Expansion Into Energy Transition Projects Will Drive Future Success

Key Takeaways

• Strategic projects in emerging markets and energy transition sectors are expected to drive future revenue and margin growth.
  
• Efficiency improvements and a focus on higher-margin services enhance profitability while maintaining strong shareholder return capacity.
  
• Geopolitical uncertainties and legacy project risks could impact Saipem's profitability, revenue growth, and cash flow, despite strategic shifts in project focus.

Catalysts

Provides energy and infrastructure solutions worldwide.

• Saipem's strong order intake, with projects in emerging markets like Suriname and strategic regions like the Middle East, is expected to bolster future revenue growth. The robust backlog provides high visibility for projected revenues in upcoming years. (Revenue)
  
• The strategic shift in the Onshore E&C business towards more predictable and higher-margin O&M services and derisked contracts is anticipated to enhance net margins, reducing the reliance on traditional EPC project risks. (Net Margins)
  
• Continued expansion in the energy transition sector, including projects in carbon capture, floating wind, and biofuels, is expected to drive long-term revenue and margin growth, tapping into increasing demand for sustainable infrastructure. (Revenue, Net Margins)
  
• Efficiency improvements in project execution, such as reducing drilling days for sockets in the Courseulles project and leveraging modularization, are poised to enhance profitability and EBITDA margins by minimizing cost overruns and improving project delivery times. (EBITDA Margins)
  
• The financial strategy to maintain a low debt level while proposing higher dividends indicates strong free cash flow generation and shareholder return capacity, enhancing the overall earnings outlook. (Earnings, Free Cash Flow)

Saipem Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Saipem's revenue will grow by 2.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.1% today to 4.2% in 3 years time.
• Analysts expect earnings to reach €653.3 million (and earnings per share of €0.33) by about April 2028, up from €306.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €862.9 million in earnings, and the most bearish expecting €519 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.7x on those 2028 earnings, up from 12.0x today. This future PE is greater than the current PE for the GB Energy Services industry at 8.7x.
• Analysts expect the number of shares outstanding to decline by 1.9% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.79%, as per the Simply Wall St company report.

Saipem Future Earnings Per Share Growth

Risks

• Challenges related to legacy projects like Courseulles and Thaioil continue to present significant execution risks, potentially impacting future profitability due to required provisions and cash outflows. This can affect net margins and earnings.
  
• The shift to more derisked EPC contracts and a focus on value over volume in onshore E&C, while strategically beneficial, might limit revenue growth opportunities in comparison to peers pursuing higher volumes.
  
• There are market dynamics and uncertainties in key regions such as potential contract terminations and client-dependent variables in projects like the Thaioil project, which could negatively impact revenue forecasts.
  
• The financial impact of fleet expansion through leases is expected to increase lease liabilities significantly, which could strain free cash flow if market conditions change, affecting net margins and earnings.
  
• Potential geopolitical and operational uncertainties in strategic regions like the Middle East could affect project execution timelines and order intake, impacting revenue visibility and growth expectations.

Valuation

• The analysts have a consensus price target of €3.121 for Saipem 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 €3.7, and the most bearish reporting a price target of just €2.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €15.6 billion, earnings will come to €653.3 million, and it would be trading on a PE ratio of 12.7x, assuming you use a discount rate of 12.8%.
• Given the current share price of €1.88, the analyst price target of €3.12 is 39.7% 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.