Green Hydrogen Projects And Tallgrass Divestment May Boost Earnings Despite Regulatory Challenges

Key Takeaways

• Divestment from Tallgrass Energy and improved credit ratings enhance flexibility for Enagás' investment plan and future earnings growth.
  
• Strategic investments in green hydrogen infrastructure align Enagás with Europe's energy transition, promising long-term revenue growth.
  
• Regulatory uncertainties and project delays pose risks to Enagás' revenue forecasts, while subsidiary performance and arbitration outcomes affect earnings stability.

Catalysts

Develops, operates, and maintains gas infrastructures in Spain and internationally.

• The divestment of Tallgrass Energy is expected to significantly improve Enagás' gross net financial income from 2025, reflecting positively on earnings.
  
• The improved credit ratings from Standard & Poor's, Fitch, and Moody's, following the divestment, set Enagás in a more flexible position to continue its investment plan, potentially enhancing future earnings.
  
• Enagás' efficiency plan aims to limit operating expense growth to no more than 1% from 2022 to 2026, suggesting an improvement in net margins over time.
  
• The green hydrogen initiatives across Europe, especially Enagás' role in projects like the H2Med corridor, are positioned to align with increased demand, creating potential for significant revenue growth.
  
• The strategic push to contribute to Europe's energy transition with significant investments in green hydrogen infrastructure is likely to be a catalyst for long-term revenue and earnings growth as the energy market shifts.

Enagás Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Enagás's revenue will decrease by -3.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 39.9% today to 28.8% in 3 years time.
• Analysts expect earnings to reach €235.8 million (and earnings per share of €0.91) by about December 2027, down from €359.3 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €210 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.8x on those 2027 earnings, up from 8.5x today. This future PE is greater than the current PE for the GB Gas Utilities industry at 18.0x.
• Analysts expect the number of shares outstanding to decline by 0.14% 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.

Enagás Future Earnings Per Share Growth

Risks

• The ongoing regulatory adjustments and uncertainty regarding natural gas and hydrogen regulation could impact Enagás' ability to accurately forecast and stabilize revenue and earnings.
  
• The reliance on the energy transition and the success of hydrogen projects amid European regulatory changes, and potential delays, poses risks to revenue growth projections and may affect the projected capital expenditures (CapEx).
  
• Recent cancellations and suspensions of hydrogen projects by other companies might indicate potential hurdles for Enagás' strategic ambitions, potentially affecting projected earnings from the hydrogen sector.
  
• Reduced contributions from key subsidiaries in the fourth quarter and other non-recurrent effects could affect Enagás' quarterly net income consistency, impacting year-end earnings projections.
  
• The delay in receiving arbitration award decisions, such as with the GSP in Peru, can introduce financial uncertainty and impact earnings, particularly if provisions or adjustments are required.

Valuation

• The analysts have a consensus price target of €15.57 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 €19.1, and the most bearish reporting a price target of just €12.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €818.8 million, earnings will come to €235.8 million, and it would be trading on a PE ratio of 20.8x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of €11.7, the analyst's price target of €15.57 is 24.9% 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.