Project Expansions In Finland And The UK Alongside Improving Power Markets Will Lead To Future Success

Key Takeaways

• Expansion in the Development segment and favorable project maturation suggest significant future revenue growth and improved profitability.
  
• Strategic project sales and refinancing efforts are set to enhance cash flow, reduce costs, and boost net margins.
  
• Arise faces revenue instability and potential earnings impacts due to fluctuating market conditions, variable power prices, and execution risks in new market developments.

Catalysts

Operates in the renewable energy sector.

• Expansion of the Development segment with a pipeline increase of 2,000 megawatts in 2024 and the maturing of projects in Finland and the U.K. suggests significant future revenue growth potential as these projects move toward realization.
  
• Successful refinancing and the reduction of financing costs by EUR 2.5 million annually lower interest expenses, potentially boosting net margins and profitability.
  
• Execution of strategic project sales in 2025, particularly in the U.K. market where appetite exists for early-stage projects, could enhance cash flow and earnings.
  
• Expectation of improved power market conditions driven by a narrowing of the price gap between Nordic and Continental Europe, and decreasing hydrological surplus, may lead to higher realized prices, positively impacting revenue and earnings.
  
• Well-positioned for growth in the Solutions segment with stable earnings and strategic focus on profitable growth could increase overall 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 February 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 7.7x on those 2028 earnings, down from 8.4x 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 5.91%, as per the Simply Wall St company report.

Arise Future Earnings Per Share Growth

Risks

• Arise's net sales decreased from SEK 191 million in Q4 2023 to SEK 153 million in Q4 2024, despite positive impacts from asset sales, indicating potential revenue instability due to fluctuating market conditions.
  
• The company experienced a decrease in realized prices for power production, from SEK 727 per megawatt hour in Q4 2023 to SEK 525 in Q4 2024, which could negatively affect overall earnings if lower prices persist.
  
• Arise operates in multiple international markets, including the Nordics and the U.K., where electricity prices and regulatory conditions differ significantly, possibly leading to challenges in managing revenue consistency across geographies.
  
• The Nordics experienced low wind speeds and lower market prices compared to previous years, which could impact profitability and net margins in their production segment if these conditions continue.
  
• The company's strategy includes significant investments in new market developments such as Finland and the U.K., which involve execution risks that could affect future earnings if the projects face delays or underperformance issues.

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 7.7x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of SEK36.7, the analyst price target of SEK80.17 is 54.2% 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.