West Bay, Hawaii And Colorado Projects Will Expand Opportunities

Key Takeaways

• Strategic expansions and acquisitions in water-stressed regions are expected to enhance recurring revenue and earnings through new contracts and increased capacity.
  
• Maintaining a strong balance sheet enables infrastructure investments and strategic acquisitions, improving shareholder value and driving long-term financial growth.
  
• Regulatory uncertainties and project delays could hinder future revenue and earnings, compounded by dependency on external economic and environmental factors.

Catalysts

Supplies potable water, treats wastewater and water for reuse, and provides water-related products and services in the Cayman Islands, the Bahamas, the United States, and the British Virgin Islands.

• The expansion of the West Bay plant in Grand Cayman, increasing capacity by 1 million gallons per day, is expected to drive future retail revenue growth due to meeting growing utility customer needs.
  
• The multiyear seawater desalination project in Hawaii, which includes a 20-year operations and maintenance (O&M) agreement after construction, is projected to significantly boost revenue and earnings in 2026 and 2027.
  
• The acquisition of REC in Colorado has created a new channel for business expansion into water-stressed regions, which is expected to enhance recurring revenue through both design build and O&M contracts, positively impacting earnings.
  
• The company's manufacturing segment is expected to improve margins due to increased production efficiency and a beneficial product mix, enhancing overall profitability.
  
• Consolidated Water's strong balance sheet, with significant cash and no debt, supports future investments in infrastructure and enables strategic acquisitions, which could lead to improved shareholder value and long-term financial growth.

Consolidated Water Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Consolidated Water's revenue will grow by 25.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 13.3% today to 12.4% in 3 years time.
• Analysts expect earnings to reach $32.6 million (and earnings per share of $2.04) by about May 2028, up from $17.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.7x on those 2028 earnings, up from 21.1x today. This future PE is greater than the current PE for the US Water Utilities industry at 21.1x.
• Analysts expect the number of shares outstanding to grow by 0.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Consolidated Water Future Earnings Per Share Growth

Risks

• The significant decline in services revenue, which dropped by 48% due to the completion of major construction projects, could lead to decreased overall revenue and earnings, as construction generated substantial income in previous years.
  
• Potential regulatory risks in Grand Cayman, where Consolidated Water's operating license with the utility regulator OfReg could require restructuring, may impact future revenue and profit margins if the terms become less favorable.
  
• Delays in the Hawaii desalination project, not caused by Consolidated Water, push back the construction phase, which is expected to significantly contribute to future revenue and earnings, leading to uncertainty about the project's financial impact.
  
• The dependency on external factors such as weather and tourism conditions in their operating regions could affect water sales and revenue from retail and bulk segments if adverse conditions occur.
  
• The impact of economic, political, and social conditions in the countries where they operate, especially in the Caribbean and U.S., could pose risks to customer demand and revenue stability if these conditions change unfavorably.

Valuation

• The analysts have a consensus price target of $38.5 for Consolidated Water based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $262.6 million, earnings will come to $32.6 million, and it would be trading on a PE ratio of 22.7x, assuming you use a discount rate of 6.2%.
• Given the current share price of $23.71, the analyst price target of $38.5 is 38.4% 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.