New Projects In Finland And The UK Will Boost Future Renewable Energy Capacity

Key Takeaways

• Strong project pipeline and cost-reduction strategies enhance future revenue potential and improve net margins through reduced financing costs.
  
• Diversification into high-potential technologies and better market conditions boost revenues and earnings growth through increased production capacity and realized prices.
  
• Decreased sales and unstable revenues, coupled with financial restructuring and increased costs, point to short-term pressures on revenue and cash flow management.

Catalysts

Operates in the renewable energy sector.

• Arise's Development segment has seen substantial growth, adding 2,000 megawatts to its pipeline in 2024 and maturing projects, particularly in Finland and the U.K., which positions the company well for project sales in 2025 and beyond. This is likely to boost revenues and earnings from project sales.
  
• The successful refinancing and new facilities agreement with DNB result in reduced financing costs and increased capital flexibility, which should improve net margins by decreasing overall interest expenses.
  
• The anticipated commercial takeover of the Kolvallen project in the first half of the year, along with ongoing maturity of significant projects like Fasikan and Finnaberget, suggests increased future production capacity and revenues.
  
• A potential improvement in power markets, due to the narrowing price gap between the Nordics and other regions like Germany, and decreasing hydrological surplus, could result in higher realized prices, enhancing revenues and net margins.
  
• The integration of acquired companies and focus on efficient resource use, alongside a strategic approach to diversifying into high-potential technologies like BESS (battery energy storage systems), supports expansion and profitability, positively impacting earnings and net margins.

Arise Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Arise's revenue will grow by 28.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 38.5% today to 46.5% in 3 years time.
• Analysts expect earnings to reach SEK 460.4 million (and earnings per share of SEK 9.9) by about March 2028, up from SEK 181.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting SEK524.8 million in earnings, and the most bearish expecting SEK396 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.6x on those 2028 earnings, down from 8.3x today. This future PE is lower than the current PE for the GB Renewable Energy industry at 8.4x.
• Analysts expect the number of shares outstanding to decline by 3.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.63%, as per the Simply Wall St company report.

Arise Future Earnings Per Share Growth

Risks

• Reduction in net sales from SEK 191 million in Q4 last year to SEK 153 million this year suggests a potential downturn in revenue despite the sale of certain assets.
  
• Significant fluctuations in the realized price per megawatt hour, down from SEK 727 in Q4 2023 to SEK 525 in Q4 2024, could lead to unstable revenues if the trend continues.
  
• Market conditions, including low wind speeds and lower market prices, impact the Production segment's revenue and profitability.
  
• The need to enter a refinancing agreement and redemption of green bonds indicates financial restructuring; however, it carries short-term costs and suggests pressures on cash flow management and financing costs initially.
  
• The mentioned pass-through costs and strategies like extraordinary maintenance or accelerated depreciation could affect net margins as they temporarily increase operating expenses or capital expenditure.

Valuation

• The analysts have a consensus price target of SEK80.167 for Arise 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 SEK90.0, and the most bearish reporting a price target of just SEK73.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK989.0 million, earnings will come to SEK460.4 million, and it would be trading on a PE ratio of 7.6x, assuming you use a discount rate of 5.6%.
• Given the current share price of SEK36.2, the analyst price target of SEK80.17 is 54.8% 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.