Expansion Into Liguria, Sicily, And Peru Will Broaden Geographical Footprint

Key Takeaways

• Strategic expansion into new regions and higher approved tariffs are expected to drive revenue growth and broaden ACEA's geographical footprint.
  
• Investments in regulated businesses and new projects are likely to enhance EBITDA and net margins through diversified revenue streams and stable returns.
  
• Regulatory and tariff uncertainties, energy market fluctuations, and temporary project halts could adversely affect ACEA's revenue stability, margins, and financial health.

Catalysts

Operates as a multi-utility company in Italy.

• ACEA's strategic expansion into new regions such as Liguria and Sicily, and its active management of stakes in South America, particularly in Peru, are expected to increase the company's geographical footprint, potentially driving future revenue growth.
  
• The approval of higher tariffs in regulated businesses such as Water Services and Electricity is expected to drive revenue growth, as evidenced by increases in the Water WACC from 4.8% in 2023 to 6.1% in 2024, and the Electricity WACC from 5.2% to 6% in 2024.
  
• The launch and acquisition of new projects, including the waste-to-energy (WTE) project in Rome and electrical flexibility services, suggest an anticipated increase in earnings from these ventures, which could positively impact ACEA's net margins through diversified revenue streams.
  
• ACEA's substantial investment in regulated businesses, with 92% of CapEx related to these areas, is likely to continue enhancing its EBITDA, as regulatory environments often provide stable returns, as demonstrated by regulated businesses driving 87% of valuable EBITDA.
  
• Continued improvements in operational efficiency, such as the establishment of a water subholding company to increase industry influence and efficiency, are expected to enhance net profit margins, potentially supporting stronger future earnings and shareholder returns.

ACEA Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ACEA's revenue will decrease by 1.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.1% today to 8.4% in 3 years time.
• Analysts expect earnings to reach €357.5 million (and earnings per share of €1.68) by about April 2028, up from €331.6 million 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 15.1x on those 2028 earnings, up from 12.5x today. This future PE is greater than the current PE for the GB Integrated Utilities industry at 11.3x.
• 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 8.46%, as per the Simply Wall St company report.

ACEA Future Earnings Per Share Growth

Risks

• Regulatory uncertainties and delays in tariff approvals for 2025 could impact revenue stability and future earnings, as a portion of ACEA's revenue is dependent on these tariffs.
  
• The end of the shareholders' agreement for the Fiora Aqueduct and ongoing negotiations introduce governance and consolidation risks, potentially affecting strategic control and earnings.
  
• Exposure to fluctuating energy prices and reduced hydroelectric volumes could negatively impact margins and earnings, given the recent decline in energy market prices.
  
• The impact of high energy prices on working capital and potential regulatory changes, such as the government's measures affecting tariffs, could strain ACEA's financial health, affecting cash flow and net profits.
  
• The temporary halt on the San Vittore waste-to-energy line and possible delays in bringing it online could reduce anticipated revenue from environmental projects.

Valuation

• The analysts have a consensus price target of €20.0 for ACEA based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €4.2 billion, earnings will come to €357.5 million, and it would be trading on a PE ratio of 15.1x, assuming you use a discount rate of 8.5%.
• Given the current share price of €19.44, the analyst price target of €20.0 is 2.8% 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.