Wind Recovery And Renewables Diversification Will Unlock Future Potential

Key Takeaways

• Diversification, capacity expansion, and long-term power agreements enhance revenue stability and position ERG to meet rising renewable energy demand.
  
• Cost efficiencies and sector trends support margin expansion, underpinning sustained earnings resilience amid the global energy transition.
  
• Persistent operational, regulatory, and market challenges threaten ERG's revenue stability, margin growth, and expansion prospects, especially amid increased competition and unpredictable wind conditions.

Catalysts

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

• The normalization of wind speeds following an anomalously weak period, combined with ERG's ongoing geographic and technological diversification (including solar and storage), is expected to drive a robust recovery in power production volumes, thus supporting revenue and EBITDA growth in the coming periods.
  
• Substantial progress in long-term power purchase agreements (PPAs) for both new and de-incentivized assets-including the recently signed multi-year deals with A2A and the Italian state railways-provides higher visibility and stability in future cash flows and margins, reducing earnings volatility.
  
• Ongoing capacity expansion through disciplined M&A and organic growth-including entry into the U.S. market, continued greenfield/repowering initiatives across Europe, and the ramp-up of storage and flexibility assets-positions ERG to capture increased electricity demand stemming from the electrification of transport and industry, directly impacting revenue growth.
  
• Recent trends in declining wind turbine and solar panel costs driven by intensified competition among OEMs, alongside ERG's rigorous procurement and asset efficiency focus, are likely to support higher project IRRs and margin expansion as new projects are commissioned.
  
• The sector's long-term growth runway remains underpinned by growing demand for renewables due to decarbonization targets and rising demand for stable, domestic energy amidst global price volatility; both factors provide a platform for sustained top-line growth and support the resilience of earnings over the long term.

ERG Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ERG's revenue will grow by 8.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 18.6% today to 22.3% in 3 years time.
• Analysts expect earnings to reach €206.4 million (and earnings per share of €1.43) by about August 2028, up from €136.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €257 million in earnings, and the most bearish expecting €184 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.7x on those 2028 earnings, up from 20.1x today. This future PE is lower than the current PE for the GB Renewable Energy industry at 25.5x.
• 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 12.48%, as per the Simply Wall St company report.

ERG Future Earnings Per Share Growth

Risks

• The company's financial results remain highly sensitive to unpredictable wind conditions across Europe, with recent data showing that even significant geographic diversification failed to mitigate volume declines during a continent-wide wind drought; prolonged periods of low wind could cause sustained drops in production and revenue, pressuring EBITDA and net profit.
  
• Increasing competition is expected in upcoming CfD auctions and from new PPAs, with management explicitly noting "fierce competition" and the need for "attractive conditions," which risks driving down achievable contract prices and compressing long-term net margins and earnings growth.
  
• The company's U.S. growth path is challenged by regulatory uncertainty, including the potential phase-out of tax equity incentives and difficulties in acquiring new, de-risked assets at attractive valuations given market inflation; this may slow down international expansion and make projected revenue and earnings contributions from the U.S. riskier.
  
• There is ongoing difficulty navigating permitting and regulatory barriers within core European markets, exemplified by lengthy appeals and restrictive conditions placed on key projects (e.g., Sardinia wind farm), increasing execution risk and potentially delaying or reducing future capacity expansions, thus impacting forecasted revenue growth.
  
• The growth in electricity demand via electrification (e.g., heat pumps, vehicles, hydrogen) is lagging behind increased renewables capacity additions, raising the risk of power oversupply, which could drive wholesale prices lower and adversely affect realised revenues and earnings stability over the long term.

Valuation

• The analysts have a consensus price target of €22.138 for ERG 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 €29.4, and the most bearish reporting a price target of just €19.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €924.6 million, earnings will come to €206.4 million, and it would be trading on a PE ratio of 21.7x, assuming you use a discount rate of 12.5%.
  
• Given the current share price of €18.88, the analyst price target of €22.14 is 14.7% 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.