Investments In Renewable Energy Will Strengthen Future Power Generation In Portugal And Brazil

Key Takeaways

• EDP's focus on renewable energy and hydroelectric performance positions it well for growth through decarbonization and low-cost energy production.
  
• Strategic investments in Portugal's electricity networks and Brazil's distribution market could boost revenues and margins through efficiency and increased demand.
  
• EDP faces financial, operational, and regulatory risks across multiple regions, affecting profits, stability, and project viability due to legal, market, and environmental factors.

Catalysts

Engages in the generation, transmission, distribution, and supply of electricity in Portugal, Spain, France, Poland, Romania, Italy, Belgium, the United Kingdom, Greece, Colombia, Brazil, North America, and internationally.

• EDP's strong hydroelectric performance, supported by higher-than-average hydro resources, suggests a robust outlook for future power generation, potentially increasing revenue and improving net margins due to low-cost energy production.
  
• The company's strategic focus on renewable energy, with 97% of its generation from renewable sources, positions it well to capitalize on the ongoing global shift towards decarbonization, potentially driving future revenue growth.
  
• EDP's plans to increase investment in electricity networks by 50% in Portugal could lead to improved electricity distribution efficiency and potentially increased revenues and margins from higher network capacity and reliability.
  
• The strategic opportunity to capitalize on data center growth in Iberia, by providing renewable energy and leveraging grid connections, can drive future revenue growth and enhance the demand for EDP's electricity supply services.
  
• The Brazilian market presents strong growth potential, with EDP investing significantly in its distribution networks, which could increase revenues and margins by capturing higher demand and benefiting from a stable regulatory framework.

EDP Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming EDP's revenue will grow by 2.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.4% today to 7.6% in 3 years time.
• Analysts expect earnings to reach €1.2 billion (and earnings per share of €0.29) by about January 2028, up from €1.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €1.4 billion in earnings, and the most bearish expecting €1.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.4x on those 2028 earnings, up from 11.4x today. This future PE is lower than the current PE for the GB Electric Utilities industry at 19.6x.
• Analysts expect the number of shares outstanding to decline by 0.51% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.34%, as per the Simply Wall St company report.

EDP Future Earnings Per Share Growth

Risks

• The judicial developments in the CMEC case in Portugal could pose legal risks, which may eventually require financial provisioning, affecting EDP’s future net profits.
  
• Potential reductions or delays in asset rotation gains, due to market conditions or valuation challenges, can impact EDP's earnings trajectory and financial stability.
  
• The impact of fluctuating hydroelectric generation, which is highly dependent on weather conditions, may create volatility in revenues and integrated margins if hydro conditions are less favorable than expected.
  
• Political and regulatory risks in Brazil, including currency depreciation and potential changes in regulatory frameworks, could affect network investments and net income due to exposure to foreign currency and operating environment stability.
  
• Uncertain future political dynamics or regulatory changes in the U.S., especially regarding tax credits and tariffs, could affect EDP's renewable project pipelines and bottom-line figures if the business environment becomes less favorable.

Valuation

• The analysts have a consensus price target of €4.33 for EDP 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 €5.95, and the most bearish reporting a price target of just €3.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €15.7 billion, earnings will come to €1.2 billion, and it would be trading on a PE ratio of 18.4x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of €2.97, the analyst's price target of €4.33 is 31.3% 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.