Investments In Small Modular Reactors Will Increase Financial Risk And Pressure Cash Flows

Key Takeaways

• Investments in reactors and refurbishment projects could strain cash flow, elevating financial risk and impacting short-term net profit.
  
• Short-term market reliance and volatile energy prices could lead to uncertain revenues and fluctuating net margins.
  
• Positive regulatory and tax changes improve net margins and profitability, with strategic projects and sales shifts potentially enhancing future revenue and efficiency.

Catalysts

Engages in the production and transmission of electricity and thermal energy in Romania.

• The investment in the Small Modular Reactors Project, with significant loans and financing planned, may lead to increased financial risk and pressure on cash flows, potentially impacting future earnings negatively.
  
• Potential future unplanned outages and increases in repair and maintenance costs due to aging infrastructure could lead to higher operating expenses and affect net margins.
  
• The restructuring of the sales mix and reliance on the short-term market, combined with volatile energy prices, could result in fluctuating revenues and increased uncertainty in revenue projections.
  
• Increased personnel costs linked to higher salaries and incentives might compress net margins if additional revenue streams or cost efficiencies are not realized.
  
• The ambitious capital expenditure projects, such as the Unit 1 refurbishment and Tritium Removal Facility, though potentially beneficial long-term, could strain short-term cash flow and elevate financial risk, impacting net profit in the near future.

S.N. Nuclearelectrica Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming S.N. Nuclearelectrica's revenue will decrease by 13.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 34.1% today to 33.3% in 3 years time.
• Analysts expect earnings to reach RON 1.3 billion (and earnings per share of RON 4.11) by about March 2028, down from RON 2.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting RON2.7 billion in earnings, and the most bearish expecting RON1.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.8x on those 2028 earnings, up from 6.2x today. This future PE is greater than the current PE for the RO Electric Utilities industry at 6.2x.
• 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 12.12%, as per the Simply Wall St company report.

S.N. Nuclearelectrica Future Earnings Per Share Growth

Risks

• The reduction in windfall tax and income tax liabilities positively impacts Nuclearelectrica’s net margins and profitability, potentially mitigating some financial pressures.
  
• The completion and international approval of projects like the Small Modular Reactors and Tritium Removal Facility may enhance future revenue streams through increased operational efficiency and new venture initiatives.
  
• Strategic shifts in the sales mix to the intraday and competitive markets, combined with recent price increases, could increase revenue if market conditions remain favorable.
  
• The company’s capability to produce nuclear fuel bundles domestically instead of relying on a single external supplier reduces cost dependencies, potentially improving profit margins.
  
• Positive regulatory developments, such as the windfall tax being deemed unconstitutional, could remove financial obligations and potentially increase net earnings.

Valuation

• The analysts have a consensus price target of RON45.235 for S.N. Nuclearelectrica 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 RON50.6, and the most bearish reporting a price target of just RON38.1.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be RON3.9 billion, earnings will come to RON1.3 billion, and it would be trading on a PE ratio of 14.8x, assuming you use a discount rate of 12.1%.
• Given the current share price of RON41.5, the analyst price target of RON45.24 is 8.3% higher. The relatively low difference between the current share price and the analyst consensus 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.