Cox Energy - Reverse DCF Valuation Analysis

Undervalued Energy Play?

At EUR 1.28 per share, Cox Energy's valuation implies aggressive growth expectations but potentially offers significant upside if management executes on their ambitious 2026-2028 capital deployment program. The reverse DCF reveals that the market is pricing in:

• WACC of 9-11%: Reasonable for emerging market utilities with execution risk

• Terminal growth of 3-4%: Conservative given infrastructure nature

• Implied FCF growth scenario: Market expects Cox to achieve ~60-70% of management's 2028 targets

Verdict: At EUR 1.28, Cox appears to be moderately undervalued relative to management's stated run-rate targets, offering 50-100% upside if execution risks are managed successfully.

I. Company Overview & Valuation Framework

Key Financial Metrics (from October 2025 Capital Markets Day)

Capital Structure

• Gross Debt (2025e): ~€2,850M (excluding Iberdrola acquisition debt)

• Gross Debt (2028e): €6,000-6,400M

• Recourse Net Debt (2025e): ~€120M

• Target Gross Leverage: 4.0x EBITDA (2028 run-rate)

Share Count Estimation

The presentation provides FCF per share but not explicit share count. Working backwards:

Method 1 - From 2025 Pro Forma:

• Operating Cash Flow: €555M (midpoint)

• FCF per share: €0.60

• Implied shares: ~925 million

Method 2 - From 2028 Run-Rate:

• Operating Cash Flow: €1,300M (midpoint)

• FCF per share: €2.64

• Implied shares: ~492 million

The discrepancy suggests either:

1. Share count reduction through buybacks (unlikely given growth capex needs)

2. Different cash-to-FCF conversion assumptions

3. Dilution from Iberdrola acquisition financing

Conservative Assumption: 900 million shares outstanding post-acquisition

This implies:

• Market Cap: €1,152 million (900M shares × €1.28)

• Enterprise Value (2025): ~€4,000 million (€1,152M + €2,850M debt)

II. Reverse DCF Methodology

What is a Reverse DCF?

Instead of forecasting cash flows to determine fair value, we work backwards from the current stock price to determine what growth and returns the market is implicitly pricing in.

Formula:

Current Stock Price = PV of Future FCF + Terminal Value
                      All discounted at WACC

By solving for various scenarios, we can determine:

1. What FCF trajectory is implied at current price?

2. What terminal value assumptions are embedded?

3. Is the market too optimistic or pessimistic?

III. Reverse DCF Scenarios

Base Assumptions

• Current Price: EUR 1.28

• Shares Outstanding: 900 million

• Market Cap: EUR 1,152 million

• Net Debt (2025): ~€2,730M (using gross debt of €2,850M - €120M cash est.)

• Enterprise Value: ~€3,882 million

• WACC: 10% (base case for emerging market utility with moderate leverage)

• Terminal Growth Rate: 3% (long-term GDP + inflation)

• Projection Period: 2025-2028 (matching management guidance) + terminal value

Scenario 1: Market Implies 100% Achievement of Management Targets

DCF Calculation:

PV of FCF (2025-2028):
  2025: 555 / 1.10^0.5 = 528
  2026: 750 / 1.10^1.5 = 654  
  2027: 1,025 / 1.10^2.5 = 817
  2028: 1,300 / 1.10^3.5 = 945

Sum of PV of FCF = €2,944M

Terminal Value = 1,300 × (1.03) / (0.10 - 0.03) = €19,114M
PV of Terminal Value = 19,114 / 1.10^3.5 = €13,888M

Enterprise Value = 2,944 + 13,888 = €16,832M
Equity Value = 16,832 - 2,730 = €14,102M
Value per Share = 14,102 / 900 = €15.67

Result: If management achieves 100% of targets, fair value = EUR 15.67 per share Upside from EUR 1.28: 1,124% or 12.2x

Scenario 2: Market Implies 60% Achievement of 2028 Targets

DCF Calculation:

PV of FCF (2025-2028):
  2025: 500 / 1.10^0.5 = 476
  2026: 600 / 1.10^1.5 = 523
  2027: 720 / 1.10^2.5 = 574
  2028: 780 / 1.10^3.5 = 567

Sum of PV of FCF = €2,140M

Terminal Value = 780 × 1.03 / 0.07 = €11,474M
PV of Terminal Value = 11,474 / 1.10^3.5 = €8,336M

Enterprise Value = 2,140 + 8,336 = €10,476M
Equity Value = 10,476 - 2,730 = €7,746M
Value per Share = 7,746 / 900 = €8.61

Result: At 60% achievement, fair value = EUR 8.61 per share Upside from EUR 1.28: 573% or 6.7x

Scenario 3: What Growth Does EUR 1.28 Imply?

