The AES CorporationAESNYSE

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DCF Valuation

DCF Valuation Summary

Strong Buy

Fair Value: $27.58 per share(market-calibrated)

+94.5%

Upside to Fair Value

Current

$14.18

Pure Model

$28.19

Fair Value

$27.58

Bull Case

$32.42

Bear Case

$24.05

Market Reality Check

Model Terminal Growth

2.00%

Market-Implied Growth

0.69%

Calibrated Growth

1.54%

Fair value uses 65% model / 35% market-implied terminal growth. Pure model: $28.19.

What's Driving This Ratingfor AES

↓

CapEx normalizing toward maintenance

Historical CapEx is 45.31% of revenue (heavy investment phase). Model fades this to 5.00% by Year 10, freeing up ~$5.7B in annual FCF. This is the biggest driver of long-term cash flow improvement.

✓

Premium margins already priced in

EBIT margin of 28.97% is already well above sector average. The model holds this level — there's limited room for margin expansion to drive upside. Valuation depends primarily on revenue growth.

→

Moderate revenue growth

Analyst consensus projects 2.49% revenue growth, fading to 2.00% by Year 10. Revenue reaches $14.2B (vs $12.2B today).

↔

Perpetuity and exit methods disagree

Perpetuity growth gives $17.38/share (11.6x terminal FCF) while exit multiple gives $39.00/share (22.6x terminal FCF). The 16x EV/EBITDA exit reflects current market multiples, while the perpetuity method with 2.00% growth is more conservative. The base case averages both methods.

🎯

Market pricing in lower growth than model

The market implies only 0.69% perpetual growth — 131bps below the model's 2.00%. This suggests the market sees headwinds or risks not in the model.

✓

Strong cash flow conversion

Year 10 FCF/EBITDA conversion of 70.89% indicates efficient cash generation. FCF reaches $3.9B by Year 10 (27.44% FCF margin).

Weighted Average Cost of Capital (WACC)

Cost of Equity (CAPM)

Risk-Free Rate (Rf)4.50%

Beta (β)0.94

Market Risk Premium4.50%

*Using current implied premium (4.5% per Damodaran 2026), not historical (6.5%)

Cost of Equity (Re)8.71%

Cost of Debt

Pre-tax Cost of Debt17.60%

Tax Rate21.00%

After-tax Cost of Debt13.90%

Equity Weight (E/V)59.25%

Debt Weight (D/V)40.75%

WACC Calculation

WACC = (E/V × Re) + (D/V × Rd × (1-Tc))

WACC = (59.25% × 8.71%) + (40.75% × 13.90%)

= 10.83%

10-Year Free Cash Flow Projections(showing years 1, 3, 5, 7, 10)

Year	Year 1	Year 3	Year 5	Year 7	Year 10
Revenue	$12.5B	$12.4B	$12.9B	$13.4B	$14.2B
EBIT	$3.6B	$3.6B	$3.7B	$3.9B	$4.1B
Tax	$763M	$754M	$784M	$816M	$866M
NOPAT	$2.9B	$2.8B	$3.0B	$3.1B	$3.3B
+ Depreciation	$1.2B	$1.2B	$1.3B	$1.3B	$1.4B
- Capex	$5.7B	$4.5B	$3.5B	$2.5B	$712M
- Δ NWC	$29M	-$38M	$24M	$25M	$26M
Free Cash Flow	-$1.6B	-$424M	$651M	$1.9B	$3.9B
Discount Factor	0.902	0.735	0.598	0.487	0.358
Present Value	-$1.5B	-$312M	$389M	$915M	$1.4B

FCF Formula: Free Cash Flow = NOPAT + Depreciation - Capex - Change in Net Working Capital

Terminal Value Calculation

Perpetuity Growth Method

Year 10 FCF$3.9B

Terminal Growth Rate2.00%

WACC10.83%

TV = FCF₁₀ × (1+g) / (WACC-g)

Terminal Value$45.2B

PV of Terminal Value$16.2B

Exit Multiple Method

Year 10 EBITDA$5.5B

Exit Multiple (EV/EBITDA)16.0x

TV = EBITDA₁₀ × Exit Multiple

Terminal Value$88.2B

PV of Terminal Value$31.5B

Valuation Summary

Perpetuity Growth Method

PV of Projected FCFs$3.2B

PV of Terminal Value$16.2B

Enterprise Value$19.3B

(-) Net Debt$6.9B

Equity Value$12.4B

Shares Outstanding712M

Price per Share$17.38

Exit Multiple Method

PV of Projected FCFs$3.2B

PV of Terminal Value$31.5B

Enterprise Value$34.7B

(-) Net Debt$6.9B

Equity Value$27.8B

Shares Outstanding712M

Price per Share$39.00

Pure Model Fair Value

$28.19

Average of perpetuity growth and exit multiple methods (before market calibration)

Sensitivity AnalysisPrice per Share

WACC ↓ / Growth →	1.00%	1.50%	2.00%	2.50%	3.00%
8.83%	$37.66	$38.78	$40.06	$41.54	$43.28
9.83%	$31.81	$32.62	$33.52	$34.55	$35.73
10.83%	$26.94	$27.53	$28.19	$28.93	$29.77
11.83%	$22.80	$23.25	$23.74	$24.29	$24.90
12.83%	$19.24	$19.59	$19.96	$20.38	$20.83

How to read: This table shows how the valuation changes with different WACC (discount rate) and terminal growth rate assumptions. Green = undervalued, Red = overvalued.

Scenario Analysis

Bear Case

$24.05

69.6% vs current

• -25% vs analyst consensus
• Terminal growth: 2.0%
• Beta: 1.17

Base Case

$28.19

98.8% vs current

• Analyst consensus
• Terminal growth: 2.0%
• Beta: 0.94

Bull Case

$32.42

128.6% vs current

• +25% vs analyst consensus
• Terminal growth: 2.5%
• Beta: 0.80

Key Assumptions & Drivers• Utilities Sector

Growth Assumptions (Select Years)

Year 1 Revenue Growth2.49%

Year 3 Revenue Growth-3.14%

Year 5 Revenue Growth2.00%

Year 7 Revenue Growth2.00%

Year 10 Revenue Growth2.00%

Terminal Growth Rate2.00%

Margin & Efficiency

Current EBIT Margin28.97%

Tax Rate21.00%

Historical Capex / Rev45.31%

Terminal Capex / Rev5.00%

NWC / Revenue9.41%

Key Drivers: Revenue growth, operating margin expansion, capex efficiency, and working capital management are the primary drivers of cash flow generation. Terminal value assumptions significantly impact final valuation.

Institutional-Grade Methodology

Actual Company Data: Revenue, EBIT, Capex, NWC, Tax Rate, Interest Expense, Beta

Market Assumptions: Risk-free: 4.5% (10Y), MRP: 4.5% (Damodaran 2026), Exit: 16x EV/EBITDA (Utilities sector)

This DCF model is for informational purposes only. Projections are based on assumptions that may not materialize. Past performance does not guarantee future results. Consult a financial advisor before making investment decisions.

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