A Dynamic Shift Into Green Energy Solutions Drives Future Growth

Key Takeaways

• Diversifying into hydrogen and carbon capture may drive growth and diversify income through infrastructure development and strategic acquisitions.
  
• Regulatory changes could influence net margins and earnings, impacting infrastructure investments and green energy projects.
  
• Supply disruptions and regulatory changes pose risks to Snam's revenue stability and future earnings amidst declining gas demand and potential interest rate hikes.

Catalysts

Engages in the operation of natural gas transport and storage infrastructure.

• Snam's ambition to transition into a multi-molecule infrastructure operator, with investments targeting hydrogen and carbon capture, is expected to drive future revenue growth and diversify its income streams.
  
• The acquisition of Edison Stoccaggio, along with the Adriatic LNG transaction, is anticipated to enhance Snam's industrial and strategic position, potentially increasing net profit and impacting earnings positively.
  
• The company's focus on energy transition projects, such as the Ravenna CCS project and collaborations on hydrogen production and transport, could contribute to higher future revenues and margin improvements as demand for green energy solutions grows.
  
• Snam's significant investment plan, with an up to €26 billion cumulative CapEx envisioned by 2032, aims to fuel infrastructure expansion and technological advancements, supporting long-term revenue and RAB growth.
  
• Regulatory changes and updates, such as the forthcoming WACC parameters and carbon capture framework, could influence Snam's net margins and earnings, especially if supportive of infrastructure investments.

Snam Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Snam's revenue will grow by 3.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 25.5% today to 29.2% in 3 years time.
• Analysts expect earnings to reach €1.3 billion (and earnings per share of €0.39) by about November 2027, up from €1.0 billion 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 16.6x on those 2027 earnings, up from 13.9x today. This future PE is lower than the current PE for the GB Gas Utilities industry at 20.0x.
• Analysts expect the number of shares outstanding to grow by 0.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.7%, as per the Simply Wall St company report.

Snam Future Earnings Per Share Growth

Risks

• The European gas market faces potential supply disruptions due to Russia-Ukraine tensions, which could lead to increased gas prices and affect Snam’s revenue and margin stability.
  
• Italy's domestic gas demand has declined due to historically low thermoelectric production and milder weather, which may result in lower revenues for Snam if the trend continues or worsens.
  
• Regulatory changes concerning the weighted average cost of capital (WACC) and RAB indexation are pending, and any unfavorable decisions could negatively impact Snam's future earnings.
  
• The transition strategy carries execution risks related to its integration and profitability, potentially affecting future earnings if costs outweigh the benefits.
  
• Increased net debt levels, despite the financial flexibility from hybrid instruments, could pressure interest expenses, affecting net income if interest rates rise further.

Valuation

• The analysts have a consensus price target of €5.04 for Snam 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 €5.9, and the most bearish reporting a price target of just €4.2.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €4.5 billion, earnings will come to €1.3 billion, and it would be trading on a PE ratio of 16.6x, assuming you use a discount rate of 8.7%.
• Given the current share price of €4.31, the analyst's price target of €5.04 is 14.6% 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.