Falling Inflation And Aggressive Auctions Will Pressure Transmission Returns And Earnings Ahead

Catalysts

About Transmissora Aliança de Energia Elétrica

Transmissora Aliança de Energia Elétrica operates electricity transmission assets across Brazil, focusing on high availability and long term contracted revenues.

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

• Accelerating investments in grid reinforcements and greenfield projects, with CapEx already close to full year guidance, heighten execution and delay risks. These factors could erode the expected uplift in regulatory revenue and compress future returns on invested capital, pressuring earnings.
• Heavy reliance on inflation linked RAP adjustments, with most debt and revenues indexed to IPCA, creates exposure to a declining inflation environment. This could slow top line growth while leaving a high real debt cost base, squeezing net margins and net income.
• Upcoming large transmission auctions are attracting more than 20 competitors and aggressive RAP discounts. This signals structurally lower allowed returns on new assets, meaning that winning future lots without compromising discipline may limit growth, while winning at tighter spreads could dilute overall EBITDA margins.
• A high payout of 100 percent of regulatory net income combined with leverage of around 4.1 times restricts reinvestment capacity. Maintaining dividend levels as concessions approach maturity could eventually require higher refinancing or equity like measures, constraining free cash flow to equity.
• Dependence on concession renewals and regulatory clarity for assets nearing the end of their terms introduces the risk of revenue step downs or less favorable renewal conditions. These outcomes could offset current availability gains and drive a structural slowdown in revenue and earnings growth.

Assumptions

This narrative explores a more pessimistic perspective on Transmissora Aliança de Energia Elétrica compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Transmissora Aliança de Energia Elétrica's revenue will decrease by 14.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 38.2% today to 46.6% in 3 years time.
• The bearish analysts expect earnings to reach R$1.3 billion (and earnings per share of R$2.89) by about December 2028, down from R$1.7 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as R$1.6 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 12.9x on those 2028 earnings, up from 8.5x today. This future PE is greater than the current PE for the BR Electric Utilities industry at 8.4x.
• The bearish 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 18.17%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Ongoing acceleration of reinforcements and greenfield projects, supported by BRL 1.3 billion of CapEx in the first nine months of 2025 and a visible pipeline into 2026 and 2027, could sustain growth in the regulated asset base and support long term revenue and earnings.
• Consistently high operational availability close to 100 percent and a structurally low variable portion ratio below 0.5 percent of RAP, driven by predictive maintenance and data driven monitoring, may protect and gradually enhance net margins and net income over time.
• Regular RAP adjustments indexed to Brazilian inflation indicators, combined with new RAP from reinforcements like Novatrans, Pitiguari and TSN, could underpin mid single digit to high single digit annual increases in regulatory net revenue despite macro volatility.
• Access to large scale green debenture markets, evidenced by nearly BRL 4.9 billion issued since 2019 and recent refinancings that lowered debt spreads, may keep the average real cost of debt contained and support stable or improving earnings and free cash flow.

Valuation

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

• The assumed bearish price target for Transmissora Aliança de Energia Elétrica is R$30.0, which represents up to two standard deviations below the consensus price target of R$34.84. This valuation is based on what can be assumed as the expectations of Transmissora Aliança de Energia Elétrica's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$44.9, and the most bearish reporting a price target of just R$30.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be R$2.8 billion, earnings will come to R$1.3 billion, and it would be trading on a PE ratio of 12.9x, assuming you use a discount rate of 18.2%.
  
• Given the current share price of R$42.3, the analyst price target of R$30.0 is 41.0% lower.
  
• 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.