Investments In Grids And Renewables Will Improve Future Prospects

Key Takeaways

• Increasing investment in grids and expanding renewable capacity could enhance network resilience, service quality, and revenue growth.
  
• Debt reduction through asset sales and strategic focus on Brazil could improve financial stability, net margins, and earnings.
  
• Currency devaluation and challenging hydrological conditions in Brazil and Colombia, alongside regulatory challenges, pose risks to Enel Américas' financial performance and operational stability.

Catalysts

Generates, transmits, and distributes electricity in Brazil, Colombia, Central America, Argentina, and Peru.

• The increase in investment in the Grids business by 30% could lead to a more resilient network, which may boost service quality and customer satisfaction, potentially enhancing revenue growth.
  
• The addition of 800 megawatts of new renewable capacity shows commitment to expanding generation capacity, which could lead to increased revenue over time as demand for renewable energy rises.
  
• The significant reduction in gross debt by 30%, achieved through asset sales, could lead to lower financial expenses and improve net margins and future earnings due to reduced interest payments.
  
• The development of solar projects in Colombia, despite current hydrological challenges, positions the company for future growth in renewable generation capacity, potentially increasing future revenues.
  
• The strategic focus on Brazil, including investments and debt reduction, indicates potential for improved financial stability and operational performance, which could positively impact net margins and earnings.

Enel Américas Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Enel Américas's revenue will grow by 1.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.3% today to 11.6% in 3 years time.
• Analysts expect earnings to reach $1.6 billion (and earnings per share of $0.01) by about July 2028, up from $707.3 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 9.8x on those 2028 earnings, down from 14.6x today. This future PE is greater than the current PE for the US Electric Utilities industry at 8.9x.
• 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 9.57%, as per the Simply Wall St company report.

Enel Américas Future Earnings Per Share Growth

Risks

• The depreciation of the Brazilian real had a negative impact on Enel Américas' EBITDA, decreasing it by $91 million, which poses a risk to their earnings.
  
• The hydrological situation in Colombia, with reduced rainfall and higher spot prices due to increased thermal generation, has negatively affected the generation business, potentially impacting future revenues.
  
• Currency devaluation in Brazil and challenging hydro conditions in Colombia have contributed to a 4% decrease in quarterly EBITDA, affecting their overall financial performance.
  
• The ongoing drought situation in Colombia could impact Enel Américas' ability to generate hydroelectric power, affecting energy sales and increasing the need for more expensive spot market purchases, thereby impacting net margins.
  
• Regulatory challenges, such as potential penalties and concession contracts in Sao Paulo and other regions, could create uncertainties and potentially impact both operational performance and financial expenses.

Valuation

• The analysts have a consensus price target of CLP107.304 for Enel Américas 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 CLP119.02, and the most bearish reporting a price target of just CLP99.49.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $14.1 billion, earnings will come to $1.6 billion, and it would be trading on a PE ratio of 9.8x, assuming you use a discount rate of 9.6%.
• Given the current share price of CLP91.5, the analyst price target of CLP107.3 is 14.7% 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.