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Terna Energy | Green light on

M&A buzz tapering off; focus back to fundamentals – Since early 2022, Terna Energy’s investment case has been dominated by potential takeover interest, a theme which has at times overshadowed fundamentals. In recent months, headwinds for the RES sector internationally along with unfavorable weather conditions domestically and a waning M&A narrative have weighed on sentiment driving a c27% drop in the share price since the summer highs. Looking ahead, we expect the stock to move more in tandem with fundamentals, with the Group continuing to expand and dominating the local RES market, boasting an operating capacity of c1.2GW following the commercial operation of Kafireas wind park (330MW).

RES landscape shaped by volatile supply/demand and cost dynamics – The latest draft of the updated National Energy and Climate Plan (NECP) sets the 2030e RES target at c26GW vs c12GW currently, placing a cap on the potential for RES development and effectively limiting visibility on the extent to which the ambitious RES targets of the Big 5 energy companies can be met. On the demand side, the energy crisis in 2022 boosted off-takers’ demand for RES, with indicative EU PPA indices recording 2-digit yoy growth underpinning demand. Nonetheless, the RES market has been affected by significant volatility recently, as increased raw material prices have pushed capex costs higher, while rising interest rates have squeezed Equity IRRs, ultimately impacting the risk-return profile of RES investments

Clear visibility to 3.3GW in mid-term; optionality from the 3.1GW LT pipeline – Terna Energy’s pipeline stands out among local peers, with management guiding for c2.1GW of additions in the mid-term, targeting installed capacity of 3.3GW. Mid-term pipeline includes >1.2GW of underway projects, with the flagship Hydro pumped storage Amfilochia project (680MW) standing out thanks to its secured IRR. In the long run, Terna Energy targets 3.1GW of additions (c6.4GW in installed capacity) and is poised to become a pioneer in offshore wind parks, following the successful nomination of one of the two first Exploration and Survey licenses.

Mid-term EBITDA at c€300mn (18% CAGR) – We now explicitly model 550MW of wind & solar adds by 2025, with the completion of 2 hydro storage projects (851MW) by 2026. In terms of estimates, we lower our 2023/24e EBITDA by 21%/5% due to unfavorable weather conditions and a slower phasing-in vs our previous estimate, but raise our longer-term estimates on boosted operating capacity, eventually targeting €291m EBITDA (18% CAGR) by 2026. We estimate the related capex envelope at c€1bn, with Net Debt peaking to €1.5bn by 2026 (5.3x Net Debt/EBITDA).

Lifting to Buy; PT at €18 (from €20.7) on lower M&A component – Our SOTP values separately the existing & underway capacity, while using a value creation framework for the mid-term and LT pipeline. With the M&A buzz tapering off, we lower our weighting (50% from 75%) to the LT pipeline component, thus reducing our PT to €18 but lifting our rating to Buy on valuation. Our new PT implies a 2024e EV/EBITDA of 13.7x, c20% premium to peers justified by Tenergy’s exposure in niche RES projects.