Growing Green Strategy Powers Future Revenue But Margin Pressures And Uncertainty Loom

Key Takeaways

• Ongoing investment in the Growing Green strategy and capital reallocation may optimize future earnings and revenue growth.
  
• Share buyback program and focus on strong credit ratings could boost EPS and improve net margins while reducing financial risk.
  
• Higher uncertainties and delays in U.S. offshore wind and hydrogen economies could affect future revenue growth and financial stability.

Catalysts

Generates and supplies electricity from renewable and conventional sources in Germany, the United Kingdom, rest of Europe, North America, and internationally.

• RWE's continued investment in their Growing Green strategy, with 11.2 gigawatts of capacity under construction, suggests future revenue growth as these assets come online.
  
• The significant share buyback program of €1.5 billion is expected to reduce the number of shares, potentially driving earnings per share (EPS) higher over the next 18 months.
  
• RWE focuses on maintaining a strong investment-grade rating while allocating capital efficiently, which could result in improved net margins by reducing financial risk and potentially decreasing the cost of capital.
  
• Strategic reduction and delay in U.S. offshore wind and hydrogen investments, while reallocating capital to higher-return projects or share buybacks, may optimize investment returns and enhance future net income.
  
• Increased guidance for EBITDA and net income indicates expected improvement in operational performance and potentially higher future earnings, fueled by better market conditions and effective hedging strategies.

RWE Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming RWE's revenue will grow by 7.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 11.9% today to 6.7% in 3 years time.
• Analysts expect earnings to reach €1.9 billion (and earnings per share of €2.65) by about November 2027, down from €2.8 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €1.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.0x on those 2027 earnings, up from 8.2x today. This future PE is lower than the current PE for the GB Renewable Energy industry at 25.3x.
• Analysts expect the number of shares outstanding to decline by 0.61% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.01%, as per the Simply Wall St company report.

RWE Future Earnings Per Share Growth

Risks

• There are higher uncertainties and delays in the U.S. offshore wind and hydrogen economies development, leading to a reduction in the CapEx program, which might impact future revenue growth.
  
• The company's net financial debt increased significantly due to investments and timing effects, which might pressure net margins if not offset by future earnings growth.
  
• Despite current strong performance, the strategy includes reducing cash investments due to uncertain future returns on certain projects, potentially affecting long-term revenue generation and earnings.
  
• Declining commodity prices present headwinds that could impact revenue and profit margins if these trends continue or worsen.
  
• The net position from hedging activities incurring an outflow indicates potential volatility and financial risk, which could negatively impact net income and overall financial stability.

Valuation

• The analysts have a consensus price target of €43.59 for RWE 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 €52.5, and the most bearish reporting a price target of just €34.2.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €29.0 billion, earnings will come to €1.9 billion, and it would be trading on a PE ratio of 19.0x, assuming you use a discount rate of 5.0%.
• Given the current share price of €31.14, the analyst's price target of €43.59 is 28.6% 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.