Electrification Investments Will Unlock New Value Pools

Key Takeaways

• Strategic acquisitions in electrification and capacity expansion investments are key drivers for Nexans' future revenue and profitability growth.
  
• Strong order growth and strategic geographic expansion will sustain revenue growth and enhance earnings stability.
  
• Divestment and economic risks threaten revenue stability, while upcoming CapEx and project execution risks could pressure cash flow and profit margins.

Catalysts

Manufactures and sells cables in France, Canada, Norway, Germany, and internationally.

• Nexans has focused on reshaping its portfolio by divesting non-core sectors and acquiring companies in the electrification sector, thus boosting electrification revenue by €1.3 billion, which is expected to drive future revenue and profitability growth.
  
• Significant investments of nearly €1 billion in capacity expansion and advanced technology in key sectors, including doubling PWR-Transmission manufacturing and installation capacity, are expected to contribute positively to revenue growth and margins over the coming years.
  
• Nexans’ strong order growth, with an order intake of more than €8.2 billion, particularly in PWR-Transmission, reflects a robust market demand that will likely sustain revenue growth and enhance earnings stability in the future.
  
• The strategic focus on electrification is set to increase its contribution to more than 74% of the group, with an outperforming EBITDA margin of 13%, compared to the overall group margin of 11%, potentially leading to higher overall net margins.
  
• Nexans plans to redeploy proceeds from divestments and treasury towards further acquisitions, unlocking new value pools through technology solutions and expanding its footprint to high-growth verticals and geographies outside Europe, expected to drive revenue expansion and improved earnings.

Nexans Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Nexans's revenue will decrease by 2.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.3% today to 5.1% in 3 years time.
• Analysts expect earnings to reach €407.6 million (and earnings per share of €9.21) by about March 2028, up from €279.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.3x on those 2028 earnings, up from 14.5x today. This future PE is greater than the current PE for the GB Electrical industry at 15.5x.
• Analysts expect the number of shares outstanding to decline by 0.33% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.77%, as per the Simply Wall St company report.

Nexans Future Earnings Per Share Growth

Risks

• The divestment of non-electrification businesses could potentially reduce revenue streams and impact overall business diversification, affecting future revenue stability.
  
• Despite the focus on electrification, the company’s exposure to economic downturns in certain regions, such as Europe, presents risks that could impact revenue and EBITDA growth.
  
• The mention of significant upcoming CapEx for strategic projects, including vessel building and recycling capacity expansion, indicates potential pressures on future free cash flow and profit margins.
  
• There is a reliance on the successful execution of large projects like GSI, where delays or cancellations could create revenue gaps and affect margin expectations.
  
• The company faces execution risks related to international expansion and potential geopolitical issues, which could hinder revenue growth and present unforeseen costs.

Valuation

• The analysts have a consensus price target of €120.329 for Nexans based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €150.0, and the most bearish reporting a price target of just €94.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €7.9 billion, earnings will come to €407.6 million, and it would be trading on a PE ratio of 16.3x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of €92.9, the analyst price target of €120.33 is 22.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.