PRYMF - Prysmian: Supportive Trends Ahead
2023-12-23 03:22:33 ET
Summary
- There is supportive news that confirms Prysmian long-term trend. In detail, the company announced new CAPEX investments and a higher order backlog.
- The telco division is facing challenges, but the CEO confirmed a positive outlook starting from H2 2024.
- We see Prysmian as a resilient player with a profitable growth path. Our buy rating is then confirmed.
In less than two months since we initiated coverage , Prysmian S.p.A. ( PRYMF ) has already reached our target price of €40 per share ($19 in ADR). In the meantime, the company delivered a solid set of results and confirmed a positive long trend with supportive news. Yesterday, the company announced an investment of approximately €350 million to construct two new advanced cable-laying ships. This investment is a clear response to the growing demand for submarine cable systems for interconnection projects and offshore wind farms. According to our analysis, submarine cable is growing exponentially, backed by new interconnection projects and renewable energy offshore wind farms. This is a long-term trend both in Europe and the United States. Here at the Lab, we see this transaction as a positive confirmation of Prysmian's leadership within the sector and support the group's long-term profitability. In detail, the first ship is an evolution of the Mona Lisa and will be built by Vard Group. Vard has already built Prysmian's most advanced cable-laying ship, Leonardo da Vinci, delivered in 2021. The new vessel will be approximately 185 meters long and 34 meters wide. It will feature advanced cable installation solutions, including three rotating platforms with a total capacity of 19,000 tonnes and a towing force of over 180 tonnes. This vessel will be delivered in 2027. Meanwhile, the second ship, an evolution of the Ulisse class, should come into operation as early as the first half of 2025. Prysmian already has a fleet of six cable-laying ships: Barbarossa, Ulissa, Cable Enterprise, Giulio Verne, and the two most advanced, Leonardo da Vinci and Mona Lisa (under construction).
This last communication fully confirmed our investment thesis. Aside from the financials, we supported the Prysmian equity story thanks to " renewable energy needs, growing electricity demand with population growth, and technological advancement with more efficient grid. "
Our internal team has not commented on the Q3 results, so today, we briefly report our four supportive highlights:
- Prysmian's Q3 EBITDA was 3% above Wall Street estimates, thanks to solid momentum in Power Distribution and the viable execution of the Project division. In detail, looking at the results, the Project business contribution reported an organic sales growth of +23.9% thanks to the ongoing execution of offshore wind farm interconnection and cabling projects. In addition, this division has a higher marginality within the Group (11.7% compared to 10.4%);
- The telecom division faces significant destocking headwinds, with a particular slowdown in the North American region. During the Q&A call, the CEO expects a recovery starting from H2 2024;
- Despite a slowdown in telecom, there is high visibility in the High Voltage segment (HV), with the company's total order book at €20 billion. Here at the Lab, we see a more muted order book cancellation risk, and we should also report that projects carry cancellation penalties and advance payment. We see the 2027 target order target achievable, and Prysmian's ambitions plans are well-underpinned thanks to a yearly order book of €13 billion;
- The company confirmed an EBITDA outlook unchanged; however, this looks conservative since the guidance mid-point implies the lowest quarterly EBITDA level since Q1, 2022.
Source: Prysmian Q3 results presentation
Post Q3 results, Prysmian signed a contract with the Brazilian Petrobras worth over €100 million to supply 170 km of deep-sea cables and offshore logistics operation. The wires will be designed, manufactured, and delivered between 2024 and 2027. Once again, this new order confirms the long-lasting relationship between the two companies. In recent years, Prysmian expanded its Brazilian industrial facility to meet customer needs better. And again, the Italian company was awarded a €850 million contract assigned by Eastern Green Link 1 Limited. This new deal served to supply the national network between Scotland and England. Therefore, the company has almost €14 billion in backlog year-to-date.
Conclusion and Valuation
In our initiation of coverage, we were aligned with the internal company's outlook of an EBITDA of €1.62 billion. Given the supportive results, we have slightly increased the yearly number and reached an EBITDA of €1.65 billion. Our annual net debt is estimated at €930 million.
On an industrial basis, the telecom cable division continues to represent a drag on the group's financials; however, having said that, the Project contribution and Power Distribution should allow the group to maintain a stable growth trajectory in 2024. Here at the Lab, we do not expect significant changes in consensus estimates in 2024, but there might be a re-rating improvement. Indeed, the company trades at 9x the 2024 EV/EBIT, with a discount of around 15% compared to the sector. Today, we decided to increase our 2023-2025 EBIT estimates by 2%, and our target price moved from €40 to €43 per share, reiterating a buy. Our supportive equity story is based on high-voltage execution and lower cancellation risk in the company's order book. On a downside scenario, we emphasize how the Telecom division could further decline, and the construction markets might continue to suffer.
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Prysmian: Supportive Trends Ahead