Investments In Renewables And Expansion Will Strengthen Future Prospects

Key Takeaways

• Strategic acquisition and governance optimization are set to enhance EBITDA, while renewable energy production boosts revenue and market positioning.
  
• Infrastructure investments and expansion in customer base improve EBITDA, supported by sustainable financing strategies ensuring stable costs and earnings growth.
  
• Fluctuations in energy prices, operational challenges, competition, and regulatory risks could pressure Iren's profitability and hinder earnings growth.

Catalysts

Operates as a multi-utility company in Italy.

• Iren's strategic acquisition of 50% of EGEA and subsequent steps towards governance optimization and consolidation are expected to generate synergies and increase EBITDA by €55-60 million by 2025. This should positively impact earnings as these synergies materialize.
  
• The commissioning of new renewable energy plants, such as the 38.5 MW photovoltaic plant, alongside a forecasted strong performance in hydroelectric power production, supports increased revenue from higher energy production volumes and favorable pricing scenarios moving forward.
  
• Continuous investments in infrastructure, notably in the Networks business unit, are driving RAB growth, positively affecting revenue constraints and improving EBITDA by capitalizing on regulatory deflators and updating parameters.
  
• Expansion in customer base, with 160,000 new customers from liberalization market auctions and operational expansion in waste collection across 114 municipalities, is expected to bolster revenue and earnings growth through a larger customer footprint and enhanced market share.
  
• The issuance of the sixth Green Bond reflects a proactive approach to financing growth through sustainable investments, effectively managing financing costs and ensuring a stable cost structure that supports healthy net margins and future earnings growth.
  

Iren Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Iren's revenue will grow by 1.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.6% today to 5.1% in 3 years time.
• Analysts expect earnings to reach €318.1 million (and earnings per share of €0.24) by about February 2028, up from €270.6 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €282.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.5x on those 2028 earnings, up from 9.8x today. This future PE is greater than the current PE for the GB Integrated Utilities industry at 9.8x.
• 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 9.89%, as per the Simply Wall St company report.

Iren Future Earnings Per Share Growth

Risks

• The decline in energy prices and margins could negatively impact earnings, particularly in the renewable and thermoelectric sectors, which saw an impact of almost €90 million. This could put pressure on Iren's profitability and revenues if energy market conditions do not improve.
  
• Technical and operational issues, such as the prolonged startup phase of new waste treatment plants and the planned maintenance of existing plants, could affect waste BU profitability and contribute to lower-than-expected net margins.
  
• Increased competition and customer acquisition costs in the retail electricity market could impact net margins, as Iren faces a negative margin of approximately €40 per customer per month from newly acquired customers, although they expect to recoup this investment over a few years.
  
• Fluctuations in renewable energy production due to weather-dependent factors (hydroelectric and photovoltaic) can affect revenue generation and earnings stability, with future projections relying on potentially volatile climatic conditions.
  
• Regulatory risks, such as changes in incentives like the termination of the 110% Superbonus, could affect revenue and profitability in energy efficiency activities, demonstrating an external risk that could dampen earnings growth if similar regulatory changes occur.

Valuation

• The analysts have a consensus price target of €2.338 for Iren 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 €2.6, and the most bearish reporting a price target of just €2.15.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €6.2 billion, earnings will come to €318.1 million, and it would be trading on a PE ratio of 12.5x, assuming you use a discount rate of 9.9%.
  
• Given the current share price of €2.08, the analyst price target of €2.34 is 11.2% 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.