Long Term Renewables Pipeline And Coal Exit Will Support A Stronger Power Portfolio

Catalysts

About Fortum Oyj

Fortum Oyj is a Nordic energy company focused on power generation, consumer energy solutions and related services.

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

• A large renewables pipeline, with approximately 8 gigawatts of onshore wind and solar projects in the permitting phase plus additional early stage projects, positions Fortum to benefit from long term demand for low carbon power, which can support future revenue and earnings from commissioned assets and related PPAs.
• Higher power price volatility and the introduction of the 15 minute market support Fortum's ability to capture an optimization premium, currently guided at about €10 per megawatt hour for 2025, which directly affects achieved power prices and can support margins in the Generation segment.
• The planned exit from coal by the end of 2027, including the €85 million retrofit at the Zabrze CHP plant, is aimed at shifting the portfolio toward cleaner generation, which can influence long term cost structure, reduce exposure to carbon related costs and support net margins.
• An efficiency improvement program that targets a €100 million recurring annual fixed cost reduction by the end of 2025, with a new fixed cost run rate from 2026, is designed to offset pressures such as higher property taxes and can support operating margins and cash flow.
• Growth and strong recent performance in Consumer Solutions, supported by improved electricity and gas margins and around €13 million of cost synergies, suggests that a larger, more efficient retail platform can provide more stable earnings and cash generation alongside cyclical generation results.
• A solid financial position, with financial net debt to comparable EBITDA at about 1.0x and liquidity reserves of roughly €7b, gives Fortum room to fund identified growth areas such as renewables development, site development and hydrogen pilots, which can influence future revenue and earnings potential.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more optimistic perspective on Fortum Oyj compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Fortum Oyj's revenue will grow by 5.5% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 15.4% today to 17.3% in 3 years time.
• The bullish analysts expect earnings to reach €1.1 billion (and earnings per share of €1.21) by about July 2029, up from €823.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €805.9 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 22.7x on those 2029 earnings, up from 21.4x today. This future PE is greater than the current PE for the GB Electric Utilities industry at 21.4x.
• The bullish 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 5.97%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Prolonged periods of below normal hydro and nuclear output, similar to the current year where hydro volumes over the last 12 months are around 17.8 terawatt hours versus a normal 20 to 20.5 terawatt hours and nuclear volumes are about 3.6 terawatt hours lower than originally planned, could keep total generation volumes structurally weaker and weigh on revenue and earnings.
• Higher and structurally rising cost items, such as the estimated €30 million increase in Swedish property taxes for 2025 to 2030 and higher nuclear fuel costs, may offset much of the €100 million fixed cost reduction program and put pressure on operating profit and net margins.
• If power prices remain low in periods of high wind output, as seen in the negative contribution from the Pjelax wind farm when capture prices were below average market prices, returns on new renewables projects could be weaker than expected and drag on segment profits and group earnings.
• Large planned investments in areas like the €85 million Zabrze CHP retrofit, renewables development, site development and hydrogen pilots, without matching long term PPA visibility or if long duration contracts are harder to secure due to customer caution, could lead to lower returns on capital and softer earnings growth.
• Slower than expected industrial electrification and delayed customer investment decisions, which management links partly to geopolitical turbulence and short order books in heavy industry, may limit long term demand growth for new capacity and keep achieved power prices and revenue below what would be needed to offset volume and cost headwinds.

Valuation

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

• The assumed bullish price target for Fortum Oyj is €23.0, which represents up to two standard deviations above the consensus price target of €17.71. 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 bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €23.0, and the most bearish reporting a price target of just €12.5.
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be €6.3 billion, earnings will come to €1.1 billion, and it would be trading on a PE ratio of 22.7x, assuming you use a discount rate of 6.0%.
• Given the current share price of €19.61, the analyst price target of €23.0 is 14.7% 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.