Expanding Renewables And Batteries Will Drive Future Earnings Stability

Key Takeaways

• Engie's focus on expanding renewables and batteries aims to drive revenue growth and earnings stability through strategic energy solutions and premium pricing.
  
• Optimizing geographical presence and regulatory strategies enhances financial stability, maximizing returns through efficient investments and reduced earnings volatility.
  
• Stabilized energy markets, nuclear shutdowns, and policy shifts challenge Engie's growth, revenue streams, and financial targets, amid strategic market focus and reliance on volatility.

Catalysts

Engages in the power, natural gas, and energy services businesses in France, Belgium, North America, Asia, the Middle East, Oceania, South America, Africa, and internationally.

• Engie is focusing heavily on expanding its renewables and battery capacity, targeting significant growth in these areas by 2030. This expansion is expected to drive substantial revenue growth and enhance long-term earnings stability.
  
• The company is strategically investing in energy solutions like 24/7 green power offerings through a combination of renewables, batteries, and flexible generation assets. This approach is likely to support higher margins and more stable revenues due to premium pricing.
  
• By optimizing its geographical presence, Engie is focusing on its core markets where it can leverage synergies and integrated business models, potentially boosting net margins by ensuring investments are more efficient and returns are maximized.
  
• Successful execution of efficiency and performance improvements is expected to yield over €1 billion in incremental EBIT by 2027, which should positively impact the net margins and overall earnings.
  
• The reduction of market exposure through increased regulation and long-term contracts is projected to enhance financial stability and predictability, positively impacting earnings by reducing volatility and risk.

Engie Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Engie's revenue will decrease by 0.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 5.5% today to 5.3% in 3 years time.
• Analysts expect earnings to reach €3.9 billion (and earnings per share of €1.67) by about March 2028, down from €4.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €4.5 billion in earnings, and the most bearish expecting €3.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.0x on those 2028 earnings, up from 10.7x today. This future PE is lower than the current PE for the GB Integrated Utilities industry at 15.0x.
• Analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.66%, as per the Simply Wall St company report.

Engie Future Earnings Per Share Growth

Risks

• Stabilization of energy markets could lead to decreased volatility, potentially impacting earnings from Engie's energy management activities which rely on market volatility for profits.
  
• The gradual shutdown of Belgian nuclear plants and reliance on a new quasi-regulated rate structure could create uncertainties about future nuclear-related earnings.
  
• A slowdown in safe renewable energy deployments in the U.S., due to potential policy shifts, could affect Engie's growth prospects and impact future revenues.
  
• The company's strategic focus on select key markets may limit flexibility and diversification, potentially impacting long-term revenues if investments in these markets underperform.
  
• Performance improvements and efficiency gains may not be fully realized or could be competed away, impacting net margins and the ability to meet financial targets.

Valuation

• The analysts have a consensus price target of €19.194 for Engie 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 €23.8, and the most bearish reporting a price target of just €16.6.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €74.0 billion, earnings will come to €3.9 billion, and it would be trading on a PE ratio of 14.0x, assuming you use a discount rate of 5.7%.
• Given the current share price of €17.81, the analyst price target of €19.19 is 7.2% 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.