Completion Of Renewable Natural Gas Facilities Will Provide Immediate Benefits And Strengthen The Midstream & Marketing Segment

Key Takeaways

• UGI's infrastructure investments and strategic acquisitions are set to enhance system reliability, customer growth, and positively impact earnings.
  
• Focused portfolio optimization and disciplined capital management aim to improve financial health and support long-term value creation and EPS growth.
  
• Higher taxes, exit from noncore business, and acquisition debt could pressure UGI's margins, revenues, and financial stability amidst operational challenges.

Catalysts

Engages in the distribution, storage, transportation, and marketing of energy products and related services in the United States and internationally.

• UGI's ongoing infrastructure modernization program with over $200 million deployed in capital investment aims to enhance system reliability and safety, which is likely to support strong customer additions and revenue growth in the natural gas businesses.
  
• The completion of several RNG facilities within the Midstream & Marketing segment, which provide immediate returns through investment tax credits, and strategic acquisitions are expected to be accretive to earnings in the first year, impacting UGI's earnings positively.
  
• UGI's proposed gas base rate increase of approximately $110 million with the Pennsylvania Public Utility Commission is projected to support over $750 million of investments in system improvements, which could positively affect future revenue growth.
  
• AmeriGas's organizational transformation plan, focusing on enhancing business processes and optimizing the supply chain, is intended to improve operational efficiency and financial performance, potentially leading to increased net margins.
  
• The strategic focus on portfolio optimization and disciplined capital allocation, combined with strong balance sheet management, is expected to improve UGI's financial health and support long-term value creation, thus positively impacting earnings per share (EPS).

UGI Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming UGI's revenue will grow by 6.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.7% today to 8.2% in 3 years time.
• Analysts expect earnings to reach $703.1 million (and earnings per share of $3.26) by about March 2028, up from $550.0 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 13.9x on those 2028 earnings, up from 12.9x today. This future PE is lower than the current PE for the US Gas Utilities industry at 19.4x.
• Analysts expect the number of shares outstanding to grow by 2.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.63%, as per the Simply Wall St company report.

UGI Future Earnings Per Share Growth

Risks

• The limitations associated with interest expense deductibility at AmeriGas could lead to higher tax expenses that negatively impact net margins.
  
• The exit from the noncore energy marketing business is expected to result in a $15 million decline in total margin for UGI International, impacting overall revenues.
  
• Decline in Midstream & Marketing EBIT due to lower margins from gathering and processing activities, which could affect earnings if not offset by other segments.
  
• AmeriGas customer attrition and the effect of colder weather could result in inconsistent LPG volumes; without significant process improvements, this could continue to affect revenue stability.
  
• The $120 million acquisition funded by debt increases Pine Run’s debt-to-equity ratio to approximately 49%, which could add financial risk and pressure on earnings if the acquisition does not yield anticipated synergies and returns.

Valuation

• The analysts have a consensus price target of $35.0 for UGI 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 $8.5 billion, earnings will come to $703.1 million, and it would be trading on a PE ratio of 13.9x, assuming you use a discount rate of 6.6%.
• Given the current share price of $32.92, the analyst price target of $35.0 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.