Debt Burden In Brazil And Iberia Will Constrain Renewables Expansion

Key Takeaways

• Rising investment requirements and regulatory uncertainty put pressure on profitability and risk financial stability through greater debt and unpredictable costs.
  
• Shifts in technology, competition, and macroeconomic volatility threaten the long-term value and earnings reliability of EDP's core renewables business.
  
• Strong execution in renewables, operational efficiency, regulatory tailwinds, and proactive risk management underpin EDP's profitability, cash flow generation, and long-term growth prospects.

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.

• Surging capital expenditure for grid modernization and decarbonization, particularly in Iberia and Brazil, increases EDP's debt burden and raises the risk of negative free cash flow over the medium term, which could force future shareholder dilution or threaten the investment grade credit rating.
  
• The risk of higher interest rates globally remains significant, which would drive up EDP's cost of capital as it refinances and expands its asset base, compressing net margins and slowing earnings growth relative to optimistic projections.
  
• Intensifying competition and commoditization in wind and solar, combined with rapid advances in battery storage, hydrogen, or nuclear technologies, threaten to erode the long-term profitability of EDP's core renewables portfolio, raising the risk of asset obsolescence and stranded investment costs that weigh on EBITDA.
  
• Increased geopolitical uncertainty and ongoing currency volatility, especially in Brazil, may escalate supply chain costs and cause unpredictable swings in revenue and earnings, undermining the stability of EDP's international growth and operational outlook.
  
• Regulatory uncertainty around tariffs, investment returns, and subsidy levels in Spain and Brazil could lead to unfavorable decisions, capping returns on invested capital and possibly eroding profitability in the company's largest markets even as capital needs mount.

EDP Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on EDP compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming EDP's revenue will decrease by 2.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 5.7% today to 7.3% in 3 years time.
• The bearish analysts expect earnings to reach €1.0 billion (and earnings per share of €0.25) by about June 2028, up from €874.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 16.5x on those 2028 earnings, down from 17.0x today. This future PE is lower than the current PE for the GB Electric Utilities industry at 17.0x.
• Analysts expect the number of shares outstanding to decline by 0.75% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.73%, as per the Simply Wall St company report.

EDP Future Earnings Per Share Growth

Risks

• Sustained global electrification, robust regulatory frameworks, and continued policy support for grid modernization and renewables are driving increased electricity demand, supporting top-line revenue and earnings resilience for EDP in the long term.
  
• EDP has a strong project pipeline and continued investment in wind and solar, with 2 GW of new capacity to be added in 2025 on time and on budget, positioning the company to benefit from secular growth trends and increasing future EBITDA from higher installed capacity.
  
• The company's operational efficiency measures, demonstrated by continued real reductions in operating expenses alongside portfolio growth, have enhanced net margins and capacity for higher free cash flow generation, directly supporting profitability.
  
• Regulatory reforms and investment incentives in key markets like Portugal, Spain, and Brazil are resulting in increased allowed returns and favorable opinions on multi-year grid investment plans, reducing regulatory uncertainty and fostering long-term gross margin and asset base growth.
  
• EDP's ability to mitigate supply chain risk (e.g., through domestic procurement and multi-year supplier agreements in the US), manage FX exposure, and access green finance at attractive terms further strengthens its financial flexibility and supports capital access for expansion, which can underpin long-term earnings stability and growth.

Valuation

• The assumed bearish price target for EDP is €3.5, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of EDP's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• 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 bearish analysts, you'd need to believe that by 2028, revenues will be €14.3 billion, earnings will come to €1.0 billion, and it would be trading on a PE ratio of 16.5x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of €3.61, the bearish analyst price target of €3.5 is 3.1% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• 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.