Rising Regulatory Burdens And Weaker Capture Prices Will Pressure Future Earnings

Catalysts

About Fortum Oyj

Fortum Oyj is a Nordic power and heat utility focused on low carbon electricity generation, energy supply and related infrastructure solutions.

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

• Persistent variability in hydro inflows and unplanned nuclear outages highlight structural exposure to weather and asset availability risk. This can cap generation volumes and weigh on revenue and earnings if investors are extrapolating current power price strength without adequately discounting these volume constraints.
• The large pipeline of onshore wind and solar projects, together with growing development and commercial costs, may face weaker realized capture prices in increasingly volatile and cannibalized markets. This could pressure project returns and potentially dilute net margins if contracted pricing fails to keep pace with cost inflation.
• Rising and partly unpredictable tax and regulatory burdens in key markets, including higher Swedish property taxes and evolving power tax regimes, risk structurally lifting the fixed cost base. This may narrow operating leverage and constrain earnings growth relative to optimistic long-term valuation assumptions.
• Expanding optimization and trading activity in a more volatile short term power market increases dependence on optimization premiums that are inherently cyclical and harder to forecast. This creates downside risk to future operating profit and earnings if volatility or Fortum's relative trading edge normalizes from the current elevated levels.
• Strong recent profitability in Consumer Solutions, supported by unusually favorable margin conditions, may not be sustainable as competition, customer price sensitivity and potential regulatory scrutiny increase. These factors could compress retail margins and limit revenue and EPS growth from this segment compared to what the current valuation implies.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Fortum Oyj's revenue will grow by 2.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 17.3% today to 16.2% in 3 years time.
• Analysts expect earnings to reach €860.3 million (and earnings per share of €0.97) by about December 2028, down from €864.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €962.1 million in earnings, and the most bearish expecting €655.4 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 19.5x on those 2028 earnings, up from 18.8x today. This future PE is greater than the current PE for the GB Electric Utilities industry at 19.0x.
• 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 5.67%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Fortum is executing a sizable fixed cost reduction program that will lower its recurring annual fixed cost base by EUR 100 million by 2026 while leverage remains low at 1.0 times and liquidity is very strong. This combination of efficiency gains and balance sheet strength could support higher long term operating margins and earnings than implied by a falling share price scenario.
• The company is building an approximately 8 gigawatt pipeline of onshore wind and solar projects backed by customer PPAs and is actively negotiating long tenor contracts with data centers and other industrial customers. If decarbonization and electrification trends translate into robust PPA demand at attractive price levels, this could drive structurally higher revenue and more visible cash flows.
• Fortum continues to benefit from increasing power price volatility and expects an optimization premium of about EUR 10 per megawatt hour in 2025 with guidance of EUR 6 to EUR 8 per megawatt hour thereafter. If volatility stays elevated or grid reforms like the 15 minute market deepen balancing needs, optimization income could remain above conservative expectations and support operating profit.
• The Consumer Solutions segment has delivered record high profitability with improved electricity and gas margins and about EUR 13 million of cost synergies. If this structurally higher earnings base in retail energy proves more sustainable than assumed, consolidated net profit and earnings per share could remain resilient or grow.

Valuation

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

• The analysts have a consensus price target of €15.88 for Fortum Oyj 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 €19.0, and the most bearish reporting a price target of just €12.5.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be €5.3 billion, earnings will come to €860.3 million, and it would be trading on a PE ratio of 19.5x, assuming you use a discount rate of 5.7%.
  
• Given the current share price of €18.05, the analyst price target of €15.88 is 13.7% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• 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.