Natural Gas Projects And Fleet Utilization Will Boost Revenue Growth And Enhance Margins

Key Takeaways

• High order intake and backlog in offshore E&C ensure future revenue growth, supporting upgraded guidance and consistent revenue streams.
  
• Strategic market expansion and cash flow focus enhance earnings potential through diversified growth, optimized margins, and reduced financial expenses.
  
• Saipem's financial performance is at risk from volatile oil prices, client suspensions, execution challenges, capacity constraints, and geopolitical factors affecting revenue and margins.

Catalysts

Provides energy and infrastructure solutions worldwide.

• Saipem's recent high order intake, particularly in offshore E&C, and a record backlog provide strong visibility for future revenue growth, supporting an upgraded revenue guidance for 2024. This can positively impact revenue in the coming years.
  
• Expansion in core markets such as Saudi Arabia, Qatar, and emerging markets like Latin America and Namibia provide diversified growth opportunities, which could lead to consistent revenue streams and possible improvements in earnings.
  
• The focus on natural gas projects and optimization of existing hydrocarbon fields ensures resilience to oil price volatility. This shift is likely to sustain or improve EBITDA margins, enhancing net margins given their potentially better economics.
  
• Strategic fleet management with fully booked E&C vessels until 2026, and significant future commitments, implies efficient asset utilization, supporting a steady or improved EBITDA and contributing to higher earnings as fixed costs are spread over more projects.
  
• Continued focus on cash flow generation and debt reduction, with plans to upgrade credit ratings, could lead to better net margins and earnings through reduced financial expenses, providing more capital for growth initiatives or shareholder returns such as dividends.

Saipem Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Saipem's revenue will grow by 2.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.2% today to 4.6% in 3 years time.
• Analysts expect earnings to reach €685.9 million (and earnings per share of €0.35) by about December 2027, up from €307.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €902 million in earnings, and the most bearish expecting €500 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.2x on those 2027 earnings, down from 16.3x today. This future PE is lower than the current PE for the GB Energy Services industry at 16.1x.
• Analysts expect the number of shares outstanding to grow by 0.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.43%, as per the Simply Wall St company report.

Saipem Future Earnings Per Share Growth

Risks

• Saipem faces risks related to volatile oil prices, which can affect the level of exploration and production (E&P) investments, thereby impacting revenue and earnings, especially since oil projects comprise a significant portion of their operations.
  
• The temporary suspension of activities by key client Saudi Aramco on several jack-up rigs has affected the offshore drilling operations, potentially impacting revenue and net margins.
  
• The ongoing execution challenges with large projects such as Mozambique LNG and Courseulles pose risks to the timely realization of revenue and may affect profit margins if delays and inefficiencies persist.
  
• With a high level of capacity utilization in their engineering and construction workforce and fleet, Saipem may face execution risks, which could lead to increased operational costs and affect net margins if additional demand pressures the company's resources.
  
• The geopolitical macro scenario might complicate investment environments in key regions, affecting Saipem’s order intake and potentially leading to fluctuations in future revenue streams.

Valuation

• The analysts have a consensus price target of €3.07 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 €3.5, and the most bearish reporting a price target of just €2.2.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €14.8 billion, earnings will come to €685.9 million, and it would be trading on a PE ratio of 12.2x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of €2.55, the analyst's price target of €3.07 is 17.0% 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.