Offshore Defense And Energy Transition Demand Will Drive Stronger Long Term Prospects

Catalysts

About James Fisher and Sons

James Fisher and Sons is a specialist marine services and engineering company focused on energy, defense and maritime transport in complex offshore and subsea environments.

What are the underlying business or industry changes driving this perspective?

• Rising global defense spending and heightened underwater security needs are expanding the addressable market for JFD's submarine rescue, tactical diving vehicles and advanced rebreathers. This is supporting sustained growth in Defense revenue and higher operating margins as the enlarged order book converts.
• The long term build out and eventual life cycle renewal of offshore wind, together with regulatory decommissioning obligations in both wind and oil and gas, is creating a growing, less cyclical demand pool for James Fisher's subsea and decommissioning technologies. This is underpinning revenue visibility and improving return on capital employed.
• Global energy transition efforts, including electrification of rigs and growing offshore activity in regions such as the Middle East, Asia and Latin America, are driving increased need for well services, compressors and specialist marine logistics. This should support top line growth while scale and supply chain integration lift net margins.
• Deepening presence in strategic geographies such as the U.S., Japan, Australia and Latin America, enabled by structures such as the U.S. special security agreement and new regional bases, is broadening market access and customer proximity. This can accelerate order intake and improve earnings through better utilization of existing assets.
• Ongoing turnaround actions, including portfolio simplification, supply chain transformation and self help efficiency programs, are structurally lowering the cost base at the same time as new product development accelerates. This is creating operating leverage that can drive operating profit margin toward and beyond the 10 percent target and support stronger earnings growth.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming James Fisher and Sons's revenue will grow by 5.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 11.0% today to 1.2% in 3 years time.
• Analysts expect earnings to reach £5.9 million (and earnings per share of £0.25) by about December 2028, down from £44.7 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 54.4x on those 2028 earnings, up from 4.4x today. This future PE is greater than the current PE for the GB Infrastructure industry at 10.4x.
• Analysts expect the number of shares outstanding to grow by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.98%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Reliance on defense budgets and long procurement cycles exposes the company to political and fiscal shifts, such as reduced or delayed military spending in key markets like the U.S., U.K. and Asia. This could slow conversion of the GBP 315 million order book into revenue and constrain operating profit growth.
• The Energy division remains exposed to cyclicality in oil and gas and to project delays. For example, African projects slipping into 2026 and a weak LNG market affecting Fendercare could result in slower top line growth and pressure on net margins if utilization and day rates soften further.
• The strategy depends heavily on executing a complex turnaround, including self help cost programs, supply chain transformation and lifting underperforming units such as IRM, James Fisher Renewables and Fendercare to hurdle rates. Any execution missteps or cost overruns could stall margin progression toward the 10 percent underlying operating profit target and limit earnings expansion.
• Growth plans require sustained high capital and development expenditure of around GBP 30 million to GBP 35 million per year, new vessel leases and geographic expansion in regions like Japan, Guyana and Latin America. This may keep covenant leverage above the 1 to 1.5 times target range and increase interest expense, putting pressure on free cash flow and diluting return on capital employed.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of £4.88 for James Fisher and Sons 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 £5.3, and the most bearish reporting a price target of just £4.25.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be £482.7 million, earnings will come to £5.9 million, and it would be trading on a PE ratio of 54.4x, assuming you use a discount rate of 9.0%.
  
• Given the current share price of £3.92, the analyst price target of £4.88 is 19.6% higher. Despite analysts expecting the underlying business to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.