Grimsel Dam Approval Will Boost Future Energy Production

Key Takeaways

• Strategic renewable energy projects and expansions, including wind, solar, and battery storage, are expected to drive future revenue growth.
  
• Improvements in operational efficiencies and profitability are anticipated from smart meter deployment and restructuring within the services segment.
  
• Declining energy revenues, cash flow risks, and reliance on volatile trading profits introduce uncertainty, with external factors potentially impacting future growth and profitability.

Catalysts

About BKW

An international energy and infrastructure company, plans, builds, and operates infrastructure to produce and supply energy to businesses, households, and the public sector in Switzerland, Germany, Italy, France, and internationally.

What are the underlying business or industry changes driving this perspective?

• BKW is advancing several renewable energy projects, including solar and wind projects, in response to the vote on the Electricity Act. The anticipated approval of the Grimsel Dam concession is expected to enhance future energy production and revenue growth.
  
• The deployment of 400,000 smart meters by 2028 is likely to improve operational efficiencies and potentially enhance profit margins through automated data collection and management.
  
• The planned expansion of BKW's solar engineering brand, Solstis, aims to double installed capacity to over 75 megawatts in two years, which could drive significant revenue growth in renewable energy services.
  
• The partnership for the Wunsiedel battery storage facility, with 100-megawatt capacity expected to be operational by 2025, presents a future revenue stream from increasing demand for energy storage solutions.
  
• The strategic acquisition and internal restructuring within the services segment are intended to stabilize and gradually improve profitability, aiming to achieve a sustainable EBIT margin improvement over the next few years.

BKW Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming BKW's revenue will grow by 4.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.8% today to 9.4% in 3 years time.
• Analysts expect earnings to reach CHF 450.8 million (and earnings per share of CHF 8.75) by about August 2029, up from CHF 371.8 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as CHF522.0 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 20.1x on those 2029 earnings, up from 17.8x today. This future PE is greater than the current PE for the GB Electric Utilities industry at 15.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 3.95%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• BKW's energy business revenue has declined due to lower electricity prices in the energy markets, which could impact future revenue streams.
  
• There is a cash flow risk associated with increasing net working capital and temporary lower cash conversion, which could affect liquidity and overall profitability.
  
• The services business is in a transition phase, with the company still working to stabilize and improve margins, indicating potential challenges in achieving targeted earnings.
  
• The reliance on volatile trading profits as a significant component of overall earnings introduces uncertainty into future profitability.
  
• External regulatory and political factors, such as biodiversity initiatives or changes to the Electricity Act, could impose additional costs or barriers to infrastructure projects, affecting future returns and growth potential.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of CHF152.81 for BKW 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 CHF200.0, and the most bearish reporting a price target of just CHF135.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be CHF4.8 billion, earnings will come to CHF450.8 million, and it would be trading on a PE ratio of 20.1x, assuming you use a discount rate of 4.0%.
• Given the current share price of CHF125.5, the analyst price target of CHF152.81 is 17.9% 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.