Green Hydrogen Investments Will Align With EU Climate Goals And Strengthen Financial Resilience

Key Takeaways

• Enagás's investment in green hydrogen aligns with EU goals, potentially boosting revenue through new growth drivers like Scale Green Energy projects.
  
• Prudent debt management and operating expense control bolster financial resilience, supporting sustainable dividends and enhancing shareholder returns.
  
• Regulatory and execution risks in hydrogen and natural gas infrastructure could negatively impact Enagás's earnings, margins, and profitability.

Catalysts

Engages in the transmission, storage, and regasification of natural gas.

• Enagás's strategy involves significant investments in green hydrogen infrastructure and new growth drivers, such as Scale Green Energy projects, which are expected to boost revenue growth as they align with EU priorities and climate change goals.
  
• The company plans to maintain a cap on operating expense growth at 1.5% per year from 2024-2026, along with a 40% reduction in net financial income, which can enhance net margins by increasing operational efficiencies and reducing financial costs.
  
• Enagás anticipates completing major hydrogen infrastructure projects by 2030, supported by substantial EU funding, which should positively impact earnings by enabling revenue from new hydrogen networks and associated services.
  
• Future improvement in returns from strategic affiliates like TAP and TGP is expected as network expansions and enhanced international collaborations come online, contributing to overall earnings growth.
  
• The company's prudent debt management, with over 80% at a fixed rate and liquidity of €3.25 billion, combined with reduced net debt, supports sustainable dividend payments and strengthens its financial resilience, which can increase shareholder returns.

Enagás Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Enagás's revenue will decrease by 3.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -33.1% today to 29.5% in 3 years time.
• Analysts expect earnings to reach €240.2 million (and earnings per share of €0.92) by about March 2028, up from €-299.3 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €209 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.8x on those 2028 earnings, up from -11.2x today. This future PE is greater than the current PE for the GB Gas Utilities industry at 12.6x.
• 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 7.14%, as per the Simply Wall St company report.

Enagás Future Earnings Per Share Growth

Risks

• Potential regulatory changes in the financial return on hydrogen investments could lead to lower-than-expected remuneration, impacting Enagás's projected earnings from its hydrogen infrastructure initiatives.
  
• The arbitration process with the Peruvian government and the uncertainty surrounding the release of TGP dividends and additional compensation claims could affect future cash flows and net margins.
  
• Delays in the hydrogen infrastructure deployment or modifications in the subsidy rates assumed for projects such as H2med and the Spanish backbone network could disrupt expected capital expenditure plans, potentially affecting projected earnings growth.
  
• The concentration of CapEx within a short timeframe and potential execution bottlenecks could increase operational risks, potentially affecting project timelines, overall costs, and resulting in a negative impact on margins and profitability.
  
• Dependence on regulatory support and incentives for natural gas infrastructure to ensure a fair rate of return could expose Enagás to risks if these incentives are altered or not realized as anticipated, impacting net margins and earnings stability.

Valuation

• The analysts have a consensus price target of €14.861 for Enagás 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 €19.04, and the most bearish reporting a price target of just €11.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €815.0 million, earnings will come to €240.2 million, and it would be trading on a PE ratio of 19.8x, assuming you use a discount rate of 7.1%.
• Given the current share price of €12.82, the analyst price target of €14.86 is 13.7% 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.