Heartland Integration And Wind Projects May Support Cash Flows Amid Expected Revenue Decrease

Key Takeaways

• Full integration of Heartland assets and operationalization of wind projects are expected to enhance revenue stability and boost future earnings.
  
• Transition away from coal-fired generation and CO2 reduction could improve margins by benefiting from regulatory incentives.
  
• TransAlta's profitability is threatened by declining power prices, increased costs, high debt, regulatory hurdles, and potential market oversupply.

Catalysts

Engages in the development, production, and sale of electric energy.

• The full integration of Heartland's 1.75 gigawatts of assets into TransAlta’s Alberta portfolio is expected to enhance its competitive position and contribute to steady cash flows because 60% of the revenues are contracted, potentially increasing future revenue stability.
  
• Completion and operationalization of new facilities such as the Horizon Hill and White Rock wind projects are projected to contribute over $175 million in adjusted EBITDA annually, thus potentially boosting future earnings.
  
• Strategic development opportunities at legacy thermal sites, particularly with data centers, are anticipated to provide new revenue streams, positively impacting long-term revenue growth.
  
• Anticipated share buybacks of up to $100 million in 2025 are expected to be accretive, potentially enhancing earnings per share.
  
• The ongoing reduction of CO2 emissions and ceasing coal-fired generation by 2025 positions TransAlta favorably for regulatory benefits or incentives, likely to improve net margins through reduced compliance costs.

TransAlta Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TransAlta's revenue will decrease by 6.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.2% today to 5.0% in 3 years time.
• Analysts expect earnings to reach CA$116.5 million (and earnings per share of CA$0.32) by about April 2028, down from CA$177.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CA$155 million in earnings, and the most bearish expecting CA$78 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 52.7x on those 2028 earnings, up from 19.9x today. This future PE is greater than the current PE for the US Renewable Energy industry at 18.2x.
• Analysts expect the number of shares outstanding to decline by 2.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.17%, as per the Simply Wall St company report.

TransAlta Future Earnings Per Share Growth

Risks

• TransAlta faces a challenging pricing environment, particularly in Alberta, where spot power prices have seen a significant decline. This can impact revenues and profits due to pressures on pricing for electricity sales.
  
• The company's increased operational and maintenance costs, especially related to the Heartland acquisition and growth initiatives, could potentially squeeze net margins if not offset by equivalent revenue growth.
  
• High capital expenditure and debt levels related to strategic acquisitions and growth initiatives might increase interest expenses, impacting net earnings if not managed properly.
  
• Regulatory risks and lengthy processes, such as the Federal Competition Bureau's review leading to asset divestitures, can complicate strategic transactions and affect financial outcomes, potentially increasing costs or reducing assets contributing to revenues.
  
• Potential oversupply in the Alberta energy market could drive down electricity prices and limit energy market growth, impacting TransAlta’s revenue from its merchant and peaking generation assets.

Valuation

• The analysts have a consensus price target of CA$17.864 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$23.0, and the most bearish reporting a price target of just CA$12.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$2.3 billion, earnings will come to CA$116.5 million, and it would be trading on a PE ratio of 52.7x, assuming you use a discount rate of 7.2%.
• Given the current share price of CA$11.83, the analyst price target of CA$17.86 is 33.8% 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.