Upcoming Renewable Projects May Increase Capacity Amid Forecasted Revenue Challenges

Key Takeaways

• Strategic investments in renewable energy and data centers aim to enhance revenue, diversify energy sources, and boost demand.
  
• Contract extensions and Ontario capacity additions potentially improve revenue predictability and cash flow stability.
  
• Reliance on strategic U.S. contracts and major capital investments carries financial risks amid potential tariffs and fluctuating power prices in Alberta.

Catalysts

Develops, acquires, owns, and operates renewable and thermal power generation facilities in Canada and the United States.

• Capital Power's investment in repowering the Genesee facility is expected to increase capacity by 512 megawatts while reducing greenhouse gas emissions, potentially enhancing revenue through increased generation and reduced costs related to carbon taxes.
  
• The anticipated operationalization of new renewable projects like Halkirk 2 wind and the North Carolina solar projects by 2025-2027 could drive future revenue growth and diversify energy sources, potentially improving earnings.
  
• The advancement of data center opportunities in Alberta and the U.S. offers a potential new revenue stream. Successful execution of these projects could lead to increased demand for power and expansion of customer base, boosting revenue and earnings.
  
• Capital Power's strategic positioning and capacity additions in Ontario, including upgrades and battery energy storage systems, could enhance revenues with long-term contracted capacity in a growing market, improving cash flow stability.
  
• The company's efforts to extend and amend contracts in the U.S. market, supported by strong market fundamentals, could result in higher pricing and longer duration contracts for its assets, enhancing revenue predictability and reducing cash flow volatility.

Capital Power Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Capital Power's revenue will decrease by 9.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 18.1% today to 14.2% in 3 years time.
• Analysts expect earnings to reach CA$384.0 million (and earnings per share of CA$2.74) by about April 2028, down from CA$665.0 million 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 35.9x on those 2028 earnings, up from 10.1x today. This future PE is greater than the current PE for the CA Renewable Energy industry at 19.2x.
• 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 6.48%, as per the Simply Wall St company report.

Capital Power Future Earnings Per Share Growth

Risks

• The company faces uncertainties due to potential U.S. tariffs, which could indirectly impact their business operations and financial stability, potentially affecting future revenues and earnings.
  
• The lower generation and power prices in Alberta, as mentioned for the year 2024, poses a risk of affecting revenue and net margins, especially if similar market conditions persist.
  
• The reliance on significant acquisitions and integration of natural gas assets for growth may introduce execution risks and impact earnings if integration does not proceed as planned.
  
• The company is heavily dependent on successfully recontracting its U.S. portfolio at superior pricing for longer durations, which serves as a critical factor for revenue stability and growth.
  
• The repowering projects and other major capital investments, like the $1.6 billion investment in the Genesee facility, entail significant financial risk if projected efficiencies and emissions reductions do not materialize, affecting net margins and overall financial performance.

Valuation

• The analysts have a consensus price target of CA$67.091 for Capital Power 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 CA$77.0, and the most bearish reporting a price target of just CA$62.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$2.7 billion, earnings will come to CA$384.0 million, and it would be trading on a PE ratio of 35.9x, assuming you use a discount rate of 6.5%.
• Given the current share price of CA$48.25, the analyst price target of CA$67.09 is 28.1% 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.