Share Buybacks and Expanding Demand Will Shape Renewable Outlook

Key Takeaways

• Rising electricity demand and favorable market dynamics position TransAlta to grow revenue, enhance margins, and achieve stable, predictable earnings.
  
• Expansion of renewables and environmental asset monetization strengthens long-term cash flow predictability amid stricter emissions regulations and customer demand for low-carbon energy.
  
• Transition risks from aging assets, market competition, and regulatory uncertainty threaten revenue growth, margin expansion, and the long-term financial stability of current operations.

Catalysts

Engages in the development, production, and sale of electric energy.

• Data center load growth in Alberta is expected to materially increase electricity demand over the next decade, with TransAlta well positioned to benefit thanks to capacity allocations, fleet optionality, and ongoing negotiations for long-term contracts, which will support sustained revenue growth and improved earnings visibility.
  
• Rising electricity demand from electrification (including data centers and broad energy transition themes) and tightening supply-demand balances in key markets like Alberta and Ontario are creating favorable recontracting environments and potential for higher realized prices, directly enhancing revenue and EBITDA over the medium-to-long term.
  
• TransAlta's ability to generate and monetize environmental attributes (such as carbon credits and environmental offsets from its hydro and wind assets) positions it competitively in a market moving towards higher carbon prices and stricter emissions regulation, supporting higher net margins as zero-carbon assets become more lucrative.
  
• Ongoing execution of renewable development, repowering, and asset optimization initiatives-including expanding and re-purposing legacy sites (like Centralia) and leveraging portfolio diversity-will increase predictable contracted cash flows and EBITDA growth, while also driving margin expansion via economies of scale.
  
• Growing demand from corporate and industrial customers for long-term, low-carbon power purchase agreements aligns with TransAlta's diversified, multi-jurisdictional renewables portfolio, providing a pipeline for stable, inflation-linked cash flows and supporting long-term earnings stability.

TransAlta Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TransAlta's revenue will decrease by 6.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from -6.7% today to 9.2% in 3 years time.
• Analysts expect earnings to reach CA$188.9 million (and earnings per share of CA$0.38) by about September 2028, up from CA$-167.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 37.2x on those 2028 earnings, up from -29.5x today. This future PE is greater than the current PE for the US Renewable Energy industry at 7.6x.
• Analysts expect the number of shares outstanding to decline by 0.67% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.74%, as per the Simply Wall St company report.

TransAlta Future Earnings Per Share Growth

Risks

• Heavy reliance on legacy coal-to-gas and older thermal assets introduces asset transition risk, as faster-than-anticipated decarbonization mandates or market shifts could force costly write-downs or impairments, directly compressing future earnings and book value.
  
• Intensifying competition and incremental generation from new gas, wind, and solar supply in core markets like Alberta are already pressuring spot and merchant power prices, which, if persistent, could undermine realized revenues and net margins despite current hedging strategies.
  
• Failure to execute timely and competitive new data center contracts or project buildouts-due to delays in regulatory frameworks (e.g., AESO Phase 2), counterparties' hesitancy, or protracted negotiations-could stall anticipated demand growth and lead to revenue stagnation or increased earnings volatility.
  
• Higher sustaining capital expenditures for aging gas fleet units and the need for additional investments to maintain plant reliability may erode free cash flow and limit net margin expansion if not offset by commensurate increases in contracted revenues.
  
• Exposure to uncertain carbon pricing regimes, especially potential federal-provincial misalignments (such as Alberta's TIER freeze versus national minimum carbon price escalation), could impact the competitiveness and monetization value of environmental attributes, posing downside risks to both future EBITDA and cash flow.

Valuation

• The analysts have a consensus price target of CA$19.35 for TransAlta 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 CA$20.0, and the most bearish reporting a price target of just CA$16.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$2.0 billion, earnings will come to CA$188.9 million, and it would be trading on a PE ratio of 37.2x, assuming you use a discount rate of 7.7%.
• Given the current share price of CA$16.61, the analyst price target of CA$19.35 is 14.2% 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.