Ongoing Renewable Energy Projects Will Expand Future Capacity And Revenue

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AnalystConsensusTarget
Consensus Narrative from 3 Analysts
Published
09 Feb 25
Updated
16 Jul 25
AnalystConsensusTarget's Fair Value
NZ$9.86
8.3% undervalued intrinsic discount
16 Jul
NZ$9.04
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1Y
5.1%
7D
0.4%

Author's Valuation

NZ$9.9

8.3% undervalued intrinsic discount

AnalystConsensusTarget Fair Value

Last Update01 May 25
Fair value Increased 0.33%

AnalystConsensusTarget has decreased revenue growth from -2.7% to -3.1%.
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Key Takeaways

  • Investments in renewable projects and strategic acquisitions will boost capacity, market position, and earnings growth through operational synergies and economies of scale.
  • Long-term deals and innovative retail offerings aim to secure stable revenue and improve profit margins by enhancing customer engagement and energy efficiency.
  • Changes in executive management and reliance on costly energy sources could disrupt strategic direction and pressure profit margins, while regulatory challenges could hinder new projects.

Catalysts

About Contact Energy
    Generates and sells electricity and natural gas in New Zealand.
What are the underlying business or industry changes driving this perspective?
  • Significant ongoing investments in renewable energy projects, such as Tauhara geothermal power station and Kōwhai Park solar battery, are expected to enhance future energy capacity and revenue streams for Contact Energy.
  • The Fonterra deal, which provides an additional 415 gigawatt hours of demand conversion, is a move towards securing long-term, stable revenue sources via industrial customer relationships, impacting revenue positively.
  • Continuation and expansion of retail offerings, specifically the Demand Flex products and time-of-use options, are set to capture more market share and improve profit margins through heightened customer engagement and optimized electricity usage.
  • The decarbonization initiatives, including retiring older thermal plants and focusing on newer, more efficient renewable solutions, should lead to reduced operating costs and improved net margins over time.
  • The Manawa acquisition, once completed, is expected to augment Contact Energy's position in the market, providing operational synergies and enhanced economies of scale that could drive earnings growth in the long term.

Contact Energy Earnings and Revenue Growth

Contact Energy Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?
  • Analysts are assuming Contact Energy's revenue will decrease by 3.1% annually over the next 3 years.
  • Analysts assume that profit margins will increase from 6.9% today to 10.6% in 3 years time.
  • Analysts expect earnings to reach NZ$315.5 million (and earnings per share of NZ$0.4) by about May 2028, up from NZ$224.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting NZ$358.0 million in earnings, and the most bearish expecting NZ$283.5 million.
  • In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 31.3x on those 2028 earnings, down from 31.8x today. This future PE is lower than the current PE for the NZ Electric Utilities industry at 32.6x.
  • Analysts expect the number of shares outstanding to grow by 1.12% per year for the next 3 years.
  • To value all of this in today's terms, we will use a discount rate of 6.61%, as per the Simply Wall St company report.

Contact Energy Future Earnings Per Share Growth

Contact Energy Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?
  • Changes in executive management could lead to disruptions or inconsistencies in strategic direction, potentially affecting operational efficiency and financial performance. (Net margins)
  • Increased electricity prices and line charges in the retail market could lead to customer dissatisfaction or loss of market share, impacting revenue. (Revenue)
  • High dependency on hydrology and gas for electricity generation introduces volatility in energy costs, especially in dry months, which could affect earnings and profit margins. (Earnings)
  • The elevated costs of thermal and acquired generation, along with reliance on expensive gas deals such as Methanex, might pressure net profit margins if not adequately managed or offset by new, cost-effective renewable projects. (Net margins)
  • Regulatory challenges and delays in fast-track consenting processes can hinder the timely implementation of new projects, potentially impacting future revenue streams if expected capacity does not come online as planned. (Revenue)

Valuation

How have all the factors above been brought together to estimate a fair value?
  • The analysts have a consensus price target of NZ$9.805 for Contact Energy 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 NZ$11.17, and the most bearish reporting a price target of just NZ$8.4.
  • In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NZ$3.0 billion, earnings will come to NZ$315.5 million, and it would be trading on a PE ratio of 31.3x, assuming you use a discount rate of 6.6%.
  • Given the current share price of NZ$8.86, the analyst price target of NZ$9.8 is 9.6% 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.

How well do narratives help inform your perspective?

Disclaimer

AnalystConsensusTarget is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by AnalystConsensusTarget are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that AnalystConsensusTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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