Energy Transition With CCUS And Biorefineries Will Create Future Opportunities

Key Takeaways

• Strategic focus on energy transition sectors like CCUS and biorefineries is expected to drive future revenue growth through new contract awards.
  
• Strong order backlog and cash position ensure revenue visibility and potential margin improvements through better capital management and reduced financial costs.
  
• Increasing lease liabilities and significant debt could strain Saipem's cash flow and net earnings, with global economic slowdown and legacy costs posing additional risks.

Catalysts

Provides energy and infrastructure solutions worldwide.

• Saipem's strategic repositioning in the energy transition sector is set to increase future revenues, focusing on niche segments such as CCUS (Carbon Capture, Utilization, and Storage) and biorefineries, supported by recent contract awards.
  
• Improved management of working capital alongside better contractual terms should contribute positively to net margins, as there is a reduction in risk and more advantageous terms over previous projects.
  
• The company's robust backlog, providing 90% revenue coverage for 2025 and substantial coverage through 2026, ensures strong visibility on top-line growth, underpinning confidence in stable future revenues.
  
• Progress in executing long-term contracts, particularly in the offshore sector, is likely to sustain EBITDA growth, driven by increased order intake and strategic expansions in maintenance and CapEx services.
  
• Saipem's strengthened balance sheet, with significant available cash and reduced net debt position, positions the company to continue reducing financial costs, potentially improving earnings through lower interest expenses.

Saipem Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Saipem's revenue will grow by 1.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.2% today to 4.2% in 3 years time.
• Analysts expect earnings to reach €658.5 million (and earnings per share of €0.32) by about May 2028, up from €326.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €783.6 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 11.7x on those 2028 earnings, down from 12.3x today. This future PE is greater than the current PE for the GB Energy Services industry at 8.8x.
• 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 10.55%, as per the Simply Wall St company report.

Saipem Future Earnings Per Share Growth

Risks

• Increasing lease liabilities due to the growth of the fleet on a chartered basis, including new vessels like the Bold Tern and Chiyoda, could strain cash flow and impact net margins if not managed carefully.
  
• The potential global economic slowdown could affect Saipem's project execution and lead to delays or cancellations, impacting future revenue expectations.
  
• Provisions used to cover legacy project costs indicate continued financial liabilities from past projects, which could negatively affect net earnings if additional provisions are required.
  
• Saipem’s significant debt and financial expense increases, including a rise in hedging costs, could pressure net earnings, especially if interest rates or financial markets shift unfavorably.
  
• Dependency on client engagement for project execution and potential legal issues, like those related to the Thaioil project, pose a risk to revenue stability and net margins if resolutions are not timely.

Valuation

• The analysts have a consensus price target of €3.096 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 €15.5 billion, earnings will come to €658.5 million, and it would be trading on a PE ratio of 11.7x, assuming you use a discount rate of 10.5%.
  
• Given the current share price of €2.04, the analyst price target of €3.1 is 34.1% 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.