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Fortum Oyj

Utilities

Research

  • Hold by alpha (07/02/2024)
    • 13.50 +14.75% by 15/02/2025

    Fortum is an energy supplier with base-load and flexible energy capacity operating in the Scandinavian market. 90% of EBITDA results from 45TWh low CO2 hydro and nuclear power generation.

    The company reported €1.32/share for continuing business that gives a valuation of 9x PE at €12. This included a strong Q1'23. A conservative forward looking estimate is 10-12x PE.

    2023 dividend €1.15 results in a 9% yield with two installments in 2024. Which I also expect for the coming two years given the capital allocation and CAPEX.

    Fortum owns future-proof energy capacity and has a strong balance-sheet. I expect the company to improve margins and ROE as the demand for reliable green-electricity continues to grow. A long-term hold with a good dividend yield.

  • Valuation (1)
    • Prudent strategy

      After the Russian invasion into Ukraine in 2022, Fortum was forced to sell Uniper to the German state as giant losses on gas contracts in Germany bankrupt Uniper. A year later the company also lost control over its Russian assets that are also no longer reported upon!

      In 2023 Fortum refocused on its core-business with clean-energy in the Nordics. Its strategy being more prudent with better risk management policies including considerations for market and geopolitical developments. With 51% ownership by the Finish state the priority is to focus on reliable, clean and cheap energy production.

      07/02/2024 by ALPHA
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  • Business (3)
    • Nuclear power

      In 2022 Fortum started a feasibility study for conventional nuclear energy and SMR(s) as future power sources. In a first report it concludes that the market has room for both. Another important conclusion is that risks should be mitigated by utilizing proven solutions/designs. Further more a risk-sharing model is needed as catalyst to spark the investment.

      The Finnish Government’s granted a new operating license for both units at Fortum’s Loviisa nuclear power plant until the end of 2050.
      07/02/2024 by ALPHA
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    • Electricity demand

      The renewable energy demand is predicted to increased with 5% CAGR in the coming decade.

      07/02/2024 by ALPHA
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    • Scandinavian market

      Fortum sees an overcapacity of energy in the market which causes lower prices (€40/MWh). Northern Europe is connected and import/export helps to stabilize the energy supply as needed. Still prices are volatile due to growing supply of intermittent wind and solar energy.

      Given the overcapacity the company lowers its CAPEX until more profitable opportunities arise. Its focus is on profitable projects for flexible and base-load energy solutions.

      A conclusion from this is that intermittent energy supply is discounted (and less profitable). Base-load and flexible solutions have a premium value in the market. This will cause a slow-down in wind/solar investment that can eliminate the lower (negative) electricity prices.

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      07/02/2024 by ALPHA
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  • People (1)
    • CEO

      Markus Rauramo communicates a prudent strategy with sound capital allocation for Fortum. His presentation of the new strategy gives confidence.

      However in 2020 he has been driving the Uniper acquisition together with the previous CEO, which turned into a disaster in 2022. Furthermore he has been leading investments into recycling and waste, that are no longer considered core business.

      08/02/2024 by ALPHA
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  • Financial (2)
    • Financial strength

      The company has a strong balance sheet with a low net debt (0.5x EBITDA). The strategic to have a disciplined capital allocation and capital expenditure (total €1.7B 2024-2026 excl. acquisitions).

      Current balance sheet gives room to invest into profitable opportunities (2.0-2.5 EBITDA target). Smaller investments into renewable energy will not immediately increase debt or change capital allocation. There will however be a significant capital demand in case of new nuclear power investments.

      08/02/2024 by ALPHA
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    • Profitability

      Before 2020 the average electricity price was around €35/MWh. After a turbulent time (2021-2023) with volatile price shocks it now looks that prices are coming back to more normal levels. 10-15y historical earnings show that Fortum can also realize good margins at normalized price levels.

      Strategy and CAPEX are focused on operational improvement. A program is started to reduce fixed costs with €100M by end of 2025. Operational margins are expected to improve.

      Capitalize on base-load and flexible energy with expected optimization premium €6-8/MWh. The company has 60-70% of its production hedged at €47-€43/MWh excluding the premium,

      Investments into innovation and profitable projects with focus on core-business.

      The historical gross margin of 50% should be feasible and result in 10% growth in earnings per share. In the coming years I expect Fortum to realize >15% ROE.

      08/02/2024 by ALPHA
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  • Risks (4)
    • Nuclear investments

      Investment into nuclear power could be driven by political motivations and have a negative impact on shareholder value.

      08/02/2024 by ALPHA
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    • Regulation

      Energy companies are at risk for regulations on maximum price levels.

      In 2023 the Polish government set a price cap for end users.
      07/02/2024 by ALPHA
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    • Spot prices

      Margin on spot prices are general lower. More operators offer solution to manage energy demand with spot prices in both B2C and B2B. There is a risk for an increased market share of less profitable sales at spot prices.

      07/02/2024 by ALPHA
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    • Reduced energy prices

      Energy prices could reduce; due to over-capacity from green energy investments, increased energy savings, and reduced demand in an economic down-turn. This will have a negative impact on Fortum's earning.

      07/02/2024 by ALPHA
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