Grid Constraints And Regulatory Pressure Will Erode Future Earnings Power

Catalysts

About Endesa

Endesa is an integrated Iberian utility focused on power generation, electricity and gas supply, and regulated distribution networks.

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

• Rising grid connection requests from new industrial loads such as data centers are meeting distribution capacity that is already close to saturated in Endesa's areas. If the remuneration framework does not materially improve, Endesa may underinvest, which can cap medium term volume growth and pressure revenue.
• Electricity demand from services and industrial customers, including data center activity in areas like Aragon, is starting to materialize. If network bottlenecks and low grid availability persist, Endesa could miss part of this demand, limiting the benefit to EBITDA and earnings.
• The push toward higher electrification and decarbonization requires heavier distribution and renewable investment. Management repeatedly flags that the current regulatory proposal does not adequately incentivise this, which could compress future allowed returns on the RAB and weigh on net margins.
• Higher ancillary services costs introduced after the blackout episode raise structural system costs. While Endesa is working to pass these through to customers, any delay or competitive pressure in retail could erode supply margins and slow earnings growth from the generation and supply segment.
• Ongoing nuclear phaseout discussions, including the importance of plants such as Almaraz for system security, create uncertainty over future inframarginal generation volumes. If closures proceed without adequate replacement economics for other assets, integrated unitary margins and long term cash generation could come under pressure.
• Customer mix is shifting toward higher value liberalized contracts and bundled offers with partners such as MasOrange. However, the very high churn in the Spanish retail market and continued loss of low value customers may limit scale benefits in supply and constrain revenue growth relative to current profitability levels.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on Endesa compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Endesa's revenue will decrease by 7.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 11.2% today to 13.2% in 3 years time.
• The bearish analysts expect earnings to reach €2.2 billion (and earnings per share of €2.11) by about July 2029, down from €2.3 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €2.7 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 15.1x on those 2029 earnings, down from 18.1x today. This future PE is lower than the current PE for the GB Electric Utilities industry at 17.6x.
• The bearish analysts expect the number of shares outstanding to decline by 1.86% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.32%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Electricity demand in Spain is already consolidating growth, with mainland demand up 2.4% year on year and Endesa's areas at 4.2%, helped by both industrial and services usage and a sharp pickup in Aragon linked to data centers, which could underpin long term revenue and support EBITDA and earnings.
• New industrial and data center loads are starting to convert from grid connection requests into actual consumption, and management describes this as a turning point in demand trends, which may support higher network utilization and improve integrated margins and long term cash generation.
• Endesa reports strong recent financial performance, with 9 month 2025 EBITDA at €4.2b, net income at €1.7b and FFO at €3.4b, together with a net debt to EBITDA ratio of 1.8x, which provides financial flexibility that could underpin earnings resilience and support shareholder returns.
• Management is actively reallocating capital through acquisitions such as the remaining 62.5% of Cetasa and Energía Colectiva, alongside a share buyback program of up to €500m and further potential debt capacity of around €5b, which could support revenue scale, margins and earnings per share.
• Regulatory discussions on distribution returns could still move closer to levels seen in other European markets, with internal references around 7.1% to 7.2% and a higher investment cap for 2026 to 2030, which may allow higher regulated asset base growth and support future revenue and net margins.

Valuation

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

• The assumed bearish price target for Endesa is €27.4, which represents up to two standard deviations below the consensus price target of €34.56. This valuation is based on what can be assumed as the expectations of Endesa'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 €41.5, and the most bearish reporting a price target of just €27.4.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be €16.5 billion, earnings will come to €2.2 billion, and it would be trading on a PE ratio of 15.1x, assuming you use a discount rate of 7.3%.
• Given the current share price of €40.42, the analyst price target of €27.4 is 47.5% 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.