Alberta Data Center Demand Will Drive Renewable Expansion

Published
28 Dec 24
Updated
07 Aug 25
AnalystConsensusTarget's Fair Value
CA$18.77
11.8% undervalued intrinsic discount
07 Aug
CA$16.56
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1Y
48.4%
7D
-3.0%

Author's Valuation

CA$18.8

11.8% undervalued intrinsic discount

AnalystConsensusTarget Fair Value

Last Update01 May 25
Fair value Increased 12%

Key Takeaways

  • Rising electricity demand and favorable market dynamics position TransAlta to grow revenue, enhance margins, and achieve stable, predictable earnings.
  • Expansion of renewables and environmental asset monetization strengthens long-term cash flow predictability amid stricter emissions regulations and customer demand for low-carbon energy.
  • Transition risks from aging assets, market competition, and regulatory uncertainty threaten revenue growth, margin expansion, and the long-term financial stability of current operations.

Catalysts

About TransAlta
    Engages in the development, production, and sale of electric energy.
What are the underlying business or industry changes driving this perspective?
  • Data center load growth in Alberta is expected to materially increase electricity demand over the next decade, with TransAlta well positioned to benefit thanks to capacity allocations, fleet optionality, and ongoing negotiations for long-term contracts, which will support sustained revenue growth and improved earnings visibility.
  • Rising electricity demand from electrification (including data centers and broad energy transition themes) and tightening supply-demand balances in key markets like Alberta and Ontario are creating favorable recontracting environments and potential for higher realized prices, directly enhancing revenue and EBITDA over the medium-to-long term.
  • TransAlta's ability to generate and monetize environmental attributes (such as carbon credits and environmental offsets from its hydro and wind assets) positions it competitively in a market moving towards higher carbon prices and stricter emissions regulation, supporting higher net margins as zero-carbon assets become more lucrative.
  • Ongoing execution of renewable development, repowering, and asset optimization initiatives-including expanding and re-purposing legacy sites (like Centralia) and leveraging portfolio diversity-will increase predictable contracted cash flows and EBITDA growth, while also driving margin expansion via economies of scale.
  • Growing demand from corporate and industrial customers for long-term, low-carbon power purchase agreements aligns with TransAlta's diversified, multi-jurisdictional renewables portfolio, providing a pipeline for stable, inflation-linked cash flows and supporting long-term earnings stability.

TransAlta Earnings and Revenue Growth

TransAlta Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?
  • Analysts are assuming TransAlta's revenue will decrease by 6.6% annually over the next 3 years.
  • Analysts assume that profit margins will increase from -6.7% today to 8.5% in 3 years time.
  • Analysts expect earnings to reach CA$173.4 million (and earnings per share of CA$0.2) by about August 2028, up from CA$-167.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as CA$-4 million.
  • In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 39.4x on those 2028 earnings, up from -29.7x today. This future PE is greater than the current PE for the US Renewable Energy industry at 20.8x.
  • Analysts expect the number of shares outstanding to decline by 0.7% per year for the next 3 years.
  • To value all of this in today's terms, we will use a discount rate of 7.88%, as per the Simply Wall St company report.

TransAlta Future Earnings Per Share Growth

TransAlta Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?
  • Heavy reliance on legacy coal-to-gas and older thermal assets introduces asset transition risk, as faster-than-anticipated decarbonization mandates or market shifts could force costly write-downs or impairments, directly compressing future earnings and book value.
  • Intensifying competition and incremental generation from new gas, wind, and solar supply in core markets like Alberta are already pressuring spot and merchant power prices, which, if persistent, could undermine realized revenues and net margins despite current hedging strategies.
  • Failure to execute timely and competitive new data center contracts or project buildouts-due to delays in regulatory frameworks (e.g., AESO Phase 2), counterparties' hesitancy, or protracted negotiations-could stall anticipated demand growth and lead to revenue stagnation or increased earnings volatility.
  • Higher sustaining capital expenditures for aging gas fleet units and the need for additional investments to maintain plant reliability may erode free cash flow and limit net margin expansion if not offset by commensurate increases in contracted revenues.
  • Exposure to uncertain carbon pricing regimes, especially potential federal-provincial misalignments (such as Alberta's TIER freeze versus national minimum carbon price escalation), could impact the competitiveness and monetization value of environmental attributes, posing downside risks to both future EBITDA and cash flow.

Valuation

How have all the factors above been brought together to estimate a fair value?
  • The analysts have a consensus price target of CA$18.773 for TransAlta 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$20.0, and the most bearish reporting a price target of just CA$14.0.
  • In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$2.0 billion, earnings will come to CA$173.4 million, and it would be trading on a PE ratio of 39.4x, assuming you use a discount rate of 7.9%.
  • Given the current share price of CA$16.74, the analyst price target of CA$18.77 is 10.8% higher.
  • 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.

How well do narratives help inform your perspective?

Disclaimer

AnalystConsensusTarget is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by AnalystConsensusTarget are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that AnalystConsensusTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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