Grimsel Dam Approval Will Boost Future Energy Production

Key Takeaways

• Strategic renewable energy projects and expansions, including wind, solar, and battery storage, are expected to drive future revenue growth.
  
• Improvements in operational efficiencies and profitability are anticipated from smart meter deployment and restructuring within the services segment.
  
• Declining energy revenues, cash flow risks, and reliance on volatile trading profits introduce uncertainty, with external factors potentially impacting future growth and profitability.

Catalysts

An international energy and infrastructure company, plans, builds, and operates infrastructure to produce and supply energy to businesses, households, and the public sector in Switzerland, Germany, Italy, France, and internationally.

• BKW is advancing several renewable energy projects, including solar and wind projects, in response to the vote on the Electricity Act. The anticipated approval of the Grimsel Dam concession is expected to enhance future energy production and revenue growth.
  
• The deployment of 400,000 smart meters by 2028 is likely to improve operational efficiencies and potentially enhance profit margins through automated data collection and management.
  
• The planned expansion of BKW's solar engineering brand, Solstis, aims to double installed capacity to over 75 megawatts in two years, which could drive significant revenue growth in renewable energy services.
  
• The partnership for the Wunsiedel battery storage facility, with 100-megawatt capacity expected to be operational by 2025, presents a future revenue stream from increasing demand for energy storage solutions.
  
• The strategic acquisition and internal restructuring within the services segment are intended to stabilize and gradually improve profitability, aiming to achieve a sustainable EBIT margin improvement over the next few years.

BKW Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming BKW's revenue will grow by 2.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 13.4% today to 11.0% in 3 years time.
• Analysts expect earnings to reach CHF 556.3 million (and earnings per share of CHF 10.54) by about April 2028, down from CHF 622.2 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as CHF492.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.2x on those 2028 earnings, up from 13.2x today. This future PE is greater than the current PE for the GB Electric Utilities industry at 13.1x.
• Analysts expect the number of shares outstanding to decline by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 3.82%, as per the Simply Wall St company report.

BKW Future Earnings Per Share Growth

Risks

• BKW's energy business revenue has declined due to lower electricity prices in the energy markets, which could impact future revenue streams.
  
• There is a cash flow risk associated with increasing net working capital and temporary lower cash conversion, which could affect liquidity and overall profitability.
  
• The services business is in a transition phase, with the company still working to stabilize and improve margins, indicating potential challenges in achieving targeted earnings.
  
• The reliance on volatile trading profits as a significant component of overall earnings introduces uncertainty into future profitability.
  
• External regulatory and political factors, such as biodiversity initiatives or changes to the Electricity Act, could impose additional costs or barriers to infrastructure projects, affecting future returns and growth potential.

Valuation

• The analysts have a consensus price target of CHF173.75 for BKW 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 CHF192.0, and the most bearish reporting a price target of just CHF155.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CHF5.1 billion, earnings will come to CHF556.3 million, and it would be trading on a PE ratio of 18.2x, assuming you use a discount rate of 3.8%.
• Given the current share price of CHF155.7, the analyst price target of CHF173.75 is 10.4% 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.