Rising Regulated Asset Base And Nuclear Output Will Drive Stronger Long Term Earnings Stability

Catalysts

About CEZ a. s

CEZ a. s is a vertically integrated Central European energy group focused on electricity and heat generation, distribution, and related services.

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

• Higher and expanding regulated asset base in electricity and gas distribution, supported by sustained CapEx and favorable regulation, should underpin structurally higher allowed revenues and more stable EBITDA and net income over the long term.
• Fuel cycle extensions and longer operating cycles at Dukovany and Temelín are lifting nuclear output toward 30 to 32 terawatt hours in peak years, improving asset utilization and supporting more resilient earnings despite lower wholesale power prices.
• Full year consolidation of GasNet and the newly acquired regional gas distributor, combined with anticipated operating synergies in a nearly nationwide gas grid, are set to reinforce recurring cash flows and help offset declining coal margins at group level.
• Ongoing replacement of coal units with combined cycle gas plants and other low carbon assets, alongside higher value heat sales in winter, positions the generation mix for better long term cost efficiency and healthier net margins as carbon costs rise.
• Scaling of energy services and ESCO activities, together with a more stable post crisis retail market and lower commodity acquisition costs, provides incremental growth in fee like and service revenues that can support group EBITDA and earnings beyond 2025.

Assumptions

This narrative explores a more optimistic perspective on CEZ a. s compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming CEZ a. s's revenue will decrease by 4.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 8.5% today to 13.6% in 3 years time.
• The bullish analysts expect earnings to reach CZK 40.7 billion (and earnings per share of CZK 75.71) by about December 2028, up from CZK 28.8 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as CZK23.3 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 19.5x on those 2028 earnings, down from 23.8x today. This future PE is lower than the current PE for the GB Electric Utilities industry at 23.9x.
• The bullish 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 7.81%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A structurally lower power price environment in Central Europe, with CEZ already guiding for a drop of roughly EUR 30 per megawatt hour between 2025 and 2026 and forward hedges declining toward EUR 72 per megawatt hour by 2029, could drive a sustained reduction in sales prices that visibly compresses group revenue and EBITDA over the medium term.
• Accelerated depreciation of lignite assets through 2030, combined with structurally narrowing coal and thermal generation margins as carbon costs remain high and coal spark spreads tighten, risks a persistent drag from higher depreciation and weaker generation profitability that pressures net income growth.
• Trading profitability appears to be normalizing back to pre crisis levels amid much lower power market volatility, with proprietary trading already down around 65% year on year, suggesting that this historic earnings lever may no longer offset weaker generation economics and could limit upside to EBITDA and earnings.
• Regulated distribution earnings, while currently strong due to a growing asset base and temporary correction factors, are inherently capped by regulation and will face reversal of some positive correction factors in 2027. As a result, the recent uplift from distribution and gas consolidation may not translate into structurally rising margins and could leave group EBITDA more exposed if other segments weaken.

Valuation

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

• The assumed bullish price target for CEZ a. s is CZK1181.5, which represents up to two standard deviations above the consensus price target of CZK898.54. This valuation is based on what can be assumed as the expectations of CEZ a. s's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CZK1181.5, and the most bearish reporting a price target of just CZK600.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be CZK298.5 billion, earnings will come to CZK40.7 billion, and it would be trading on a PE ratio of 19.5x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of CZK1278.0, the analyst price target of CZK1181.5 is 8.2% 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.