Calculated Investments Drive Revenue And Margins Up

Key Takeaways

• Population growth and new projects are expected to boost Hydro One's revenue through investments in transmission and distribution.
  
• Strong creditworthiness and government support may drive future earnings despite higher interest expenses.
  
• Economic uncertainty, regulatory changes, and rising costs may challenge Hydro One's revenue growth and margins, while investments in infrastructure pose execution risks.

Catalysts

Through its subsidiaries, operates as an electricity transmission and distribution company in Ontario.

• Increased demand for electricity in Ontario driven by population growth, energy transition, and new manufacturing capacity is expected to boost Hydro One's revenue as the company plays a critical role in meeting this demand through investments in transmission and distribution systems.
  
• Approval of new transmission projects like the Waasigan Transmission Line, which involves a significant investment, is likely to drive future revenue as these projects come online and serve regions with growing electricity needs.
  
• Successful settlement agreements for revenue requirements with current transmission partnerships provide revenue and cost certainty from 2025 to 2029, supporting stable earnings growth.
  
• The anticipated government support for broadband initiatives may catalyze incremental rate base growth in the Distribution segment, impacting long-term revenue positively.
  
• Despite higher interest expenses, Hydro One maintains strong creditworthiness, which supports potential investments and growth initiatives that could enhance future earnings per share.

Hydro One Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hydro One's revenue will grow by 2.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.8% today to 15.5% in 3 years time.
• Analysts expect earnings to reach CA$1.4 billion (and earnings per share of CA$2.27) by about November 2027, up from CA$1.1 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 22.9x on those 2027 earnings, down from 23.6x today. This future PE is greater than the current PE for the CA Electric Utilities industry at 20.3x.
• 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 5.57%, as per the Simply Wall St company report.

Hydro One Future Earnings Per Share Growth

Risks

• Global events and conflicts could introduce economic uncertainty, potentially affecting Hydro One's revenue through increased operational costs or destabilization in energy markets.
  
• Supply chain challenges and inflationary pressures across the continent could lead to higher than expected operational and maintenance expenses, impacting net margins.
  
• Interest rate increases have already led to higher interest expenses, and further hikes could affect net earnings by increasing the cost of debt.
  
• Changes in regulatory environments or unforeseen delays in regulatory approvals for transmission projects could impact revenue growth and increase operational risks.
  
• Investments in new transmission and energy infrastructure entail execution risks; any delays or cost overruns may impact anticipated revenue growth and bottom-line performance.

Valuation

• The analysts have a consensus price target of CA$44.17 for Hydro One 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$46.0, and the most bearish reporting a price target of just CA$37.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CA$8.8 billion, earnings will come to CA$1.4 billion, and it would be trading on a PE ratio of 22.9x, assuming you use a discount rate of 5.6%.
  
• Given the current share price of CA$44.18, the analyst's price target of CA$44.17 is 0.0% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.