Heavy Capital Expenditures And Execution Risks Will Impair Future Margins

Key Takeaways

• Sustained high capital expenditure, tight credit, and a heavy pipeline of unfinished projects expose margins and cash flow to financing and execution risks amid global uncertainty.
  
• Rising competition, falling electricity prices, and dependence on government contracts threaten future profitability and create significant revenue volatility and concentration risks.
  
• Expanding project pipeline and strong financial flexibility position ACWA Power to capitalize on renewable energy trends while supporting stable growth and resilient earnings.

Catalysts

Engages in the investment, development, operation, and maintenance of power generation, water desalination, and green hydrogen production plants in the Kingdom of Saudi Arabia, the Middle East, Asia, and Africa.

• The company's aggressive expansion strategy, including a targeted $250 billion investment pipeline and a doubling of portfolio size within five years, will require sustained heavy capital expenditure at a time when global interest rates have risen and credit markets remain tight, resulting in persistently elevated financing costs. This will likely exert long-term pressure on net margins and reduce both earnings quality and free cash flow generation.
  
• With only about 40% of ACWA Power's current portfolio operational and the majority of growth tied up in projects still under construction, the timeline for significant revenue realization is highly exposed to execution risks, regulatory delays and geopolitical instability across key markets such as the Middle East, Africa, and Central Asia, which could result in prolonged earnings volatility and missed revenue targets.
  
• Increasing competition for government incentives and subsidies, as new entrants rapidly grow in the renewables and green hydrogen sectors, will likely challenge ACWA Power's ability to secure favorable contract terms and future support, thereby diminishing project returns and contributing to possible revenue and margin declines in the medium-to-long term.
  
• The global decline in the levelized cost of electricity, while expanding the renewables market, is creating downward pressure on power purchase agreement pricing, which reduces contracted revenue per megawatt and will compress sector-wide margins, directly placing persistent pressure on ACWA Power's future profitability even as capacity additions accelerate.
  
• Heavy reliance on a few mega-scale PPAs from Saudi Arabia and key government-driven programs increases the company's concentration risk, such that any change in government priorities, contract renegotiations, or regulatory shifts-particularly given the long-dated nature of these agreements-could introduce sudden revenue instability and expose earnings to sharp downside shocks over the next decade.

ACWA Power Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on ACWA Power compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming ACWA Power's revenue will grow by 22.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 24.2% today to 28.2% in 3 years time.
• The bearish analysts expect earnings to reach SAR 3.7 billion (and earnings per share of SAR 4.85) by about August 2028, up from SAR 1.7 billion 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 38.9x on those 2028 earnings, down from 100.7x today. This future PE is lower than the current PE for the SA Renewable Energy industry at 100.7x.
• 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 19.75%, as per the Simply Wall St company report.

ACWA Power Future Earnings Per Share Growth

Risks

• Global decarbonization and renewable energy targets, especially the Saudi Vision 2030 program, are driving massive new capacity additions with ACWA Power playing a central role, likely supporting long-term revenue growth as more projects become operational and contribute to cash flow.
  
• A proven track record of strong project execution and successful delivery, evidenced by the company delivering gigawatt-scale projects ahead of schedule and expanding internationally into new markets (such as the recent Senegal desalination plant), demonstrates operational strength that can underpin stable earnings and growth.
  
• Robust capital raising capabilities, highlighted by the recent $1.9 billion equity raise with overwhelming investor demand (including significant foreign participation), provide financial flexibility to fund the company's ambitious growth pipeline and manage leverage, which should help protect future margins and enable continued expansion.
  
• A deep and diversified project pipeline, including major green hydrogen, renewable, and desalination projects with long-term power purchase agreements, positions ACWA Power to benefit from secular industry trends and secure predictable revenues over multiple years.
  
• Established capital recycling and divestment strategies allow the company to monetize mature assets and recycle capital efficiently, supporting improved free cash flow and helping to manage net debt levels, which should have a positive impact on net earnings and balance sheet resilience.

Valuation

• The assumed bearish price target for ACWA Power is SAR110.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of ACWA Power'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 SAR280.0, and the most bearish reporting a price target of just SAR110.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be SAR13.2 billion, earnings will come to SAR3.7 billion, and it would be trading on a PE ratio of 38.9x, assuming you use a discount rate of 19.7%.
  
• Given the current share price of SAR228.5, the bearish analyst price target of SAR110.0 is 107.7% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.