Falling Power Prices And Heavy Capex Will Pressure Earnings And Margins Over Time

Catalysts

About CEZ a. s

CEZ a. s is a Central European energy group focused on electricity and heat generation, distribution and sales, alongside gas distribution and related energy services.

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

• Accelerating decline in achieved wholesale power prices, from roughly EUR 121 to EUR 124 per megawatt hour in 2025 toward sub EUR 100 levels in the hedge profile, risks structurally compressing revenue even as nuclear output peaks around 32 terawatt hours.
• Planned accelerated depreciation and eventual decommissioning of lignite and coal assets, combined with a winter or summer operating mode, could drive a sustained drag on net income as coal EBITDA has already fallen by over 60% despite nearly flat physical volumes.
• Heavy capital expenditure of more than CZK 400 billion through 2030, focused on replacement generation, grids and new gas assets, may push net debt to EBITDA toward the 3.5 times target ceiling and limit flexibility for shareholder returns, pressuring free cash flow after dividends.
• Normalisation of trading volatility and retail margins from crisis-era highs toward historic earnings of roughly CZK 1 billion to CZK 2 billion in proprietary trading and more modest retail spreads could lead to weaker incremental EBITDA growth versus recent exceptional years.
• Regulated distribution and gas networks, while relatively stable, are constrained by regulatory returns and temporary correction factors that will partially reverse by 2027, reducing the uplift to EBITDA and limiting offset to falling generation margins and earnings.

Assumptions

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

• The bearish analysts are assuming CEZ a. s's revenue will decrease by 9.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 8.5% today to 9.2% in 3 years time.
• The bearish analysts expect earnings to reach CZK 23.3 billion (and earnings per share of CZK 43.1) by about December 2028, down from CZK 28.8 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as CZK40.8 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 17.3x on those 2028 earnings, down from 24.2x today. This future PE is lower than the current PE for the GB Electric Utilities industry at 24.2x.
• The bearish 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?

• Higher and more stable nuclear utilization around 30 to 32 terawatt hours in years without major outages could provide a resilient zero emission baseload. This could support long term revenue and cushion earnings against lower wholesale prices.
• Regulated electricity and gas distribution, now enlarged through the GasNet consolidation and the new southern Czech gas distribution acquisition, is delivering strong, repeatable EBITDA growth driven by an expanding asset base and allowed revenues. This could underpin long term net margins and earnings.
• Gas distribution and electricity grid investments above CZK 400 billion this decade, together with a strategic shift from coal toward gas plants, nuclear and services, may create a more diversified, lower risk earnings mix that supports long term revenue stability and profitability.
• The removal of the windfall tax from 2026 while maintaining a dividend payout closer to 80 percent of adjusted net income and a net debt to EBITDA target of 3.5 times could lift after tax earnings and shareholder returns despite cyclical pressure on generation margins.

Valuation

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

• The assumed bearish price target for CEZ a. s is CZK600.0, which represents up to two standard deviations below 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 more bearish 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 bearish analyst cohort, you'd need to believe that by 2028, revenues will be CZK254.2 billion, earnings will come to CZK23.3 billion, and it would be trading on a PE ratio of 17.3x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of CZK1301.0, the analyst price target of CZK600.0 is 116.8% 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.