M&A, Renewables And Waste Services Will Expand Our Market Presence

Key Takeaways

• Strategic acquisitions and operational expansions strengthen core market presence, driving revenue growth through increased efficiencies and customer bases.
  
• Investments in renewable energy and expanded municipal services enhance profitability and earnings via improved margins and increased revenue streams.
  
• Rising financial liabilities and volatility in energy prices pose challenges to earnings, while increased competition and lower margins could hurt profitability.

Catalysts

Operates as a multi-utility company in Italy.

• M&A activities, such as the consolidation of Sienambiente and the upcoming full acquisition of EGEA, are anticipated to strengthen Iren's presence in core markets, driving future revenue growth through expanded customer bases and increased operational efficiencies.
  
• Investments in the green transition, including increased renewable generation with hydroelectric power, are expected to support revenue growth and improve net margins by reducing carbon intensity and leveraging higher-margin renewable energy sources.
  
• The expansion into new municipalities for waste collection services and the development of new treatment plants are set to enhance EBITDA by increasing operational scale, leading to higher revenue from waste services and improved profitability.
  
• Participation in capacity market auctions assures new income streams from 2026 onward, positively impacting EBITDA by securing additional revenue from contracted capacity payments.
  
• The strategic increase in district heating volume and efficiency improvements in water and electricity services are likely to boost earnings through enhanced service offerings and customer satisfaction, contributing to customer retention and long-term revenue stability.

Iren Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Iren's revenue will grow by 3.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.5% today to 5.1% in 3 years time.
• Analysts expect earnings to reach €335.1 million (and earnings per share of €0.26) by about April 2028, up from €268.5 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 13.0x on those 2028 earnings, up from 11.3x today. This future PE is greater than the current PE for the GB Integrated Utilities industry at 11.3x.
• 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 8.46%, as per the Simply Wall St company report.

Iren Future Earnings Per Share Growth

Risks

• The increase in net financial debt to just under €4.1 billion signifies rising financial liabilities, which could pressure the company's future earnings and financial flexibility.
  
• There is a concern over the potential volatility in energy prices, including hydroelectric and renewable generation, which could impact revenue and profitability if energy market conditions worsen.
  
• The drop in generation results due to lower energy prices and narrowing clean spark spreads suggest potential declines in future revenue from the energy business.
  
• Despite a strategic expansion, the customer base increase might not translate to expected profitability due to possible increased churn and competition in the retail market affecting net margins.
  
• The environment sector's lower margins, impacted by energy scenario changes and plant availability issues, may continue to drag down earnings if not mitigated.

Valuation

• The analysts have a consensus price target of €2.662 for Iren 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 2028, revenues will be €6.6 billion, earnings will come to €335.1 million, and it would be trading on a PE ratio of 13.0x, assuming you use a discount rate of 8.5%.
• Given the current share price of €2.37, the analyst price target of €2.66 is 10.8% 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.