IBE - Acquisitions Of Electricity North West And Avangrid Will Expand Regulated Assets (2025)

Key Takeaways

• Strategic investments in U.S. and U.K. networks are set to expand Iberdrola’s regulated asset base, driving revenue and earnings growth from stable returns.
  
• Focus on renewables and supply chain security supports cost certainty and enhances future revenue, with key projects boosting earnings and financial flexibility.
  
• Strategic shifts towards network investments over renewables may devalue renewable projects, risking future earnings amidst geopolitical, regulatory, and financial challenges.

Catalysts

About Iberdrola

Engages in the generation, production, transmission, distribution, and supply of electricity in Spain, the United Kingdom, the United States, Mexico, Brazil, Germany, France, and Australia.

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

• The acquisition of Electricity North West and Avangrid minorities expands Iberdrola’s regulated asset base, particularly in the U.S. and U.K., enhancing their position for future growth in transmission and distribution investments that will exceed €41 billion by 2030. This is likely to drive future revenue and earnings growth.
  
• Iberdrola's strategic focus on network investments, particularly in the U.S. and U.K., with a €19 billion planned investment in the U.S. and €22 billion in the U.K. by 2030, is expected to significantly expand their regulated asset base, consequently increasing revenue and EBITDA from stable, regulated returns.
  
• Increased investment in renewables, with a focus on offshore wind projects such as Vineyard Wind in the U.S. and East Anglia 2 and 3 in the U.K., aims to grow Iberdrola’s renewable capacity. These projects, which are set to become operational by 2025, will enhance future electricity production revenues and contribute to Iberdrola’s earnings growth.
  
• Iberdrola's strategic decision to secure supply chains through framework agreements for investments in networks and renewables aims to lock in costs and availability, minimizing financial risk and potentially improving net margins due to cost certainty.
  
• Continued organic growth in regulated networks, including new investments and better frameworks in all markets, is anticipated to boost Iberdrola's future operating cash flow, supporting sustainable dividend growth and financial flexibility.

Iberdrola Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Iberdrola's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.1% today to 12.3% in 3 years time.
• Analysts expect earnings to reach €6.3 billion (and earnings per share of €1.0) by about March 2028, up from €5.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.0x on those 2028 earnings, up from 15.9x 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 decline by 2.66% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.14%, as per the Simply Wall St company report.

Iberdrola Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?

• The decision to prioritize network investments over renewable growth in the U.S. suggests a strategic shift, leading to a potential devaluation of renewable pipeline projects, impacting future earnings from renewables.
  
• Ongoing geopolitical factors and changing energy needs might affect the stability and competitiveness of energy prices, putting pressure on net margins and potentially affecting future revenue streams.
  
• The company's decision to diversify its operations in core geographies depends heavily on securing supply chains and favorable regulatory conditions, which presents execution risks that could impact long-term revenue.
  
• Increased debt from acquisitions like Electricity North West may affect the financial leverage and increase financial risk, potentially impacting future net earnings and credit metrics.
  
• Potential regulatory changes or delays, such as those in Spain's electricity distribution regulations, could introduce uncertainties that may impact revenue predictions and operational costs in the associated markets.

Valuation

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

• The analysts have a consensus price target of €14.297 for Iberdrola 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 €16.5, and the most bearish reporting a price target of just €9.7.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €51.4 billion, earnings will come to €6.3 billion, and it would be trading on a PE ratio of 16.0x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of €13.77, the analyst price target of €14.3 is 3.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.