Renewable And Gas Investments Will Shape Future Paths Amid Risks

Key Takeaways

• Significant investments in renewables, batteries, and gas generation will support future revenue growth due to rising power demand.
  
• Capital efficiency strategies and share buybacks are expected to boost net margins and enhance earnings per share.
  
• RWE's cautious capital allocation amidst geopolitical tensions and supply chain issues may hinder growth and diversification, affecting long-term revenue and earnings targets.

Catalysts

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

• Significant investments in renewables, batteries, and gas generation are needed in core markets due to increased power demand, supporting future revenue growth.
  
• The strategy to farm down stakes in projects under construction, like Sofia and Norfolk, is expected to enhance capital efficiency and improve net margins by reducing capital employed.
  
• The 18% CAGR in EPS from '25 to '27, driven by existing assets and capital flexibility, suggests strong future earnings potential.
  
• Committed net investments of €13 billion in ongoing projects, predicted to yield attractive returns, are anticipated to bolster long-term earnings.
  
• Additional share buybacks, as part of capital allocation consideration, could increase EPS by reducing outstanding shares, enhancing per-share earnings growth.

RWE Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming RWE's revenue will grow by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 21.2% today to 7.2% in 3 years time.
• Analysts expect earnings to reach €2.0 billion (and earnings per share of €2.93) by about April 2028, down from €5.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €2.4 billion in earnings, and the most bearish expecting €1.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.8x on those 2028 earnings, up from 4.9x today. This future PE is lower than the current PE for the GB Renewable Energy industry at 19.3x.
• Analysts expect the number of shares outstanding to decline by 0.51% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.3%, as per the Simply Wall St company report.

RWE Future Earnings Per Share Growth

Risks

• Uncertainty in the investment environment and reduction in planned investments by 25% to €35 billion net for 2025-2030 could impact future growth opportunities, potentially affecting long-term revenue and earnings targets.
  
• Higher uncertainty in energy policy direction in the U.S. and geopolitical tensions could complicate international investments, potentially lowering expected returns or hindering expansion efforts in key emerging markets.
  
• The cautious approach to capital allocation and stricter investment criteria, particularly in the U.S., might limit RWE's ability to capitalize on growth opportunities, thereby impacting expected revenue and earnings growth.
  
• Supply chain constraints and delays, especially in the new build gas turbine sector, could lead to higher-than-expected costs and slower project delivery, negatively affecting capital expenditure plans and profitability.
  
• A slowdown or halt in U.S. Offshore Wind investments reflects reluctance to take on significant merchant risk amidst uncertain market conditions, which could limit diversification of revenue streams and future earnings growth.

Valuation

• The analysts have a consensus price target of €42.429 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 €49.0, and the most bearish reporting a price target of just €36.3.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €28.0 billion, earnings will come to €2.0 billion, and it would be trading on a PE ratio of 17.8x, assuming you use a discount rate of 5.3%.
• Given the current share price of €34.08, the analyst price target of €42.43 is 19.7% 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.