Renewed Concessions In Italy And Brazil Will Support Future Energy Investments

Key Takeaways

• Renewed regulatory support and capital optimization strategies could boost investment in energy transition projects and enhance asset-based profitability.
  
• Strategic focus on brownfield opportunities and stable renewables may lead to predictable revenue growth and improved shareholder value.
  
• Currency devaluation and political instability in Latin America, along with regulatory challenges in Europe, threaten Enel's earnings and profit margins.

Catalysts

Operates as an integrated operator in electricity and gas industries worldwide.

• The improvement in regulatory support, with concessions renewed in Italy and expected in Brazil, could drive increased investment in energy transition projects, potentially boosting future revenue growth.
  
• The company's focus on optimizing capital allocation, with 50% of investments in networks, is likely to enhance asset-based profitability, improving net margins.
  
• Efficiency programs that have already resulted in €800 million in savings could lead to further cost reductions, positively impacting Enel's net margins and earnings.
  
• The continuation and expansion of Enel's share buyback program aims to enhance shareholder value, potentially leading to increased earnings per share (EPS).
  
• The company's strategic focus on lower-risk brownfield opportunities and profitable renewables in stable countries, including the U.S. and Spain, is expected to contribute to stable and predictable revenue growth.

Enel Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Enel's revenue will grow by 1.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 8.9% today to 8.7% in 3 years time.
• Analysts expect earnings to reach €7.2 billion (and earnings per share of €0.71) by about April 2028, up from €7.0 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 15.7x on those 2028 earnings, up from 9.8x today. This future PE is greater than the current PE for the GB Electric Utilities industry at 13.3x.
• Analysts expect the number of shares outstanding to grow by 2.73% per year for 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.

Enel Future Earnings Per Share Growth

Risks

• Currency devaluation in Latin America, particularly in Brazil, could reduce earnings when converted to euros, impacting net income negatively.
  
• High political and macroeconomic instability in Latin America may adversely affect investment returns and revenue projections.
  
• The potential costs associated with concession renewals in Italy and other regions could increase expenses and reduce net margins.
  
• Increased competition in the retail market due to liberalization could pressure sales margins and limit revenue growth in Italy and Spain.
  
• Regulatory changes or government measures to cap electricity prices could limit revenue potential and compress profit margins.

Valuation

• The analysts have a consensus price target of €8.07 for Enel 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 €9.2, and the most bearish reporting a price target of just €6.6.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €83.2 billion, earnings will come to €7.2 billion, and it would be trading on a PE ratio of 15.7x, assuming you use a discount rate of 8.5%.
• Given the current share price of €6.79, the analyst price target of €8.07 is 15.8% higher.
• 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.