ANA: Concession Asset Optimism Will Face Downside Risk After Sell Rating

Key Takeaways

• Acciona's strong infrastructure backlog and renewable energy expansion set a foundation for revenue and operating margin growth through large-scale projects.
  
• Geographic and technological diversification in renewables and infrastructure mitigate risks, offering stable revenue and higher margins in the long term.
  
• ACCIONA Energia faces challenges from market volatility, low renewable energy prices, asset dependency, policy risks, and competition, potentially impacting profitability and growth.

Catalysts

Engages in the energy, infrastructure, and other businesses in Spain and internationally.

• ACCIONA's infrastructure backlog reached an all-time high of €54 billion, providing a strong foundation for future revenue growth through large-scale projects and concession awards. This is expected to drive an increase in revenue and operating margins as projects come to fruition.
  
• ACCIONA Energia's addition of 2 gigawatts of capacity in 2024, following 1.7 gigawatts in 2023, highlights a significant expansion of its renewable energy portfolio. New capacity, particularly from the MacIntyre wind farm, is likely to enhance revenue and EBITDA growth as these projects become operational.
  
• Successful asset rotation activities in the energy sector, with proceeds of €1.3 billion so far, are aimed at optimizing the portfolio and unlocking value. This strategy is expected to result in gains that enhance earnings and strengthen the balance sheet.
  
• Nordex's turnaround is evidenced by improved profit margins and a 20% growth in its order book. Its recovery and expansion in the renewables sector position it for stronger net margins and contributions to overall earnings growth.
  
• ACCIONA's focus on geographic and technological diversification in its renewable energy and infrastructure projects mitigates market risks and enhances growth prospects. This strategic positioning is likely to improve revenue stability and contribute to higher margins over the medium to long term.

Acciona Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Acciona's revenue will grow by 2.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 3.7% today to 2.6% in 3 years time.
• Analysts expect earnings to reach €600.8 million (and earnings per share of €10.83) by about July 2029, down from €803.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €749.2 million in earnings, and the most bearish expecting €432.8 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 23.3x on those 2029 earnings, up from 17.1x today. This future PE is greater than the current PE for the GB Electric Utilities industry at 17.4x.
• 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 7.32%, as per the Simply Wall St company report.

Risks

• The challenging market in Spain during the first half of the year required ACCIONA Energia to revise down their EBITDA expectations, which initially suggests volatility and uncertainty that could negatively impact future revenue generation if such conditions persist.
  
• The issue of historically low prices and new generation paradigms bringing challenges like curtailments in the renewable energy sector might affect the profitability and net margins of ACCIONA Energia in the future.
  
• The rotation of assets as part of a strategy required for refinancing and maintaining investment-grade ratings, particularly in light of high leverage, indicates a dependency on asset disposals for liquidity, which could pressure earnings or net margins if market conditions for asset sales worsen.
  
• Exposure to energy policy volatility in the U.S. and changes in political environments can influence the returns on ACCIONA Energia's investments, potentially impacting revenue or earnings if current policy support for renewable energies declines.
  
• Competition from more mature or oversaturated renewable markets, coupled with potential delays or cost overruns in projects, embodies execution risks that could affect net margins or revenue, particularly if investment returns do not align with expectations in these regions.

Valuation

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

• The analysts have a consensus price target of €208.09 for Acciona 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 €266.0, and the most bearish reporting a price target of just €160.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be €22.8 billion, earnings will come to €600.8 million, and it would be trading on a PE ratio of 23.3x, assuming you use a discount rate of 7.3%.
• Given the current share price of €251.4, the analyst price target of €208.09 is 20.8% 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.