27 GW Renewables Pipeline May Boost Returns, But Financing And Regulatory Risks Could Impact Margins

Key Takeaways

• Scatec's expansion in backlog and pipeline projects could drive substantial future revenue growth and earnings potential.
  
• Decreasing solar PV costs and strategic debt reduction may positively impact net margins and financial flexibility.
  
• Scatec's reliance on external financing, geographic concentration, and exposure to market risks could impact financial stability, growth potential, and net margins.

Catalysts

Provides renewable energy solutions worldwide.

• Scatec's strong growth in backlog and pipeline projects, with a 73% increase to 2.7 GW of projects expected to connect to the grid in the coming years, suggests a substantial potential for future revenue growth.
  
• Continued reduction in solar PV and battery storage system prices, making renewables more competitive, could positively impact net margins by reducing project costs and increasing uptake.
  
• The company's plan to continue leveraging proceeds from divestments to pay down corporate debt could enhance net margins by decreasing interest expenses and improving financial flexibility.
  
• The development of large projects in Egypt and Romania with favorable market conditions and support from EU programs offers a pathway to increased revenue and strong returns, supporting earnings growth.
  
• The expectation to generate strong returns from their backlog, with the pipeline expected to provide a return of 30%, indicates future growth in earnings and potentially higher equity IRR.

Scatec Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Scatec's revenue will grow by 14.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 30.0% today to 8.3% in 3 years time.
• Analysts expect earnings to reach NOK 548.1 million (and earnings per share of NOK 3.45) by about April 2028, down from NOK 1.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting NOK1.2 billion in earnings, and the most bearish expecting NOK-149 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 37.0x on those 2028 earnings, up from 8.5x today. This future PE is greater than the current PE for the GB Renewable Energy industry at 8.8x.
• 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 8.95%, as per the Simply Wall St company report.

Scatec Future Earnings Per Share Growth

Risks

• Scatec's reliance on external financing for growth projects and refinancing activities could lead to increased financial vulnerability and impact their net margins if capital costs rise unexpectedly.
  
• The overcapacity in the value chain and continued low prices of solar PV modules and battery storage systems might increase competitive pressure and compress profit margins for Scatec, potentially affecting revenue growth.
  
• Delays or regulatory hurdles in bringing projects, like those in Romania and Egypt, to construction could hinder anticipated growth and return timelines, impacting earnings projections.
  
• Political and market risks in countries such as South Africa, Romania, and Egypt might introduce uncertainties in project execution and anticipated returns, potentially affecting net margins.
  
• Heavy investment and focus on few geographic markets could expose Scatec to concentrated risk; any adverse economic, regulatory, or environmental developments could significantly impact their overall financial performance and earnings.

Valuation

• The analysts have a consensus price target of NOK99.125 for Scatec 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 NOK6.6 billion, earnings will come to NOK548.1 million, and it would be trading on a PE ratio of 37.0x, assuming you use a discount rate of 9.0%.
• Given the current share price of NOK70.1, the analyst price target of NOK99.12 is 29.3% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.