Offshore Wind And Carbon Capture Projects Will Yield Mixed Outcomes

Key Takeaways

• High order intake in offshore wind and CCS projects could drive future revenue growth and improve project margins.
  
• Strategic contract shifts and cost-saving synergies may enhance net margins and EBITDA, bolstering earnings growth.
  
• Operational challenges and geopolitical risks in renewables projects might affect margins and earnings, whereas increased oil and gas tenders hint at a strategic focus shift.

Catalysts

Provides solutions, products, systems, and services to the oil and gas industry in Norway, the United States, Brazil, the United Kingdom, Malaysia, Angola, Brunei, Canada, India, and internationally.

• Aker Solutions is experiencing high order intake driven by new contracts, particularly in offshore wind and carbon capture and storage (CCS) projects. This suggests potential future revenue growth as these projects are executed.
  
• The company’s strategic shift from traditional lump-sum contracts to models with balanced risk-reward profiles and joint incentives is expected to improve project margins. This may result in better net margins as risks and upsides are more closely tied to Aker’s performance.
  
• Significant progress on projects such as Johan Castberg FPSO and Aker BP initiatives highlights Aker Solutions’ capability to deliver complex projects. Continued success and timely execution of these projects can drive future earnings growth and improve the bottom line.
  
• Ongoing development of synergies in its OneSubsea operations, alongside an ambition to save $100 million annually, points to cost reductions that could increase EBITDA margins over time.
  
• With a robust tender pipeline of NOK 85 billion, primarily in Europe, and anticipated growth in the subsea and lifecycle services segments, Aker Solutions is well-positioned to expand its revenue base in the coming years.

Aker Solutions Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Aker Solutions's revenue will decrease by 8.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 5.1% today to 4.3% in 3 years time.
• Analysts expect earnings to reach NOK 1.7 billion (and earnings per share of NOK 3.7) by about May 2028, down from NOK 2.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting NOK2.6 billion in earnings, and the most bearish expecting NOK938 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.1x on those 2028 earnings, up from 5.1x today. This future PE is greater than the current PE for the GB Energy Services industry at 8.6x.
• Analysts expect the number of shares outstanding to decline by 1.88% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.28%, as per the Simply Wall St company report.

Aker Solutions Future Earnings Per Share Growth

Risks

• The legacy renewables projects are described as both operationally and commercially challenging, which could continue to negatively impact net margins until 2025.
  
• Challenges in resolving commercial issues with clients and subcontractors in legacy renewables projects might prolong, creating uncertainties or additional costs, affecting earnings.
  
• The geopolitical situation, particularly concerning tariffs and trade restrictions, is being closely monitored and could potentially disrupt the supply chain, impacting future revenue and operational costs.
  
• The segment of oil and gas in the tender pipeline is increasing, suggesting a potential shift in focus that could impact long-term revenue stability if renewables don't perform as expected.
  
• Potential delays in client investment decisions due to geopolitical factors could affect the timing and realization of new orders, thereby impacting future revenue streams.

Valuation

• The analysts have a consensus price target of NOK36.2 for Aker Solutions 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 NOK46.0, and the most bearish reporting a price target of just NOK30.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NOK39.4 billion, earnings will come to NOK1.7 billion, and it would be trading on a PE ratio of 12.1x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of NOK28.06, the analyst price target of NOK36.2 is 22.5% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.