Masdar Partnership And Renewable Expansion Powering Robust Growth And Profitability

Key Takeaways

• Strategic partnerships and effective hedging stabilize revenues, enhance margins, and support future earnings growth by minimizing market volatility.
  
• Increased renewable energy output, cost efficiencies, and recovering energy demand improve profitability and secure long-term revenue streams.
  
• High competition, regulatory uncertainty, and demand challenges could pressure Endesa’s margins and profitability, risking its future growth and shareholder value.

Catalysts

Engages in the generation, distribution, and sale of electricity in Spain, Portugal, France, Germany, Morocco, Italy, the United Kingdom, Singapore, and internationally.

• Endesa's strategic move to incorporate a partner like Masdar for solar assets and securing a 15-year power purchase agreement at competitive costs positions the company to maintain control over critical assets while providing financial proceeds for future growth. This can positively impact earnings by securing long-term revenue streams.
  
• The intensification of renewable energy, particularly solar and hydro production, resulted in a significant increase in emission-free output. This enhancement can lead to higher net margins as renewable sources often have lower operational costs compared to traditional energy sources.
  
• As Endesa progresses in its hedging strategy, having secured almost all of its 2024 and 2025 output and a substantial portion for 2026, it provides stability and predictability in revenues and minimizes exposure to market volatility, which can improve net margins and earnings.
  
• The ongoing focus on efficiencies, as demonstrated by a fixed cost improvement and EBITDA growth of 16% year-over-year, allows Endesa to enhance its net margins and overall profitability by leveraging cost-effective operations.
  
• With expectations of a recovery in energy demand as indicated by forward market prices and signs of mainland electricity demand recovery, Endesa anticipates an increase in revenue from its liberalized power sales, supporting the potential for future earnings growth.

Endesa Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Endesa's revenue will grow by 6.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.0% today to 7.2% in 3 years time.
• Analysts expect earnings to reach €1.9 billion (and earnings per share of €1.79) by about November 2027, up from €1.1 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €2.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.7x on those 2027 earnings, down from 18.8x today. This future PE is lower than the current PE for the GB Electric Utilities industry at 20.3x.
• Analysts expect the number of shares outstanding to decline by 0.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.7%, as per the Simply Wall St company report.

Endesa Future Earnings Per Share Growth

Risks

• The sustained high competition in the electricity and gas supply market, particularly from small suppliers and oil and gas companies, poses a risk to Endesa's customer base and could exert pressure on supply margins, potentially affecting revenue and overall profitability.
  
• Regulatory uncertainty in Spain, especially regarding distribution network investments and hydro assets, could impede long-term planning and capital allocation, thus impacting future earnings potential and growth.
  
• The decrease in industrial demand, particularly from energy-intensive industries like paper and metal, alongside sustained weak demand in Endesa's operational areas, could continue to suppress volume growth, thereby affecting revenue and operating margins.
  
• The volatility of gas unitary margins, despite recent improvements, remains a concern given fluctuating prices and demand, presenting risks to maintaining stable earnings and net margins.
  
• Potential high costs or overvaluation associated with M&A opportunities in the renewable sector or hydro assets could risk financial strain, affecting net profits and long-term shareholder value.

Valuation

• The analysts have a consensus price target of €21.71 for Endesa 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 €25.3, and the most bearish reporting a price target of just €19.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €26.2 billion, earnings will come to €1.9 billion, and it would be trading on a PE ratio of 14.7x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of €19.26, the analyst's price target of €21.71 is 11.3% higher.
  
• 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.