Modernizing Electricity Networks And Renewable Integration Will Foster Future Prosperity

Key Takeaways

• Anticipated growth in electricity networks and the Brazilian sector could drive future revenue and improve net margins.
  
• EDP's cost-cutting and strategic initiatives aim to boost EPS, financial resilience, and operational efficiency.
  
• Heavy reliance on asset rotation gains and uncertainties in foreign exchange, regulations, and investment levels challenge long-term profitability and growth potential.

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 anticipates significant investment growth in electricity networks, driven by increasing electrification, infrastructure modernization, digitalization, and integration of renewable generation. This could boost future revenue through expanded regulated asset bases and improved demand.
  
• EDP's energy sector in Brazil shows strong growth potential, particularly with the 30-year extension of distribution concessions and increasing electricity demand. This is likely to contribute positively to net margins and earnings in the future.
  
• Prospective enhancements in electricity prices and expected performance improvement from energy management activities indicate potential revenue growth in the integrated Iberia business, supported by superior hedging positions.
  
• EDP plans to optimize operational efficiency, demonstrated by a significant cost-cutting program and ambitious savings targets. Enhanced operational efficiencies are expected to positively impact net margins and earnings.
  
• EDP's strategic pivot towards higher returns and investment moderation, integrated with share buyback initiatives, signals an EPS growth catalyst while maintaining their credit rating and improving financial resilience.

EDP Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming EDP's revenue will grow by 1.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.4% today to 7.5% in 3 years time.
• Analysts expect earnings to reach €1.2 billion (and earnings per share of €0.29) by about April 2028, up from €801.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €1.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.2x on those 2028 earnings, up from 16.3x today. This future PE is greater than the current PE for the GB Electric Utilities industry at 16.3x.
• Analysts expect the number of shares outstanding to grow by 5.78% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.55%, as per the Simply Wall St company report.

EDP Future Earnings Per Share Growth

Risks

• The heavy reliance on asset rotation gains at EDPR, which decreased significantly from 2023 to 2024, raises concerns about sustainable long-term profitability, impacting earnings stability.
  
• Concerns about foreign exchange volatility, notably the Brazilian real depreciation, could impact EDPR's net profits due to significant operations in Brazil.
  
• Ongoing regulatory uncertainties in Iberia, especially regarding return on investment in electricity networks, may affect future RAB growth assumptions, thus impacting future revenue predictions.
  
• The strategic reduction in investment levels, leading to slower capacity additions in wind and solar, could hinder growth potential and impact long-term revenue.
  
• The extraordinary tax in Portugal, which is currently under appeal, poses a risk to net margins if not repealed, potentially affecting overall financial performance.

Valuation

• The analysts have a consensus price target of €4.025 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 €3.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €15.5 billion, earnings will come to €1.2 billion, and it would be trading on a PE ratio of 21.2x, assuming you use a discount rate of 7.5%.
• Given the current share price of €3.14, the analyst price target of €4.02 is 21.9% 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.