Seasonal Competition And Mild Weather Will Pressure Future Revenues In Nordic Electricity Market

Key Takeaways

• Seasonal demand shifts and increased competition pose challenges for revenue and customer growth, impacting spot products and consumer acquisition.
  
• Political uncertainties in Norway and rising bankruptcy trends in Sweden introduce risks to revenue and net margins in the Nordic segment.
  
• Effective margin management and strategic asset sales strengthen Elmera Group's financial position amid weather challenges, with potential growth in electricity consumption enhancing revenue.

Catalysts

Engages in the purchase, sale, and portfolio management of electrical power to households, private and public companies, and municipalities in Norway.

• The seasonal decline in demand for spot products has led to a change in consumer preferences towards fixed-price contracts during winter, potentially affecting future revenue growth in this segment.
  
• Increased competition during the seasonal peak from Black Week to Christmas has temporarily impacted customer acquisition in the Consumer segment, challenging the achievement of long-term customer growth targets, which could pressure revenue growth.
  
• The mild weather resulted in a reduction in consumption volumes, impacting net revenue, and although mitigated, any continuation of such weather trends could further affect future revenue and earnings.
  
• The political debate over proposed changes to Norway’s electricity subsidizing schemes introduces uncertainty, and depending on the outcome, this could either positively or negatively affect future net revenue due to changes in consumer behavior.
  
• Rising bankruptcy trends in Sweden leading to increased loss provisions and amortization costs in the Nordic segment could negatively impact net margins going forward if such trends persist.

Elmera Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Elmera Group's revenue will decrease by 2.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.9% today to 3.2% in 3 years time.
• Analysts expect earnings to reach NOK 357.0 million (and earnings per share of NOK 3.22) by about February 2028, up from NOK 353.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting NOK422 million in earnings, and the most bearish expecting NOK292 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.5x on those 2028 earnings, up from 10.1x today. This future PE is greater than the current PE for the NO Electric Utilities industry at 11.2x.
• Analysts expect the number of shares outstanding to grow by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.94%, as per the Simply Wall St company report.

Elmera Group Future Earnings Per Share Growth

Risks

• Elmera Group successfully mitigated lower volumes due to mild weather by effectively managing product margins, which resulted in increased core margins in both Consumer and Business segments, positively impacting net margins.
  
• Despite adverse weather conditions affecting consumption, Elmera Group achieved its financial targets, with net revenue and EBIT adjusted increasing year-over-year, indicating strong earnings potential.
  
• Strategic sales of ownership stakes, such as the sale of Elmera Group's 40% ownership in Metzum, demonstrate the company's ability to realize value through spin-offs, potentially boosting future net revenue.
  
• The improvement in political stability, with potential enhanced subsidizing schemes, might lead to increased electricity consumption, positively impacting revenue.
  
• The company's leadership in the Nordic electricity market and its focus on technological advancements and cost optimization could strengthen financials through added revenue and stable or improved net margins.

Valuation

• The analysts have a consensus price target of NOK31.667 for Elmera Group 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 NOK37.0, and the most bearish reporting a price target of just NOK24.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NOK11.3 billion, earnings will come to NOK357.0 million, and it would be trading on a PE ratio of 11.5x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of NOK32.8, the analyst price target of NOK31.67 is 3.6% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.