Expanded Capacity And Sustainability Focus Will Support Future Transmission Sector Prospects

Key Takeaways

• Strategic capacity expansions and strong Power Grid demand may consolidate higher EBITDA margins and enhance revenue stability.
  
• Emphasis on sustainable products and Encore Wire integration should boost pricing power and operational efficiencies.
  
• Challenges across multiple sectors, including integration impacts, market pressures, and strategic decisions, hinder profitability and growth, affecting EBITDA margins and top-line growth opportunities.

Catalysts

Produces, distributes, and sells power and telecom cables and systems, and related accessories under the Prysmian, Draka, and General Cable brands worldwide.

• Expected future growth in the transmission business, driven by expanded capacity and increased installation capability with new vessel additions, is likely to positively impact revenue and EBITDA margins.
  
• Strong demand in the Power Grid sector, especially in the U.S., coupled with strategic capacity expansions, suggests potential consolidation of higher EBITDA margins between 12% and 13% going forward.
  
• Integration of Encore Wire is expected to yield synergies, which should lead to operational efficiencies and cross-selling opportunities, positively impacting net margins and earnings.
  
• Increased focus on circular economy drivers and sustainable products, which comprised 43% of revenue, may provide pricing power and contribute to revenue growth through premium pricing strategies.
  
• High visibility on future growth due to a strong backlog in the Transmission sector, supported by new capacity expansions, should enhance revenue stability and predictability of earnings beyond 2025.

Prysmian Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Prysmian's revenue will grow by 8.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.3% today to 6.2% in 3 years time.
• Analysts expect earnings to reach €1.4 billion (and earnings per share of €4.77) by about March 2028, up from €729.0 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 24.2x on those 2028 earnings, up from 23.5x today. This future PE is greater than the current PE for the GB Electrical industry at 15.1x.
• Analysts expect the number of shares outstanding to grow by 5.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.21%, as per the Simply Wall St company report.

Prysmian Future Earnings Per Share Growth

Risks

• The integration of Encore Wire has introduced purchase price accounting effects, impacting depreciation, amortization, and net income, which could continue to affect reported earnings negatively.
  
• Power Grid sector's EBITDA margin target of 12% to 13% might suggest reduced profitability compared to 2024, possibly due to increased capacity leading to pricing pressure, which could impact net margins.
  
• Volatile weather conditions and potential tariffs in North America could affect copper building wire pricing, causing potential fluctuations in revenue and profitability in the Electrification segment.
  
• The decision not to pursue the Brayton Point capacity expansion in the U.S., originally expected to contribute significantly to revenue, could hinder growth opportunities in the Transmission segment, affecting top-line growth.
  
• Persistent challenges in the automotive sector and a slowdown in the Elevator business, driven by a weak residential market, have negatively influenced the Specialties sector's performance, impacting overall EBITDA margins.
  

Valuation

• The analysts have a consensus price target of €69.656 for Prysmian 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 €80.0, and the most bearish reporting a price target of just €32.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €21.7 billion, earnings will come to €1.4 billion, and it would be trading on a PE ratio of 24.2x, assuming you use a discount rate of 12.2%.
• Given the current share price of €59.64, the analyst price target of €69.66 is 14.4% 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.