Despite Data Center Ambitions In Alberta, Regulatory Hurdles And Oversupply Threaten Earnings

Key Takeaways

• Regulatory hurdles and Alberta market conditions could delay synergies and compress margins, impacting earnings despite mitigation strategies.
  
• Growth depends on redeveloping assets and data centers, with risks of insufficient returns and unmet expectations.
  
• TransAlta's financial strength and strategic acquisitions, along with effective hedging and asset optimization, position it for sustained growth despite market challenges.

Catalysts

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

• The Heartland Generation acquisition faces regulatory hurdles, with completion contingent on obtaining Competition Act approval. This uncertainty could delay expected synergies and negatively impact earnings.
  
• The temporary mothballing of Sundance Unit 6 due to oversupply conditions defers significant sustaining capital expenditures, but it also results in the loss of revenue and EBITDA from this unit in the near term.
  
• Growth prospects at the Centralia site and other legacy thermal sites hinge on the success of redeveloping existing assets and securing new contracts, which may not materialize as expected, potentially impacting future revenues.
  
• Alberta's market conditions, characterized by oversupply and a decline in spot power prices, could compress net margins and reduce earnings, despite hedging strategies that provide some mitigation.
  
• The strategy of advancing data center capabilities at the Alberta sites involves significant upfront investment and assumes customer interest, with a risk of delayed or insufficient returns impacting earnings forecasts.

TransAlta Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TransAlta's revenue will decrease by -4.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 5.7% today to 2.8% in 3 years time.
• Analysts expect earnings to reach CA$68.8 million (and earnings per share of CA$0.25) by about January 2028, down from CA$158.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 85.6x on those 2028 earnings, up from 38.4x today. This future PE is greater than the current PE for the US Renewable Energy industry at 23.5x.
• Analysts expect the number of shares outstanding to decline by 2.88% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.25%, as per the Simply Wall St company report.

TransAlta Future Earnings Per Share Growth

Risks

• TransAlta's strong financial and operating results, including adjusted EBITDA of $325 million and a substantial free cash flow, indicate potential for sustained earnings growth, which could counteract a decrease in share price.
  
• The company's $1.8 billion available liquidity, inclusive of $400 million in cash, provides financial flexibility to pursue capital allocation priorities and acquisitions like the Heartland Generation acquisition, potentially bolstering future revenue and earnings.
  
• Active engagement with the Competition Bureau and sellers regarding the Heartland Generation acquisition showcases potential for value-added transactions, potentially enhancing net margins and earnings for TransAlta.
  
• The expansion of data center opportunities and maximizing legacy assets in Alberta could increase operational capacity, potentially elevating future revenues and net income.
  
• Effective hedging strategies and portfolio optimization efforts are enhancing margins even under challenging market conditions, likely stabilizing net margins and positively impacting earnings.

Valuation

• The analysts have a consensus price target of CA$17.97 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$10.25.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$2.4 billion, earnings will come to CA$68.8 million, and it would be trading on a PE ratio of 85.6x, assuming you use a discount rate of 6.3%.
• Given the current share price of CA$20.33, the analyst's price target of CA$17.97 is 13.1% 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.