Clean Hydro Portfolio And Transmission Expansion Will Drive Massive Future Upside

Catalysts

About AXIA Energia

AXIA Energia is a Brazilian power company focused on clean, renewable hydro generation, energy trading and regulated transmission assets.

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

• Completion of the divestment from thermal and nuclear assets and a portfolio now fully concentrated in clean, renewable hydro generation should structurally enhance risk profile and support higher, more stable net margins.
• Growing participation and demonstrated competitiveness in Brazil's transmission and capacity auctions, with record investment commitments and double digit targeted returns, is set to expand regulated asset base and recurring revenue.
• Rising demand for flexible, dispatchable power in a system increasingly supplied by intermittent wind and solar places AXIA's hydro fleet, modulation gains and future expansion projects in a position to capture premium pricing and support EBITDA growth.
• Transformation into a more customer centric commercial platform, including expansion in energy trading and free market clients, allows AXIA to monetize available energy at better prices and improve trading margins and overall earnings quality.
• Disciplined capital allocation, active portfolio rotation and a robust five year visibility on cash flow and leverage create room for continued high dividend payouts while still funding growth investments, supporting total shareholder returns and earnings per share.

Assumptions

This narrative explores a more optimistic perspective on AXIA Energia compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming AXIA Energia's revenue will grow by 7.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -14.1% today to 44.8% in 3 years time.
• The bullish analysts expect earnings to reach R$23.5 billion (and earnings per share of R$12.52) by about December 2028, up from R$-6.0 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as R$18.8 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 16.1x on those 2028 earnings, up from -25.0x today. This future PE is greater than the current PE for the US Electric Utilities industry at 8.3x.
• The bullish 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 18.16%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The growing reliance on Brazilian capacity and battery auctions to monetize AXIA Energia's hydro fleet and future storage projects introduces regulatory and policy risk, because any delay, design change or lower than expected returns in these auctions could reduce the value of its project pipeline and slow revenue growth.
• The long term shift of the Brazilian power matrix toward more intermittent wind and solar generation, combined with the current lack of a liquid market product and clear rules to price hydropower modulation, means AXIA may be unable to fully capture scarcity premiums for its flexible assets, which would cap trading gains and pressure EBITDA margins.
• Heavy participation in transmission auctions and expansion projects, alongside record high annual investments nearing BRL 10 billion, exposes the company to construction, execution and cost overrun risks at a time when it is also targeting high shareholder remuneration. This could lead to higher net debt and weaker net income if projects underperform or are delayed.
• The strategic shift to a more customer centric trading and free market model in an environment of evolving regulations, full market opening and potential changes to distributed generation and curtailment compensation may intensify competition and compress spreads, limiting commercialization revenue and dampening earnings growth.

Valuation

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

• The assumed bullish price target for AXIA Energia is R$83.0, which represents up to two standard deviations above the consensus price target of R$71.04. This valuation is based on what can be assumed as the expectations of AXIA Energia's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$83.0, and the most bearish reporting a price target of just R$49.14.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be R$52.3 billion, earnings will come to R$23.5 billion, and it would be trading on a PE ratio of 16.1x, assuming you use a discount rate of 18.2%.
  
• Given the current share price of R$66.81, the analyst price target of R$83.0 is 19.5% 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.