Working backwards from current price to solve for implied FCF:

Target Enterprise Value = Equity Value + Net Debt
                        = (1.28 × 900) + 2,730
                        = 1,152 + 2,730
                        = €3,882M

Assuming terminal growth of 3% and WACC of 10%, we can solve:

If we assume FCF grows from €500M (2025) to X (2028):

Let's test different 2028 FCF levels:

Result: At EUR 1.28, market implies 2028 FCF of approximately EUR 260-280M

This represents:

• 21-22% of management's €1,300M target

• 50% of 2025 pro forma €555M

• A decline of 14% CAGR from 2025 to 2028

Interpretation: The market is pricing in significant execution failure or believes management targets are extremely aggressive.

IV. Sensitivity Analysis

Impact of WACC on Valuation

Holding 2028 FCF constant at €780M (60% achievement):

Impact of Terminal Growth on Valuation

Holding 2028 FCF at €780M and WACC at 10%:

Impact of 2028 FCF Achievement on Valuation

Holding WACC at 10% and terminal growth at 3%:

V. Key Insights from Reverse DCF

What the Market is Telling Us

1. Extreme Skepticism: At EUR 1.28, the market prices in only ~20-25% achievement of management's 2028 run-rate targets

2. Execution Risk Premium: The ~75% discount to even a conservative 60% achievement scenario suggests:

   • High uncertainty around Iberdrola Mexico integration

   • Doubts about €5.5B capex execution

   • Regulatory/political risk in Mexico

   • General emerging market discount

3. Asymmetric Risk/Reward:

   • Downside: If Cox fails completely (FCF declines to €200M by 2028), stock could fall to €0.80-1.00 (-20-37%)

   • Upside: If Cox achieves 60% of targets, stock could reach €8-9 (525-600%)

   • Risk/Reward Ratio: ~10:1 upside/downside

Comparison to Management Targets

VI. Comparable Company Analysis (Sanity Check)

Utility Sector Multiples (Emerging Markets)

Cox Energy Implied Multiples

At Current Price (EUR 1.28):

• EV/EBITDA (2025 pro forma): 3,882 / 705 = 5.5x

• EV/EBITDA (2028 run-rate): 3,882 / 1,550 = 2.5x

• FCF Yield (2025): 555 / 3,882 = 14.3%

• FCF Yield (2028 if achieved): 1,300 / 3,882 = 33.5%

Analysis:

• 2025 EV/EBITDA of 5.5x is in line with LatAm utility peers

• 2028 EV/EBITDA of 2.5x would be extremely cheap if achieved

• Current FCF yield of 14.3% is significantly higher than 9.7% peer average, suggesting market skepticism

Fair Value Using Comparable Multiples:

If Cox trades at peer average 5.5x EV/EBITDA on 2028 run-rate:

EV = 1,550 × 5.5 = €8,525M
Equity Value = 8,525 - 6,200 (2028 debt) = €2,325M
Price per share = 2,325 / 900 = €2.58
Upside = 102%

This is far more conservative than DCF suggests because it doesn't give credit for continued growth beyond 2028.

