Hydro Volatility And Nuclear Outages Will Undermine Earnings Stability Over The Long Term

Catalysts

About Fortum Oyj

Fortum Oyj is a Nordic energy company focused on power generation, consumer energy solutions and related infrastructure, with a core footprint in hydro, nuclear and wind.

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

• Higher power price volatility and the move to a 15 minute market increase the complexity of dispatching hydro and nuclear assets. If Fortum misjudges hedging or optimization, the current optimization premium of about €10 per megawatt hour could compress and weigh on earnings.
• The large onshore wind and solar development pipeline of roughly 8 gigawatts requires significant future capital. If long term PPAs do not materialize on terms that reflect rising capture risks, future projects could dilute returns and pressure net margins.
• Sustained hydrological variability, with hydro output at 17.8 terawatt hours over the last 12 months compared to a normal 20 to 20.5 terawatt hours, shows the portfolio’s sensitivity to weather. This can leave revenue and EBITDA exposed if low inflows coincide with weaker hedged prices.
• Unplanned nuclear outages, such as the estimated 3.6 terawatt hour shortfall for 2025, highlight operational risk in Fortum’s low carbon baseload fleet. Any recurrence could force more expensive replacement purchases or lost volumes, affecting operating profit and cash flow.
• The push to decarbonize assets, including the coal exit in Poland and hydrogen pilot projects, adds incremental fixed and development costs at a time when Swedish property taxes are expected to add about €30 million between 2025 and 2030. This could limit fixed cost savings and restrict EPS growth.

Assumptions

This narrative explores a more pessimistic perspective on Fortum Oyj compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Fortum Oyj's revenue will decrease by 1.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 17.3% today to 17.8% in 3 years time.
• The bearish analysts expect earnings to reach €841.8 million (and earnings per share of €0.94) by about January 2029, down from €864.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €947.3 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 15.7x on those 2029 earnings, down from 20.4x today. This future PE is lower than the current PE for the GB Electric Utilities industry at 20.4x.
• The bearish 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 5.67%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Fortum is building a large pipeline of around 8 gigawatts of onshore wind and solar projects. Management has stated that investment decisions will be tied to customer PPAs and internal return criteria. If they selectively commit only to projects with contracted offtake, this could support more stable long term revenue and help protect net margins.
• The Consumer Solutions segment has produced record third quarter and nine month comparable operating profit, with improved electricity margins in the Nordics and better gas margins in Poland. If this level of performance proves repeatable rather than exceptional, it could offset weaker generation volumes and support earnings.
• The fixed cost reduction program is targeting €100 million of recurring annual savings by the end of 2025, with a new run rate from 2026. If Fortum delivers these efficiencies as planned, this could partially counteract higher Swedish property taxes and support operating profit and net margins.
• Fortum’s balance sheet, with financial net debt to comparable EBITDA at 1.0x and €7.0b of liquidity, gives management scope to fund growth projects and manage volatility in hydro and nuclear output. This could reduce earnings risk over time.
• Management repeatedly highlights long term customer interest in decarbonization and electrification, including inquiries from data centers and industrial customers. If this translates into long term PPAs and higher power demand in the Nordics, it could support achieved power prices and volume utilization, which would benefit revenue and earnings.

Valuation

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

• The assumed bearish price target for Fortum Oyj is €12.5, which represents up to two standard deviations below the consensus price target of €15.77. This valuation is based on what can be assumed as the expectations of Fortum Oyj's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €19.0, and the most bearish reporting a price target of just €12.5.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be €4.7 billion, earnings will come to €841.8 million, and it would be trading on a PE ratio of 15.7x, assuming you use a discount rate of 5.7%.
  
• Given the current share price of €19.66, the analyst price target of €12.5 is 57.3% lower.
  
• 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.