Global Decarbonization And Rising Electricity Demand Will Create Renewable Opportunities

Key Takeaways

• Accelerated project execution, strong PPA pipeline, and portfolio growth position the company for outperformance in revenue, earnings, and long-term cash flow stability.
  
• Early leadership in green hydrogen and international desalination, along with rising investor demand and geographic expansion, enhance margins, risk diversification, and potential for rapid expansion.
  
• Aggressive investment, high financial leverage, regional concentration, and exposure to volatile project, market, and policy conditions threaten ACWA Power's long-term profitability and financial resilience.

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.

• Analysts broadly agree that ACWA Power can deliver strong growth as more assets move from development to operation, but this may be understated given the company's proven record of doubling its portfolio in three years and recently accelerating its operational ramp-up, which could drive significantly higher revenue and earnings than expected as new projects come online ahead of schedule.
  
• Analyst consensus incorporates some construction and financial risks, but the company's unmatched success in securing recurring mega-PPAs-such as the recent world's largest 15 GW PPA and multi-year Saudi block tenders-suggests future offtake volumes and revenue visibility are actually superior to current bullish expectations, potentially lifting long-term cash flow stability and margin resilience.
  
• ACWA Power's early and large-scale moves into green hydrogen and international desalination projects, supported by global decarbonization mandates, position the company for market leadership in emerging high-margin sectors, which could structurally lift net profit margins as these segments mature and expand.
  
• The immense appetite from international investors-evidenced by a capital raise nearly six times oversubscribed-signals untapped demand for ESG assets, likely lowering the company's future cost of capital and opening the door to faster expansion and higher return on equity.
  
• The company's expanding geographic footprint into new and emerging markets diversifies regulatory and offtake risks, potentially smoothing volatility in earnings and unlocking additional, faster-growing revenue streams outside its home region.

ACWA Power Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on ACWA Power compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming ACWA Power's revenue will grow by 23.5% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 24.2% today to 32.3% in 3 years time.
• The bullish analysts expect earnings to reach SAR 4.4 billion (and earnings per share of SAR 5.98) 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 bullish analyst cohort, the company would need to trade at a PE ratio of 84.0x 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

• High net debt to operating cash flow, at nearly 7 times, appears likely to remain elevated due to aggressive investment plans and the pace of project development, which increases financial risk and could pressure net earnings and limit financial flexibility.
  
• ACWA Power's rapid expansion is concentrated primarily in Saudi Arabia and select international markets, making it vulnerable to regional regulatory changes, policy shifts, or political instability that could negatively affect long-term revenue growth and margin stability.
  
• Execution risk on complex megaprojects, such as NEOM green hydrogen and large-scale PPAs, may materialize in construction delays or cost overruns, which can impair forecasted earnings and threaten anticipated return on capital over multiple years.
  
• Rising global interest rates and reliance on debt capital to finance expansion could drive up borrowing costs for new projects, eroding net margins and profitability as the company ramps investment toward its 2030 targets.
  
• Growing competition in renewable energy development, shrinking government subsidies worldwide, and potential supply chain or input cost inflation can squeeze project returns, leading to downward pressure on revenue and operating income across ACWA Power's asset base.

Valuation

• The assumed bullish price target for ACWA Power is SAR280.0, which is the highest 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 bullish 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 bullish analysts, you'd need to believe that by 2028, revenues will be SAR13.6 billion, earnings will come to SAR4.4 billion, and it would be trading on a PE ratio of 84.0x, assuming you use a discount rate of 19.8%.
  
• Given the current share price of SAR228.5, the bullish analyst price target of SAR280.0 is 18.4% 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.