Investment In Sines Industrial Area Will Proceed, But Earnings May Decline Due To Rising Costs

Key Takeaways

• Increased renewables penetration and strategic CapEx investments could enhance revenue growth and expand the regulated asset base, benefiting long-term earnings.
  
• Regulatory support and effective debt management could improve margins and financial efficiency, fostering a favorable investment environment.
  
• Decreased EBITDA, higher costs, and regulatory changes introduce challenges to profitability, while delays and reduced gas volumes may constrain future earnings growth.

Catalysts

Through its subsidiaries, engages in the transmission of electricity and natural gas in Portugal.

• The increase in renewables penetration from 55% to 73% and plans to further develop renewable electricity generation could significantly enhance revenue growth by tapping into the growing demand for cleaner energy. This could also lead to improved net margins by reducing exposure to volatile fossil fuel prices.
  
• The approval and upcoming execution of a significant CapEx project for the Sines industrial area, with a total investment of €536 million to be completed over the next several years, could drive revenue growth and expand the regulated asset base (RAB) over time, leading to higher earnings from regulated activities.
  
• Expected strong future CapEx execution and investments in multi-year projects indicate a substantial long-term growth in asset base, which would positively impact future earnings as these investments start contributing to the RAB.
  
• The stabilization of financial costs due to lower interest rates and effective refinancing, despite increasing maturities, could improve net margins and earnings by reducing the cost of debt and enhancing financial efficiency.
  
• Positive changes in the regulatory environment, such as the anticipated continuation of government support for energy transition and potential adjustments to recognize rising costs of capital, could enhance revenue and earnings by providing a more favorable framework for future investments and returns.

REN - Redes Energéticas Nacionais SGPS Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming REN - Redes Energéticas Nacionais SGPS's revenue will grow by 1.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 14.1% today to 11.9% in 3 years time.
• Analysts expect earnings to reach €120.7 million (and earnings per share of €0.18) by about January 2028, down from €137.2 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €102 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.8x on those 2028 earnings, up from 11.4x today. This future PE is greater than the current PE for the GB Integrated Utilities industry at 11.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.81%, as per the Simply Wall St company report.

REN - Redes Energéticas Nacionais SGPS Future Earnings Per Share Growth

Risks

• The decrease in EBITDA and net income due to lower non-recurring revenues and higher financial costs poses a challenge to improving profitability and could impact earnings.
  
• Rising operational expenses, particularly personnel costs, might continue affecting net margins negatively until they plateau by 2025.
  
• Regulatory changes affecting the rate of return for the natural gas sector and the new regulatory period could worsen financial outcomes, impacting revenue and net margins.
  
• Delays in CapEx transfers to RAB could limit the growth in asset base, which might constrain future earnings growth.
  
• Reduction in natural gas volumes due to increased renewable energy generation could negatively affect revenue from that sector.

Valuation

• The analysts have a consensus price target of €2.81 for REN - Redes Energéticas Nacionais SGPS 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 €3.4, and the most bearish reporting a price target of just €2.4.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €1.0 billion, earnings will come to €120.7 million, and it would be trading on a PE ratio of 18.8x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of €2.36, the analyst's price target of €2.81 is 16.0% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.