Solar Expansion And Chromite Acquisition To Power Earnings Surge And Margin Growth

Key Takeaways

• Renewable growth and solar projects are projected to boost Aboitiz Power's revenue, with diversified energy strategies enhancing earnings and net margins.
  
• Increased baseload contracting and strategic acquisitions are expected to stabilize revenue, reduce volatility, and enhance shareholder value.
  
• Regulatory risks, declining sales volumes, and high expenses may reduce revenue stability and profitability, affecting strategic projects and net income growth.

Catalysts

Through its subsidiaries, engages in the power generation and distribution, and electricity retail businesses in the Philippines.

• Aboitiz Power's renewable growth program is progressing with new solar projects expected to be energized before the end of 2024, which could increase overall revenue through higher capacity and sales in future periods.
  
• The reallocation of oil plant capacities to the reserves market has resulted in increased spot sales with higher margins, potentially expanding overall earnings and net margins as market conditions stabilize.
  
• The expected increase in contracted portfolio to over 90% for the baseload segment by the end of 2025 can ensure stability in revenue and margins, reducing volatility in Aboitiz Power’s financial performance.
  
• Anticipated reduction in fuel costs due to lower coal prices, combined with ongoing fuel management initiatives, should support margin expansion and improved earnings in upcoming periods.
  
• Upcoming acquisitions, such as the Chromite Gas transaction, which are expected to be earnings accretive from day one, could contribute to higher net margins and overall financial performance, enhancing shareholder value in future reporting periods.

Aboitiz Power Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Aboitiz Power's revenue will grow by 2.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.8% today to 19.2% in 3 years time.
• Analysts expect earnings to reach ₱41.0 billion (and earnings per share of ₱5.53) by about January 2028, up from ₱33.6 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.4x on those 2028 earnings, up from 8.1x today. This future PE is lower than the current PE for the PH Renewable Energy industry at 23.5x.
• Analysts expect the number of shares outstanding to grow by 0.93% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.8%, as per the Simply Wall St company report.

Aboitiz Power Future Earnings Per Share Growth

Risks

• The suspension and resumption of the reserves market operations introduce uncertainty in revenue stability and may affect future earnings due to regulatory risks.
  
• Declines in BCQ sales volume and reductions in BCQ and spot rates pose a risk to revenue growth, potentially impacting net margins as competitive dynamics influence pricing.
  
• Declines in gross margins in energy generation from thermal facilities and softer spot market prices may reduce profitability, impacting net earnings.
  
• High interest and depreciation expenses due to GNPD unit recognitions could increase financial burdens, reducing net income growth.
  
• Dependency on regulatory approvals for significant transactions, like the Chromite Gas transaction and several power supply agreements, introduces risks that could delay strategic projects and impact revenue forecasts.

Valuation

• The analysts have a consensus price target of ₱45.15 for Aboitiz Power 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 ₱55.0, and the most bearish reporting a price target of just ₱30.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₱213.6 billion, earnings will come to ₱41.0 billion, and it would be trading on a PE ratio of 11.4x, assuming you use a discount rate of 11.8%.
• Given the current share price of ₱37.7, the analyst's price target of ₱45.15 is 16.5% 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.