LNG Expansion And Infrastructure Upgrades Will Secure Reliable Energy Supply

Key Takeaways

• Snam's expansion in LNG and storage capacity, alongside infrastructure upgrades, is set to boost revenues and secure a reliable energy supply chain.
  
• Strategic investments in energy transition initiatives and asset rotations are poised to enhance margins, earnings, and shareholder value.
  
• Regulatory and geopolitical uncertainties could destabilize Snam's revenue, while rising rates and capital spend may strain cash flow and profit margins.

Catalysts

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

• Snam's expansion in LNG capacity (increasing from 6 to 19 bcm) and organic growth in storage capacity position it to benefit from future energy demand, likely boosting revenues and securing a reliable supply chain.
  
• Investments in national infrastructure, including the completion of the Adriatic line and upgrades to export capacity to Austria, are expected to support growth and increase revenues and net margins by facilitating new connections and enhancing infrastructure resilience.
  
• Snam's advancements in energy transition initiatives, such as significant investments in biomethane plants and CO2 storage projects, are poised to contribute to revenue growth and improved net margins by enhancing its role in the decarbonization market.
  
• The projected growth in tariff RAB, driven by regulatory revenues and investment in gas infrastructure and storage, is expected to elevate EBITDA and earnings, providing improved financial performance and stability.
  
• The implementation of an employee stock ownership plan and strategic asset rotations, including financial acquisitions and disposals, are set to improve earnings per share and offer flexibility in capital allocation, driving value creation for shareholders.

Snam Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Snam's revenue will grow by 8.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 36.1% today to 31.4% in 3 years time.
• Analysts expect earnings to reach €1.4 billion (and earnings per share of €0.42) by about March 2028, up from €1.3 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 15.9x on those 2028 earnings, up from 12.0x today. This future PE is greater than the current PE for the GB Gas Utilities industry at 14.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.14%, as per the Simply Wall St company report.

Snam Future Earnings Per Share Growth

Risks

• The energy market and geopolitical situation remain unsettled, emphasizing the need for a reliable energy supply, which could impact gas demand and Snam's revenue and net profit.
  
• Rising interest rates have already impacted Snam's net profit despite significant growth in EBITDA, suggesting potential future financial strain that could affect net margins and earnings.
  
• Capital expenditures have increased significantly, totaling €8 billion between 2022 and 2024, with postponements already evident, potentially affecting future operational efficiency, cash flow, and earnings.
  
• The reshuffling of gas flows due to geopolitical tensions and fluctuating demand could continue to challenge Snam's ability to maintain its growth trajectory and stable revenue streams.
  
• Regulatory uncertainties like potential shifts in WACC calculations and deflator changes pose risks to Snam's financial planning and future return expectations, potentially impacting net income.

Valuation

• The analysts have a consensus price target of €5.15 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 2028, revenues will be €4.5 billion, earnings will come to €1.4 billion, and it would be trading on a PE ratio of 15.9x, assuming you use a discount rate of 9.1%.
  
• Given the current share price of €4.62, the analyst price target of €5.15 is 10.3% 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.