Cost Reductions In Solar PV Could Strengthen Future Prospects Despite Debt Risks

Key Takeaways

• Reduced module and battery costs enhance potential net margins and future revenues for Scatec's renewable projects.
  
• Secured long-term contracts and ongoing refinancings support earnings stability and future growth by reducing debt and ensuring stable revenue streams.
  
• Heavy reliance on asset divestments and sales for debt reduction risks impacting sustainable revenue and net profits if divestment opportunities dwindle.

Catalysts

Provides renewable energy solutions worldwide.

• The reduction in module and battery prices by 66% and 58% respectively enables Scatec to capitalize on lower costs for renewable projects, potentially increasing future revenues and net margins.
  
• With 2.7 gigawatts of projects under construction and in the backlog, representing a 73% increase over the previous year, Scatec could see significant future revenue growth as these projects become operational.
  
• Scatec's ongoing divestments and project refinancings, particularly in the Philippines, are helping reduce corporate debt, which could enhance future earnings by reducing interest expenses.
  
• The awarded 20-year PPA in South Africa and 15-year Contract for Difference in Romania show Scatec's ability to secure long-term contracts, providing visibility for future revenue streams and potentially improving earnings stability.
  
• The strategy to focus on a robust pipeline of 10 gigawatts, primarily in core markets, with projected equity IRR of 15% from power production and D&C margin uplift, could drive future revenue and earnings growth.

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 February 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 37.6x on those 2028 earnings, up from 9.5x today. This future PE is greater than the current PE for the GB Renewable Energy industry at 9.4x.
• 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 9.43%, as per the Simply Wall St company report.

Scatec Future Earnings Per Share Growth

Risks

• The company's reliance on asset divestments and proceeds from sales to reduce corporate debt indicates a heavy reliance on non-operational income, which could affect sustainable revenue streams and net profits if divestment opportunities decrease.
  
• The declining prices for solar PV modules and battery storage could potentially reduce revenue margins for Scatec's existing projects, impacting net earnings if the company is unable to capitalize on reduced costs before competitors.
  
• The lack of new contracts in the Philippines and existing contract reductions could lower future revenue and profitability if ancillary services or other income sources do not sufficiently compensate for the decrease.
  
• The ongoing geopolitical and regulatory uncertainties in countries like Romania and Tunisia, where Scatec operates opportunistically, may introduce risks that could affect the company's revenue and earnings negatively.
  
• The planned increase in project debt to fund new constructions could heighten financial leverage risk, impacting net margins and overall profitability if projects do not generate expected returns.

Valuation

• The analysts have a consensus price target of NOK99.5 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 37.6x, assuming you use a discount rate of 9.4%.
  
• Given the current share price of NOK78.0, the analyst price target of NOK99.5 is 21.6% 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.