Hawaii Renewable Investments And Litigation Resolution Will Power Long-Term Success

Key Takeaways

• Legislative and regulatory changes are reducing liability risks and enabling margin improvement through liability caps, securitization, and performance-based rate adjustments.
  
• Strategic focus on regulated utilities and clean energy investment supports stability, modernization, and long-term revenue and earnings growth.
  
• Ongoing wildfire litigation, regulatory uncertainty, local economic exposure, and high capital needs threaten future earnings growth, margin stability, and financial flexibility.

Catalysts

Engages in the electric utility business in the United States.

• The anticipated resolution of Maui wildfire litigation, combined with pending state legislation (SB 897) establishing an aggregate liability cap, should significantly reduce future liability risk and lower insurance costs, improving net margins and reducing earnings volatility.
  
• Robust renewable energy investments-supported by favorable legislation that backs utility power purchase agreements and incentivizes clean energy procurement-ensure long-term regulated asset base growth and stable, potentially rising revenues as Hawaii advances toward its 100% renewables target by 2045.
  
• Securitization authorization for up to $500 million of wildfire mitigation and grid resilience CapEx allows HEI to modernize infrastructure with lower cost financing, mitigating the impact on customer rates and supporting long-term return on equity and earnings growth.
  
• The company's refocus on regulated utility operations-following the divestitures of non-core businesses and sale of American Savings Bank-increases cash flow stability and aligns all resources to capitalize on grid modernization, climate adaptation, and electrification of transport, which should underpin future revenue and margin expansion.
  
• Ongoing and forthcoming adjustments to performance-based regulation (PBR), including the rebasing of allowed revenues and potential reconsideration of equity ratio and return on equity, create a pathway for margin improvement through potentially higher allowed returns and cost recovery mechanisms.

Hawaiian Electric Industries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hawaiian Electric Industries's revenue will grow by 5.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -41.5% today to 3.8% in 3 years time.
• Analysts expect earnings to reach $140.2 million (and earnings per share of $1.1) by about July 2028, up from $-1.3 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.3x on those 2028 earnings, up from -1.4x today. This future PE is lower than the current PE for the US Electric Utilities industry at 22.0x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.14%, as per the Simply Wall St company report.

Hawaiian Electric Industries Future Earnings Per Share Growth

Risks

• The company remains exposed to ongoing and potentially significant financial risk from the Maui wildfire tort litigation, with $1.99 billion in settlement contributions required over the next few years-this creates pressure on future liquidity, could necessitate substantial debt and equity issuance, and may compress net margins and earnings.
  
• Future wildfire-related liability remains unpredictable, as the ultimate structure and amount of the legislated liability cap (SB 897) is undetermined, and if set at a high level or with limited "safe harbor" provisions, HEI could still face large claims and insurance cost hikes, risking substantial negative impact to future net income and cash flow.
  
• HEI's long-term revenue growth is tied to its ability to win favorable terms in regulatory rate cases under the PBR (performance-based regulation) framework; there is risk that the allowed ROE or equity ratio could be reduced in upcoming filings, leading to margin compression and lower earnings.
  
• HEI's geographic concentration in Hawaii, along with a now singular focus on regulated utility operations (following divestitures), makes it strongly exposed to local regulatory changes, economic downturns, or unfavorable population/migration trends, all of which could impair revenue growth and overall profit resilience.
  
• The ongoing need for substantial capital expenditures in wildfire mitigation and grid modernization, along with inflationary pressures and higher interest rates, increases HEI's financing costs; if utility rate increases are not approved or customer/political resistance intensifies, elevated expense levels may erode net margins and restrict earnings growth.

Valuation

• The analysts have a consensus price target of $11.5 for Hawaiian Electric Industries 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 $14.0, and the most bearish reporting a price target of just $10.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.7 billion, earnings will come to $140.2 million, and it would be trading on a PE ratio of 21.3x, assuming you use a discount rate of 7.1%.
• Given the current share price of $10.82, the analyst price target of $11.5 is 5.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.