VII. Bull vs Bear Case Valuation

Bull Case Assumptions (Probability: 30%)

• Management achieves 90-100% of 2028 targets

• Mexico energy market dynamics play out favorably

• Water desalination projects win additional bids

• Successful deleveraging to <3x by 2029

• Multiple re-rating as execution track record builds

Fair Value: EUR 12-15 per share (840-1,070% upside)

Base Case Assumptions (Probability: 40%)

• Management achieves 60-70% of 2028 targets

• Iberdrola integration goes reasonably well

• Some project delays but overall portfolio performs

• Leverage remains manageable at 3.5-4.5x

Fair Value: EUR 7-10 per share (447-681% upside)

Bear Case Assumptions (Probability: 30%)

• Management achieves only 30-40% of targets

• Major integration issues with Iberdrola Mexico

• Mexican political/regulatory headwinds

• Cost overruns on €5.5B capex program

• Forced asset sales or equity dilution

Fair Value: EUR 0.80-1.50 per share (-37% to +17%)

Probability-Weighted Fair Value

(30% × €13.50) + (40% × €8.50) + (30% × €1.15) = €7.80

Expected Value: EUR 7.80 per share Upside from current: 509% or 6.1x

VIII. What Would Need to Happen for Stock to Reach EUR 5.00?

Solving reverse DCF for EUR 5.00 target:

Market Cap at €5.00 = 900M × 5.00 = €4,500M
Enterprise Value = 4,500 + 2,730 = €7,230M

Required 2028 FCF (assuming 10% WACC, 3% terminal growth): Approximately €850-900M or 65-70% of management target

Catalysts needed:

1. Successful Iberdrola Mexico integration (Q1 2026 closing on track)

2. First €1.5-2B of capex deployed successfully (2026-2027)

3. Service Co. transformation delivering €30-40M of €45-50M target

4. Water pipeline winning 1-2 major desalination contracts

5. Maintained Investment Grade rating

6. No major regulatory setbacks in Mexico

Probability: 50-60% over 24-36 month timeframe

IX. Investment Decision Framework

Buy Thesis (Why EUR 1.28 is Attractive)

1. Extreme Margin of Safety: Market prices in near-complete failure; any moderate success creates massive upside

2. Asymmetric Payoff: 10:1 upside/downside ratio

3. Contracted Revenue: 90% of 2025 generation contracted provides downside protection

4. Proven Assets: Iberdrola Mexico is operating, not greenfield development

5. Strategic Value: Integrated utility model in high-growth Mexico market

6. Multiple Expansion: As execution track record builds, 5.5x could re-rate to 7-8x

Risks (Why EUR 1.28 Could Be Fair)

1. Execution Risk: €5.5B capex is enormous for a company with €1.2B market cap

2. Leverage Risk: Gross debt could reach 6x+ EBITDA before deleveraging

3. Mexico Political Risk: Government policies could change unfavorably

4. Dilution Risk: May need equity to fund growth if debt markets close

5. Integration Risk: Iberdrola Mexico integration is non-trivial

6. Emerging Market Discount: Structural discount may persist

Position Sizing Recommendation

Given high risk/high reward profile:

• Aggressive investor: 3-5% position (aim for 5-10x over 3-5 years)

• Moderate investor: 1-2% position (option-like exposure)

• Conservative investor: 0.5-1% position or pass entirely

Suggested Entry Strategy:

1. Build 50% position at current levels (~EUR 1.20-1.40)

2. Reserve 25% for EUR 1.00 or below (if opportunity arises)

3. Reserve 25% for adding on successful integration news

X. Conclusion

Summary Valuation Table

Final Verdict

At EUR 1.28, Cox Energy represents a compelling risk/reward opportunity for investors who:

1. Can tolerate high volatility (potential -30% to +500% over 2-3 years)

2. Believe in the fundamental Mexico energy demand story

3. Give management credit for 50-70% execution on stated targets

4. Can hold through integration noise (2025-2026)

5. Are comfortable with emerging market utilities exposure

The reverse DCF reveals that the market is pricing in near-complete failure. Even a mediocre 50-60% achievement of management's conservative targets would yield 400-500% returns.

The key question: Is management's "conservative" 2026-2028 plan actually achievable, or is the market's skepticism justified?

Rating: SPECULATIVE BUY with 2-3 year horizon and appropriate position sizing (1-3% portfolio weight)

Price Targets:

• 12-month: EUR 2.50-3.50 (as integration progresses)

• 24-month: EUR 5.00-7.00 (as capex deployed)

• 36-month: EUR 8.00-12.00 (as run-rate approached)

Right now it sits on my watchlist, which you can access in real-time in our community.

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