Renewable Expansion With Serra Do Assurua May Boost Revenue, But Shrinking Margins And Rising Debt Pose Risks

Key Takeaways

• Strategic connectivity line acquisitions, early project operations, and large-scale investments highlight potential revenue growth and enhanced market expansion.
  
• Capital recycling and optimized energy sales strategies could improve net margins by reallocating resources to high-growth opportunities and higher average price sales.
  
• Rising financial costs, regulatory uncertainties, and unfavorable conditions could undermine Engie Brasil Energia's revenue generation and financial stability.

Catalysts

Generates, sells, and trades in electrical energy in Brazil.

• Engie Brasil Energia's acquisition of Lot 1 in Aneel's bid to develop 780 kilometers of strategic connectivity lines could enhance revenue through expanded transmission capabilities and potential future demand from connected regions.
  
• The early operational commencement of the Serra do Assurua Wind Complex and the Assu Sol Photovoltaic Complex with anticipated generation output can potentially boost revenue and offset curtailed wind and solar output impacts.
  
• The ongoing investment in large-scale projects such as Asa Branca and Grauna Transmissora de Energia emphasizes potential revenue growth through expansion into new markets and increased infrastructure capability.
  
• Engie Brasil's capital recycling strategy, including reduced participation in TAG for CapEx funding, indicates a focus on increasing net margins by reallocating resources towards high-growth generation and transmission projects.
  
• Engie's strategy to sell energy at higher average prices, coupled with the opening of markets to free customers, suggests potential improvement in net margins and revenue stabilization through optimized contract sales.

Engie Brasil Energia Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Engie Brasil Energia's revenue will grow by 2.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 39.0% today to 23.9% in 3 years time.
• Analysts expect earnings to reach R$2.7 billion (and earnings per share of R$3.62) by about December 2027, down from R$4.2 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.3x on those 2027 earnings, up from 7.5x today. This future PE is lower than the current PE for the BR Renewable Energy industry at 24.9x.
• Analysts expect the number of shares outstanding to decline by 2.7% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 17.99%, as per the Simply Wall St company report.

Engie Brasil Energia Future Earnings Per Share Growth

Risks

• Engie Brasil Energia reported a decrease in adjusted EBITDA by 7% and a significant reduction in net profit by 30% due to lower participation in TAG and increased financial costs, which could impact earnings.
  
• High levels of curtailment, particularly affecting wind and solar energy, can negatively impact effective energy generation and revenue potential.
  
• The company's persistent unfavorable hydrology conditions could lead to reduced hydroelectric power generation, affecting revenue.
  
• Increased net debt and higher financial costs, with leveraging expected to rise due to investments, may impact net margins and financial sustainability.
  
• Uncertainty in regulatory environments and market conditions, such as demand fluctuations and auction outcomes, may pose risks to revenue and competitive positioning.

Valuation

• The analysts have a consensus price target of R$42.55 for Engie Brasil Energia 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$47.0, and the most bearish reporting a price target of just R$38.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be R$11.4 billion, earnings will come to R$2.7 billion, and it would be trading on a PE ratio of 19.3x, assuming you use a discount rate of 18.0%.
• Given the current share price of R$37.99, the analyst's price target of R$42.55 is 10.7% 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.