Goldman Sachs maintains Buy rating on RWE and raises target price to €71

Overview

This is a Goldman Sachs company research report on RWE. Its core view is that the market continues to underestimate RWE’s medium- to long-term earnings improvement potential, particularly the upside potential from returns on Amprion’s transmission assets, US renewables project returns, and Europe’s Flexible Generation business. Goldman Sachs maintains its Buy rating on RWE and raises the 12-month target price from €68.5 to €71.

Core views

Goldman Sachs identifies three major sources of upside for RWE. First, Amprion’s current 2031 guidance implies ROE of only approximately 6.5%-7.0%, below the 10%-11% expected returns of peers such as Elia; factoring in higher leverage and capitalized interest, an ROE increase to approximately 9% could generate significant earnings upside. Second, more than half of RWE’s renewables capital expenditure is located in the US, where project returns remain approximately 10%-11%, above the company’s RES IRR target of “above 8.5%.” Third, FlexGen could benefit from rising power consumption, margin improvement, and additional gas-fired generation capacity, leading to potential earnings upgrades. Together, these factors could lift 2031E EPS to €5.52, approximately 20% above current company guidance, and support net profit CAGR of up to approximately 17% from 2026 to 2031.

Analysis framework

The report supports its investment view through segment earnings scenario analysis, peer ROE comparisons, benchmarking of US renewables IRRs, FlexGen capacity expansion assumptions, and an updated valuation framework. The target price uses a 2/3 weighting for 2027E SOTP valuation and a 1/3 weighting for existing asset value. Within the SOTP, renewables are valued using DCF, FlexGen and other businesses use pure-play comparable multiples, and existing asset value uses an EV/IC model.

Methodology notes

• Valuation methodsSOTP

  Sum-of-the-parts valuation

  Two-thirds of the target price is based on 2027E SOTP, implying a per-share value of €75.9 and reflecting higher earnings forecasts and Amprion value creation.

• Valuation methodsDCF

  Discounted cash flow

  The renewables business is valued using DCF, assuming a 6.1% WACC and incorporating capacity additions through 2035, without a terminal value.

• Valuation methodsEV/IC

  Enterprise value/invested capital model

  Existing asset value is estimated using an EV/IC model, assuming no growth after 2026, corresponding to approximately €61 per share.

• fundamental_analysispeer_comparison

  Peer comparison

  The report compares Amprion’s implied ROE with the 10%-11% expected 2031 returns of peers such as Elia to assess whether RWE’s guidance is conservative.

• broker_frameworkGS Factor Profile

  Goldman Sachs factor profile

  The Goldman Sachs factor profile compares the stock with the market and industry peers across growth, financial returns, valuation multiples, and composite dimensions.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• RWEG.DE

  Core covered security

  Strengths

  Buy rating, higher target price, potential 2031E EPS upgrade, and relatively fast earnings growth among European peers.

  Weaknesses

  Free cash flow is expected to be negative from 2027 to 2031, mainly due to continued high investment in renewables and other areas.

  Comparison

  2030E P/E is approximately 12.5x, a double-digit percentage discount to peers; EV/EBITDA is discounted by a mid-single-digit percentage relative to peers.

  Risks

  Economic recession, weaker power demand, LNG and power prices below expectations, higher sovereign yields, poor renewables project execution, and GBP/USD depreciation.

• AMPRION GMBH

  RWE-related transmission asset and potential source of upside

  Strengths

  If ROE rises from the implied 6.5%-7.0% to approximately 9%, it could add approximately €300mn of after-tax earnings to RWE.

  Weaknesses

  The report’s current forecasts do not fully incorporate Amprion’s incremental contribution, and assumptions regarding the transaction and ownership percentage remain uncertain.

  Comparison

  Amprion’s current guidance implies ROE below the 10%-11% expected 2031 returns of peers such as Elia.

  Risks

  Transaction not completed, regulatory returns below expectations, and leverage and capitalized interest assumptions not materializing.

• US renewables

  Important capital expenditure region for RWE’s renewables business

  Strengths

  Average US project returns of approximately 10%-11% are above the company’s RES IRR target of above 8.5%, implying potential after-tax earnings upside of approximately €225mn.

