, up from 8.8x today. This future PE is greater than the current PE for the BR Electric Utilities industry at 8.4x.
• 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 17.16%, as per the Simply Wall St company report.

Alupar Investimento Future Earnings Per Share Growth

Risks

• Alupar faces significant curtailment issues in its assets due to localization challenges, impacting operation efficiency and leading to increased energy purchase costs. This can affect net revenue and EBITDA.
  
• The company is involved in a confidential arbitration process, which could present financial uncertainties and risks, potentially affecting future earnings and expenses.
  
• Alupar's international projects involve currency risks as revenues are fixed in local currencies and converted to dollars, which could impact financial stability due to exchange rate fluctuations, affecting revenue and profit margins.
  
• Alupar's involvement in large-scale LATAM projects requires significant CapEx and faces potential execution risks. Unanticipated increases in project costs could strain financial resources, affecting net margins and profitability.
  
• The competitive landscape in LATAM markets is described as intense, with major international players potentially affecting Alupar’s ability to maintain or grow its market share and consistent revenue streams.

Valuation

• The analysts have a consensus price target of R$35.304 for Alupar Investimento 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 R$42.7, and the most bearish reporting a price target of just R$29.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$4.2 billion, earnings will come to R$886.6 million, and it would be trading on a PE ratio of 20.2x, assuming you use a discount rate of 17.2%.
  
• Given the current share price of R$27.76, the analyst price target of R$35.3 is 21.4% 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.