Carbon Capture Innovation And Market Expansion Will Propel Future Earnings Growth

Key Takeaways

• Strong organic growth and market penetration with over 4 million customers indicate future revenue potential and stable earnings.
  
• Innovation and financial efficiencies position Hera as a leader in waste energy solutions, contributing to improved margins and growth flexibility.
  
• Decline in turnover and end of Super-ecobonus could limit future growth, while competition and cash flow strain pose additional challenges.

Catalysts

A multi-utility company, engages in the waste management, water services, and energy businesses in Italy.

• Hera is experiencing significant organic growth driven by expansion in both liberalized and regulated markets, adding €117 million in EBITDA, which will positively impact future revenue and earnings.
  
• The successful integration of 1 million new customers from the STG auction, surpassing 4 million customers, indicates strong market penetration and potential for increased revenues from the electricity sector.
  
• Continuous investment in innovation, such as the carbon capture project supported by a €24 million grant, positions Hera as a leader in waste energy solutions, which could improve net margins.
  
• Hera's waste business is on an upward trajectory despite market slowdowns, largely due to market share increases and strategic positioning of treatment plants, likely contributing to stable or growing margins.
  
• Financial efficiencies, such as reduced interest expenses and stable debt-to-EBITDA ratio, provide opportunities for improved net profit margins and increased flexibility for future growth.

Hera Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hera's revenue will grow by 2.5% annually over the next 3 years.
• Analysts are assuming Hera's profit margins will remain the same at 3.3% over the next 3 years.
• Analysts expect earnings to reach €455.1 million (and earnings per share of €0.31) by about December 2027, up from €422.6 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 15.6x on those 2027 earnings, up from 11.7x today. This future PE is lower than the current PE for the GB Integrated Utilities industry at 19.7x.
• Analysts expect the number of shares outstanding to grow by 0.66% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.97%, as per the Simply Wall St company report.

Hera Future Earnings Per Share Growth

Risks

• There is a decline in turnover due to the price effects and reduction in Super-ecobonus activities, which could impact future revenues if such trends continue.
  
• Hera is experiencing increased net working capital absorption related to the acquisition of new customers, which could strain cash flow and balance sheet stability if not managed properly.
  
• Although net profit is up, it is partly due to a major reduction in financial expenses, which suggests that profit growth may not be sustainable if expenses rise again.
  
• The expiration of fiscal benefits linked to the Super-ecobonus could limit future growth opportunities, affecting revenue and net margins.
  
• The company faces potential challenges from competitive pressures in the energy market, which may impact profitability and market share.

Valuation

• The analysts have a consensus price target of €3.84 for Hera 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 2027, revenues will be €13.6 billion, earnings will come to €455.1 million, and it would be trading on a PE ratio of 15.6x, assuming you use a discount rate of 8.0%.
• Given the current share price of €3.42, the analyst's price target of €3.84 is 10.9% 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.