Great Sea Interconnector And Copper Recycling Investments Propel Revenue And Margins

Key Takeaways

• Significant investment in copper recycling and electrification projects aligns with revenue growth and enhanced margins via new revenue streams and margin-focused growth.
  
• Large CapEx investments in high-demand cable production aim to boost profitability, supported by a robust project backlog ensuring future revenue and earnings stability.
  
• Nexans faces challenges with inventory reduction, automotive market weaknesses, copper scarcity, project execution risks, and weak construction, impacting revenue and profit margins.

Catalysts

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

• Nexans is investing significantly in recycling capabilities for copper, with €80 million allocated to new facilities that will enable the company to recycle substantial volumes of copper, potentially creating a new revenue stream and improving margins through secondary copper sales.
  
• The ongoing commitment to electrification, demonstrated by strong growth in Generation & Transmission and new high-voltage onshore cable projects, suggests sustained revenue growth driven by demand for infrastructure upgrades.
  
• Large CapEx investments, including a €90 million facility for onshore cables and further expansions in low-carbon medium-voltage cable production, aim to meet high demand and are expected to boost revenue growth and profitability over the coming years.
  
• The strong backlog, particularly in Generation & Transmission, with projects like the Great Sea Interconnector, is likely to ensure robust future revenue and earnings as these projects transition to execution and completion phases.
  
• Continued strategic selectivity and margin-focused growth in key sectors like Electrification and Distribution, combined with prudent inventory management adjustments, are anticipated to enhance net margins and financial stability moving forward.

Nexans Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Nexans's revenue will decrease by -1.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.3% today to 5.7% in 3 years time.
• Analysts expect earnings to reach €444.2 million (and earnings per share of €10.11) by about January 2028, up from €263.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €498 million in earnings, and the most bearish expecting €371.0 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.3x on those 2028 earnings, down from 17.3x today. This future PE is lower than the current PE for the GB Electrical industry at 22.9x.
• Analysts expect the number of shares outstanding to grow by 0.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.76%, as per the Simply Wall St company report.

Nexans Future Earnings Per Share Growth

Risks

• Nexans experienced a weak Q3 due to inventory reduction, which caused delays in deliveries, affecting revenue and potentially impacting net margins.
  
• The automotive harnesses segment saw a double-digit decline in sales, reflecting broader market challenges in the automotive industry, which could dampen earnings.
  
• Concerns about copper scarcity present a risk, as it could lead to increased material costs and affect the company's ability to maintain profit margins.
  
• Destocking in North America and weak construction in Europe, particularly in the residential sector, could lead to reduced sales and impact revenue growth.
  
• The reliance on large projects, such as the Great Sea Interconnector, poses execution risks and the potential for political and geopolitical disruptions, which could affect revenue recognition and profitability.

Valuation

• The analysts have a consensus price target of €126.55 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 €157.0, and the most bearish reporting a price target of just €100.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €7.8 billion, earnings will come to €444.2 million, and it would be trading on a PE ratio of 15.3x, assuming you use a discount rate of 7.8%.
• Given the current share price of €104.2, the analyst's price target of €126.55 is 17.7% 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.