Interconnection With France And Salto De Chira Investments Will Strengthen Future Operations

Key Takeaways

• Strategic CapEx increase focuses on key projects, boosting future revenue streams and operational efficiency by streamlining core transmission business.
  
• European subsidies and regulatory framework changes enhance investment viability, reducing debt reliance and supporting earnings growth.
  
• Regulatory changes and increased investments without matching revenue growth, alongside geopolitical instability, challenge Redeia’s financial performance and earnings stability.

Catalysts

Engages in the electricity transmission, and system operation and management of the transmission network for the electricity system in Spain and internationally.

• Redeia plans to increase its 2025 CapEx to over €1.4 billion, driven by strategic projects like the interconnection with France and the Salto de Chira project in the Canary Islands, which will strengthen its infrastructure and can potentially enhance future revenue streams.
  
• The divestment of Hispasat and completion of previous asset rotations have streamlined Redeia's business, allowing the company to focus more resources on its core regulated transmission business, which can positively impact net margins due to increased operational efficiency.
  
• The updated regulatory framework anticipated for 2025 may raise the financial remuneration rate and review other parameters like inflation indexation, enhancing the financial viability of Redeia's investments and supporting stronger earnings growth.
  
• European subsidies totaling approximately €1.5 billion, including €200 million from congestion fees and funds for interconnections, are expected to support Redeia's investment strategy, reducing the reliance on debt and improving net profit margins.
  
• Redeia's increased investment in digitalization and grid interconnection projects aligns with the accelerated energy transition efforts, potentially leading to higher revenue and operational efficiencies, which could translate into improved EPS over time.

Redeia Corporación Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Redeia Corporación's revenue will grow by 7.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 30.6% today to 32.3% in 3 years time.
• Analysts expect earnings to reach €656.0 million (and earnings per share of €1.23) by about March 2028, up from €506.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €743 million in earnings, and the most bearish expecting €549 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.7x on those 2028 earnings, down from 18.9x today. This future PE is greater than the current PE for the GB Electric Utilities industry at 16.2x.
• Analysts expect the number of shares outstanding to remain consistent over 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.

Redeia Corporación Future Earnings Per Share Growth

Risks

• Revenues at Redeia Corporación decreased by one third due to regulatory changes, impacting future revenue prospects.
  
• Increased investment by threefold without a corresponding rise in revenue could lead to pressure on net margins.
  
• The political and geopolitical uncertainty in the EU and U.S. may impact Redeia’s operations, potentially affecting earnings stability.
  
• The historical end-of-life for pre-98 assets and asset sales, such as Hispasat, resulted in a sharp revenue drop, which could pressure earnings further if not offset by new income streams.
  
• Lower contributions from Reintel due to contract renegotiations and a challenging market context could impact revenue streams and overall financial performance.

Valuation

• The analysts have a consensus price target of €18.542 for Redeia Corporación 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 €20.7, and the most bearish reporting a price target of just €15.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €2.0 billion, earnings will come to €656.0 million, and it would be trading on a PE ratio of 18.7x, assuming you use a discount rate of 7.1%.
• Given the current share price of €17.72, the analyst price target of €18.54 is 4.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.