  Weaknesses

  Returns depend on project execution, the policy environment, financing costs, and power market conditions.

  Comparison

  US project returns are higher than the RES IRR target in company guidance.

  Risks

  Poor execution of the renewables pipeline, higher interest rates, and policy or power price changes depressing IRRs.

• FlexGen

  Flexible generation business and source of earnings upside

  Strengths

  Rising power consumption, higher output, margin improvement, and 3GW of additional capacity by 2031 could contribute approximately €170mn to net profit.

  Weaknesses

  Earnings depend on capacity payments, power demand, and utilization hours of gas-fired power plants.

  Comparison

  The €75/kW capacity payment assumption is consistent with previous UK auctions and significantly below the €240/kW cap recently set by the German government.

  Risks

  Power demand below expectations, changes in capacity payment policy, and fuel price and power price volatility.

Key data

• RatingBuyThe rating has been Buy since April 3, 2023.
• 12-month target price€71.00Raised from €68.5 to €71.
• Current price€56.00Price disclosed on the report cover.
• Implied upside26.8%Based on the €71 target price and €56 current price.
• 2031E EPS upside scenario€5.52If the Amprion 55% stake, 9% ROE, and other upside factors are included, approximately 20% above company guidance.
• Potential 2031 net profit upsideApproximately €700mnDriven by Amprion ROE normalization, a reassessment of US renewables returns, and FlexGen upside.
• Potential Amprion earnings upsideApproximately €300mn after tax; approximately €0.40 EPSBased on an assumed Amprion ROE of approximately 9% in 2031.
• Potential US renewables earnings upsideApproximately €225mn after tax; approximately €0.30 EPSUS project returns of approximately 10%-11%, above the company’s target IRR of above 8.5%.
• Potential FlexGen earnings upsideApproximately €170mn; approximately €0.20 EPSDriven by rising power demand, margin improvement, and 3GW of additional capacity by 2031.
• 2026-2031E EBITDA CAGRApproximately 12%Primarily driven by capacity additions, FlexGen profit improvement, and better US returns.
• 2026-2031E clean EPS CAGRApproximately 15%; up to approximately 17% including the Amprion 55% scenarioThe report states that RWE could become one of Europe’s fastest-growing companies.
• 2027E SOTP€75.9/shareUsed for the two-thirds weighting of the target price.
• Existing asset value€61/shareUsed for the one-third weighting of the target price.
• 2030E P/EApproximately 12.5xA double-digit percentage discount to peers.
• Market capitalization€39.5bn / $45.2bnDisclosed in the report’s key data table.
• Enterprise value€68.0bn / $78.0bnDisclosed in the report’s key data table.

Impact & implications

If Goldman Sachs’ upside scenario materializes, RWE’s medium- to long-term earnings trajectory would be materially above company guidance and market consensus, and its valuation could re-rate upward from its current discount to peers. The investment implication is that the market may not yet fully reflect the combined impact of transmission asset returns, high US renewables IRRs, and FlexGen capacity revenues. The March 2027 CMD update could become an important catalyst for management to provide further disclosure on these upside opportunities.

Risks

• Economic recession and declining power demand.
• LNG and power prices below expectations.
• Higher sovereign yields.
• Renewables pipeline execution below expectations.
• GBP/USD depreciation.
• Negative cash flow from 2027 to 2031 due to sustained high capital expenditure.
• Uncertainty regarding completion of the Amprion transaction, ownership percentage, and ROE improvement assumptions.

What to watch

• Whether RWE discloses greater earnings potential for Amprion, US renewables, and FlexGen in its planned March 2027 CMD update.
• Whether Amprion ROE moves from the 6.5%-7.0% implied in company guidance toward peer levels.
• Whether US renewables project IRRs can remain at 10%-11%.
• The addition of 3GW of FlexGen capacity, capacity payment levels, and progress on Germany’s capacity mechanism policy.
• Whether RWE’s 2030-2031 EBITDA and EPS forecasts continue to be upgraded.
• Free cash flow and balance sheet pressure during the high-investment phase.