Renewable Drive Energizes Growth But Faces Margin Squeeze And Political Hurdles

Key Takeaways

• Engie's renewable energy growth, expanding wind and solar capacity and battery storage, positions it well for future revenue and earnings increases.
  
• Strategic shifts in power networks, including Brazilian concessions and French tariffs, support revenue stability and potential profit margin improvements.
  
• ENGIE faces challenges from fluctuating energy prices, U.S. operational issues, French taxation, and currency risks impacting margins and earnings.

Catalysts

ENGIE SA engages in the power, natural gas, and energy services businesses.

• Engie is showcasing steady growth in renewable energy projects, achieving significant increases in wind and solar capacity. This expansion is set to double capital employed in renewables from 2021 to 2024 and target 80 gigawatts by 2030, potentially boosting revenue and earnings from increased capacity and favorable project economics.
  
• The advancement in Engie's battery storage initiatives is a strong growth catalyst. With their recent progress toward a 10 gigawatt target by 2030, primarily in the U.S. and Europe, this positions Engie to effectively capture revenue from increased energy demand and intermittency management, enhancing margins through energy storage solutions.
  
• Engie's strategic shift towards power network business rebalancing, exemplified by their concession win in Brazil, aligns with increasing electricity demands and may enhance revenue stability and overall earnings due to regulated returns and expanded capacity.
  
• The company's ability to efficiently manage project execution, as indicated by its success in delivering renewable projects on time and within budget, suggests higher profit margins and revenue growth potential, leveraging the sophistication and quality of their portfolio for more competitive pricing.
  
• The implementation of increased tariff measures in France within the Networks segment is expected to boost future revenues, helping to offset past revenue shortfalls and potentially improving EBIT, especially for long-term income stability in regulated parts of its business.

Engie Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Engie's revenue will grow by 1.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.7% today to 5.3% in 3 years time.
• Analysts expect earnings to reach €4.0 billion (and earnings per share of €1.62) by about November 2027, down from €4.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.5x on those 2027 earnings, up from 7.5x today. This future PE is lower than the current PE for the GB Integrated Utilities industry at 20.3x.
• Analysts expect the number of shares outstanding to grow by 0.94% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.28%, as per the Simply Wall St company report.

Engie Future Earnings Per Share Growth

Risks

• ENGIE's EBIT excluding Nuclear decreased by 11% due to market headwinds, indicating potential challenges in maintaining revenue growth amid fluctuating energy prices.
  
• The Energy Solutions segment in the U.S. faced difficulties resulting in new provisions for construction contracts, signaling potential risks to net margins due to operational challenges and restructuring costs.
  
• There is uncertainty surrounding the French political and budgetary context, notably new taxation on French earnings, which could impact net earnings if the contingencies do not sufficiently cover these tax increases.
  
• The depreciation of the Brazilian real had a negative impact on financial results, highlighting risks to earnings from currency fluctuations in important markets like Brazil.
  
• The company notes that retail earnings decreased organically due to lower volumes and timing effects, indicating potential risks to revenue if these trends continue in a rapidly changing retail energy market.

Valuation

• The analysts have a consensus price target of €18.75 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 €23.3, and the most bearish reporting a price target of just €16.8.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €75.8 billion, earnings will come to €4.0 billion, and it would be trading on a PE ratio of 13.5x, assuming you use a discount rate of 5.3%.
  
• Given the current share price of €15.18, the analyst's price target of €18.75 is 19.0% 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.