Majority Stake Acquisition Will Support Improved Margins Amid Revenue Uncertainty

Key Takeaways

• Neoenergia's focus on renewable expansion and grid modernization aligns with global decarbonization trends, supporting long-term growth and improved operational efficiency.
  
• Regulatory clarity, organic customer growth, and disciplined deleveraging strengthen earnings predictability and enhance shareholder returns.
  
• A strategic pivot toward distribution growth, high leverage, and market concentration heightens Neoenergia's exposure to regulatory, financial, and operational risks.

Catalysts

Generates, transmits, distributes, trades in, and commercializes electric energy in Brazil.

• Neoenergia is poised to benefit from the accelerating decarbonization and net-zero emission commitments globally and in Brazil, leading to increased demand for renewable energy, as evidenced by its active pipeline in renewables and continued investment in expanding its wind, solar, and hydro portfolio; this is likely to drive sustained, long-term revenue growth.
  
• Continued urbanization and electrification in Brazil are fueling greater electricity consumption and a growing customer base (313,000 new customers added in the last 12 months), enabling Neoenergia to achieve organic growth in distribution and supporting stable/recurrent revenues.
  
• Significant investment in grid modernization, transmission infrastructure, and digitalization-demonstrated by the near-completion of new transmission lots and ongoing quality improvements-improves grid reliability and operational efficiency, supporting EBITDA margin expansion and reducing losses.
  
• Upcoming renewal and extension of key concessions (e.g., Neoenergia Coelba, Cosern, Elektro), anticipated for approval soon, provide long-term regulatory clarity and a robust framework for future investments, reducing operational risks and underpinning long-term earnings visibility.
  
• Ongoing deleveraging (from asset sales and growing EBITDA) and heightened cost discipline position Neoenergia to lower interest expenses, accumulate cash, and potentially increase future dividend payouts, which should positively affect net income and shareholder returns.

Neoenergia Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Neoenergia's revenue will decrease by 4.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 8.5% today to 6.9% in 3 years time.
• Analysts expect earnings to reach R$3.1 billion (and earnings per share of R$3.88) by about September 2028, down from R$4.3 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 20.9x on those 2028 earnings, up from 7.8x today. This future PE is greater than the current PE for the BR Electric Utilities industry at 7.8x.
• Analysts expect the number of shares outstanding to grow by 0.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 18.61%, as per the Simply Wall St company report.

Neoenergia Future Earnings Per Share Growth

Risks

• Neoenergia's strategic shift away from large-scale transmission auctions toward organic distribution growth may limit its access to high-return, long-term growth opportunities-potentially capping revenue expansion and pressuring future earnings if organic investments underperform relative to sector peers.
  
• The company's continued high leverage (net debt/EBITDA ratio above 3x until at least 2026) and significant ongoing capex requirements for distribution grid upgrades increase its financial risk profile, which may elevate interest expenses and compress net margin if EBITDA growth slows or borrowing costs rise.
  
• Execution risks remain elevated in the completion and operation of large infrastructure projects; any project delays, cost overruns, or regulatory hold-ups (such as in the concession renewals or asset sales to GIC) could negatively impact revenue recognition, cash flow timing, and overall profitability.
  
• Potential adverse regulatory developments-such as changes to tariff review timelines, market interventions, or new policies affecting low-income customer bases-could constrain Neoenergia's ability to pass through costs or realize planned returns, directly affecting revenue reliability and long-term earnings growth.
  
• Concentration in the Brazilian market makes Neoenergia vulnerable to macroeconomic volatility, local regulatory unpredictability, and weather-driven events; these factors, coupled with climate change-induced weather extremes, could increase operational disruption costs and insurance expenses, thus pressuring EBITDA and net earnings.

Valuation

• The analysts have a consensus price target of R$31.98 for Neoenergia 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 R$40.0, and the most bearish reporting a price target of just R$24.1.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$45.2 billion, earnings will come to R$3.1 billion, and it would be trading on a PE ratio of 20.9x, assuming you use a discount rate of 18.6%.
• Given the current share price of R$27.91, the analyst price target of R$31.98 is 12.7% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.