Low Carbon Energy And Biomethane Expansion Will Drive Long Term Utility Resilience

Catalysts

About Energisa

Energisa is a diversified Brazilian utility group focused on electricity distribution, transmission, natural gas distribution and low carbon energy solutions.

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

• Consistent volume growth in power distribution, with consumption in its concession areas outpacing Brazil overall despite distributed generation expansion, supports ongoing tariff-linked revenue expansion and stabilizes earnings.
• Operational efficiency gains, including structurally lower energy losses and PMSO growth running below inflation, create room for margin expansion and stronger net profit even in a challenging tariff environment.
• Rapid scaling of the natural gas platform, with double digit increases in distributed volumes, customer base and investments at ES Gás and Norgás, underpins multi year growth in regulated gross margin and EBITDA.
• Turnaround in distributed generation and value added services, with lower churn and sharply higher sales, positions the company to capture rising demand for decentralized and clean energy solutions, supporting faster revenue and EBITDA growth.
• Strategic build out in biomethane and waste to energy, anchored by regional clusters near industrial and agricultural hubs, leverages the shift toward low emission fuels and is expected to provide new high margin earnings streams that diversify cash flows.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Energisa's revenue will decrease by 2.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 9.2% today to 3.4% in 3 years time.
• Analysts expect earnings to reach R$1.1 billion (and earnings per share of R$1.42) by about December 2028, down from R$3.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting R$1.5 billion in earnings, and the most bearish expecting R$875.1 million.
• 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 34.8x on those 2028 earnings, up from 5.7x 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 20.66%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Analysts are projecting a structural deterioration in profitability, with profit margins expected to fall from 9.2% today to 3.4% in three years, which would materially pressure net income and reduce the upside potential for earnings.
• Forecasts point to revenue shrinking by 2.6% annually over the next three years in a context of excess energy supply in Brazil and rising distributed generation, which could erode Energisa's tariff base and slow top-line growth.
• The investment case requires a large rerating of the shares, as the implied 2028 price-to-earnings multiple of 34.8 times is far above both the current 5.7 times and the sector average of 8.4 times, so any disappointment in growth or regulation could trigger a de-rating and weigh on the share price.
• High financial expenses and leverage at 3.2 times net debt to EBITDA, despite recent liability management, expose the company to a prolonged high interest rate environment in Brazil, which could compress net profit and limit future dividend growth.
• Regulatory changes such as adjustments to white tariffs, treatment of fiscal incentives in the North and Northeast and potential new rules for distributed generation remain uncertain, and adverse outcomes in these debates could reduce allowed returns and negatively impact both revenue and earnings.

Valuation

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

• The analysts have a consensus price target of R$58.82 for Energisa 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$85.0, and the most bearish reporting a price target of just R$53.64.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be R$33.0 billion, earnings will come to R$1.1 billion, and it would be trading on a PE ratio of 34.8x, assuming you use a discount rate of 20.7%.
  
• Given the current share price of R$49.36, the analyst price target of R$58.82 is 16.1% higher. Despite analysts expecting the underlying business 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.