Higher Financing Costs And Regulatory Hurdles Will Strain European Renewables

Key Takeaways

• Rising financing costs and regulatory delays are eroding profit margins and constraining ERG's project expansion in key regions.
  
• Overcapacity, weak electricity demand, and increasing competition are compressing revenues and heightening earnings volatility.
  
• Expansion across regions, growing renewables, and focus on efficiency and storage support stable earnings, cash flow, and reduced risk from market fluctuations.

Catalysts

Through its subsidiaries, produces energy through renewable sources in Italy, France, Germany, the United Kingdom, Poland, Bulgaria, Sweden, Romania, and Spain.

• Rising global interest rates combined with a net financial position approaching €2 billion are likely to increase ERG's future cost of capital, making project financing more expensive and eroding returns on invested capital, which in turn will weigh on free cash flow and net margins over the long term.
  
• Regulatory and permitting hurdles, especially in core regions like Italy and France, are becoming more pronounced, with delayed project approvals and unpredictable local opposition resulting in stalled growth and unreliable revenue forecasts for new capacity.
  
• The ongoing electrification of European economies is failing to keep pace with renewable capacity buildout, resulting in stagnating electricity demand at a time when the industry is already grappling with overcapacity and power price compression, directly impairing top-line revenue growth.
  
• Intensifying competition from both large utilities and oil majors entering renewables is driving down capture prices in key markets, squeezing ERG's revenue and compressing EBITDA margins, while making share gains more difficult, especially as short-term hedges become less lucrative.
  
• Prolonged wind resource volatility across Europe, as recently experienced, highlights the vulnerability of ERG's asset base to climate and meteorological unpredictability, leading to greater earnings volatility and persistent downside risk to group-wide profitability and growth guidance.

ERG Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on ERG compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming ERG's revenue will grow by 6.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 18.6% today to 22.2% in 3 years time.
• The bearish analysts expect earnings to reach €197.3 million (and earnings per share of €1.31) by about August 2028, up from €136.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 19.9x on those 2028 earnings, down from 20.3x today. This future PE is lower than the current PE for the GB Renewable Energy industry at 21.4x.
• Analysts expect the number of shares outstanding to decline by 0.77% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.42%, as per the Simply Wall St company report.

ERG Future Earnings Per Share Growth

Risks

• Ongoing decarbonization policies, increasing electrification of consumption, and EU initiatives supporting renewables continue to provide a strong long-term demand environment for ERG, which may support steady revenue and EBITDA growth despite short-term weather volatility.
  
• ERG's successful expansion and diversification across multiple European countries, as well as recent acquisitions in the U.K. and U.S., expand the company's asset base and revenue streams, potentially reducing the risk from regional setbacks or adverse local conditions and enhancing long-term cash flow stability.
  
• The company's proven ability to secure long-term Power Purchase Agreements (PPAs), such as the recent deal with A2A and the FS Group in Italy, increases revenue visibility, mitigates price volatility, and could support sustained net margin improvement.
  
• Continuous investments in battery storage and flexible energy systems position ERG to benefit from grid modernization trends, improved renewable reliability, and new ancillary revenue streams, which may bolster EBITDA and earnings over time.
  
• Falling capital expenditures for wind and solar assets, combined with growing competition among equipment suppliers, are likely to lower project costs; this, together with ERG's focus on cost efficiencies and digitalization, may improve free cash flow and profit margins in the coming years.

Valuation

• The assumed bearish price target for ERG is €19.5, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of ERG's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €29.4, and the most bearish reporting a price target of just €19.5.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €889.1 million, earnings will come to €197.3 million, and it would be trading on a PE ratio of 19.9x, assuming you use a discount rate of 12.4%.
  
• Given the current share price of €19.09, the bearish analyst price target of €19.5 is 2.1% higher. The relatively low difference between the current share price and the analyst bearish 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.