Green Generation Expansion And Battery Storage Are Expected To Drive Long Term Upside

Catalysts

About AB Ignitis grupe

AB Ignitis grupe is an integrated utility focused on developing and operating green generation, electricity networks, reserve capacities and customer energy solutions across the Baltics and Poland.

What are the underlying business or industry changes driving this perspective?

• Rapid expansion of green generation capacity, with installed capacity already at 2.1 gigawatts and secured capacity at 3.4 gigawatts, positions the group to capture rising demand for clean electricity and ancillary services, supporting sustained growth in revenue and EBITDA.
• Significant investment into battery energy storage systems, including 291 megawatts of projects in Lithuania backed by state aid, improves system flexibility and creates new regulated and market based income streams that should enhance earnings resilience and net margins once operational.
• Regulator approved growth of the regulated asset base to EUR 1.9 billion and a higher allowed return, combined with ongoing grid expansion and smart meter rollout, provides clear visibility on inflation protected, volume agnostic cash flows that are supportive of long term EBITDA and return on capital employed.
• Progress in large scale wind projects such as Kelme and Curonian Nord, underpinned by access to long term green financing from European institutions, should lower the cost of capital and unlock higher project level equity returns, translating into improved group level earnings over time.
• Growth of EV charging infrastructure and expected reform of the prosumer model, including a planned update aimed at improving loss making activities, can turn currently dilutive customer and solutions operations into a contributor to group profitability and lift consolidated net margins.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming AB Ignitis grupe's revenue will grow by 5.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.8% today to 9.0% in 3 years time.
• Analysts expect earnings to reach €259.8 million (and earnings per share of €3.53) by about December 2028, up from €194.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €325.7 million in earnings, and the most bearish expecting €206.1 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 9.6x on those 2028 earnings, up from 7.8x today. This future PE is greater than the current PE for the LT Electric Utilities industry at 7.7x.
• Analysts expect the number of shares outstanding to grow by 0.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.22%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Rising greenhouse gas emissions and a lower green share of generation, driven by increased use of the Elektrėnai Complex, could expose the company to tightening EU climate policy, carbon pricing and reputational pressure. This may require additional capex or constrain generation volumes, which could weigh on revenue and earnings.
• Persistently loss making Customers and Solutions activities, particularly from the current prosumer net metering scheme and weaker B2B gas margins, may not be fully fixed by the planned 2026 reform. This could leave a structurally unprofitable segment that drags on consolidated net margins and group earnings.
• High and rising leverage, with net debt at EUR 1.8 billion and net debt to adjusted EBITDA at 3.3 times, combined with large investment needs for wind, solar and battery projects, leaves the group sensitive to higher interest rates or any rating pressure. This could increase financing costs and reduce net profit and free cash flow.
• Regulatory dependence in networks and reserve capacities, including reliance on regulated asset base levels, allowed WACC and tariff components, creates long term risk that future regulatory cycles could be less favorable than the current terms. This could limit EBITDA growth in these core segments and constrain return on capital employed.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of €27.2 for AB Ignitis grupe based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be €2.9 billion, earnings will come to €259.8 million, and it would be trading on a PE ratio of 9.6x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of €20.9, the analyst price target of €27.2 is 23.2% 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.