Riacho Grande And Agua Vermelha Will Spur Revenue Amid Risks

Key Takeaways

• New greenfield projects and significant core investments drive revenue growth and ensure future expansion and reliability of revenue streams.
  
• Efficient financial strategies and investments are expected to enhance network reliability, reduce costs, and contribute to stable long-term financial performance.
  
• Increased leverage and higher financial expenses could pressure earnings, and ongoing legal and regulatory issues introduce risks that may impact future profitability.

Catalysts

Engages in the electric transmission business in Brazil.

• The completion of greenfield projects such as Riacho Grande and Agua Vermelha, expected to go live within the next 12 months, will generate new streams of revenue through RAP, boosting overall revenue growth.
  
• Significant investment growth in core projects like those in the Piraque project and new authorizations for reinforcement projects ensures future expansion and reliability of revenue streams, contributing positively to top-line growth.
  
• The financial strategy involves raising funds through debentures and managing debt efficiently, indicating anticipated future cost savings in financial expenses, which may positively impact net margins and earnings.
  
• Investments in reinforcements and improvements are expected to enhance network reliability and reduce maintenance costs, potentially increasing net margins and future earnings.
  
• The company’s strategy to grow EBITDA contributes to long-term financial stability, with financial discipline allowing for continued payout practices while managing leverage, which can enhance EPS stability even during aggressive growth phases.

ISA Energía Brasil Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ISA Energía Brasil's revenue will decrease by 12.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 43.9% today to 35.2% in 3 years time.
• Analysts expect earnings to reach R$1.9 billion (and earnings per share of R$2.74) by about May 2028, down from R$3.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.3x on those 2028 earnings, up from 4.4x today. This future PE is greater than the current PE for the BR Electric Utilities industry at 7.4x.
• 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 16.92%, as per the Simply Wall St company report.

ISA Energía Brasil Future Earnings Per Share Growth

Risks

• The company's net income decreased by 17.6% due to higher net financial expenses, which could negatively impact profitability in the future.
  
• The increase in leverage to fund growth might result in higher financial risk and could pressure earnings, particularly if debt levels rise beyond current forecasts.
  
• There are significant ongoing investments in greenfield projects and reinforcements, which, while necessary for growth, increase the risk of execution and could delay revenue generation.
  
• The uncertainty and potential postponement of battery project auctions indicate that strategic opportunities in storage might not materialize as quickly as planned, potentially affecting revenue streams.
  
• The pending legal cases and regulatory issues, such as those involving the state government of Sao Paulo, introduce risks that could have financial implications, including potential costs that may affect net margins.

Valuation

• The analysts have a consensus price target of R$25.882 for ISA Energía Brasil 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$33.4, and the most bearish reporting a price target of just R$21.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$5.4 billion, earnings will come to R$1.9 billion, and it would be trading on a PE ratio of 14.3x, assuming you use a discount rate of 16.9%.
  
• Given the current share price of R$23.42, the analyst price target of R$25.88 is 9.5% 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.