Renewable And Battery Expansion Will Support More Resilient Earnings Profile

Catalysts

About Engie Energia Chile

Engie Energia Chile develops, owns and operates a diversified power generation portfolio in Chile, increasingly focused on renewables, battery storage and flexible gas assets under long term contracts.

What are the underlying business or industry changes driving this perspective?

• Ongoing build out of approximately 1.3 gigawatts of renewable and battery capacity through 2027 should lift contracted volumes and reduce reliance on high cost spot purchases, supporting revenue growth and more resilient EBITDA.
• Conversion of coal units to natural gas, synchronous condensers and high availability thermal assets positions the company to provide flexible, system critical capacity as variable renewables rise, sustaining generation margins and stabilizing net income.
• Growing electricity demand from regulated customers and higher pro rata allocation in distribution supply, as weaker competitors suspend contracts, enhances visibility on cash flows and underpins medium term revenue and earnings growth.
• Execution of a large, mostly green CapEx pipeline financed with long tenor green bonds and AB loans, while keeping net debt to EBITDA near 3.3 to 3.4 times, should translate into operating leverage and gradual improvement in net margins as assets ramp up.
• Strategic repositioning toward a portfolio where about 70 percent of capacity is renewables and batteries by 2027, combined with lower average supply costs, is expected to expand the energy margin per megawatt hour and support sustained EBITDA and net income growth.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Engie Energia Chile's revenue will decrease by 8.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.5% today to 15.3% in 3 years time.
• Analysts expect earnings to reach $242.0 million (and earnings per share of $0.23) by about December 2028, up from $235.7 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 8.3x on those 2028 earnings, up from 6.3x today. This future PE is lower than the current PE for the CL Electric Utilities industry at 13.3x.
• 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 10.99%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company is in an intensive capital expenditure phase of around USD 1.4 billion between 2025 and 2027. Any cost overruns, construction delays, or underperformance in its pipeline of renewable and battery projects could weaken operating leverage and compress future EBITDA and net income growth expectations, which could put downward pressure on the share price rather than leaving it unchanged.
• Structural changes in Chilean regulation, including the methodological error in regulated tariff indexation and the pending decree on how the related refund is implemented, highlight regulatory risk that could reduce interest income and regulated PPA revenue over several years. This could undermine the stability of cash flows that might otherwise support a flat share price.
• The long term shift away from coal toward renewables and flexible gas, including mandated disconnections of coal plants and potential requirements by the authority to keep units available, exposes Engie Energia Chile to transition risk. Stranded asset costs or additional preservation expenses could erode margins and net income instead of providing a neutral backdrop for valuation.
• Reliance on LNG and gas supply contracts, including the expiry of a key LNG agreement after 2026 and past disputes that required arbitration, leaves the company exposed to global LNG market volatility. Higher future fuel or replacement contract costs could raise supply costs and compress the energy margin, negatively impacting EBITDA and earnings.
• While electricity demand growth and increased pro rata allocation in regulated supply have recently boosted revenue and energy margin, any slowdown in industrial and mining activity, prolonged maintenance at key customers, or broader macroeconomic weakness in Chile could reduce volumes and PPA driven revenue. This could increase sensitivity to the spot market and challenge the assumption that the share price will remain stable.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of CLP1273.53 for Engie Energia Chile 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 CLP1425.54, and the most bearish reporting a price target of just CLP1052.01.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $1.6 billion, earnings will come to $242.0 million, and it would be trading on a PE ratio of 8.3x, assuming you use a discount rate of 11.0%.
  
• Given the current share price of CLP1290.0, the analyst price target of CLP1273.53 is 1.3% 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.