Successful Integration And Renewable Energy Focus Will Strengthen Future Prospects

Key Takeaways

• Selective bidding and portfolio high-grading in key projects are anticipated to enhance profit margins and support margin expansion.
  
• Successful integration and increased activity in core markets are projected to boost operating income, supporting future earnings growth.
  
• High tax rates, increased competition, and project execution risks could constrain Subsea 7's growth and profitability despite improving market conditions.

Catalysts

Subsea 7 S.A. delivers offshore projects and services for the energy industry worldwide.

• Subsea 7 has a robust backlog of $11.2 billion, with 80% of 2025 revenue already visible, providing strong future revenue growth certainty.
  
• The company’s selective bidding and portfolio high-grading in offshore wind and conventional and subsea projects are expected to enhance profit margins, indicating potential margin expansion.
  
• Increased tender opportunities, particularly in Brazil and new markets like Namibia, bolster prospects for sustaining revenue growth and strong order intake in the coming years.
  
• Recent successful integration of OneSubsea and increased activity in core renewable markets are projected to enhance net operating income, supporting earnings growth.
  
• Controlled capex and focus on operational efficiency, combined with improved profitability in global operations, are likely to stabilize and eventually improve net margins and free cash flow.

Subsea 7 Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Subsea 7's revenue will grow by 2.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.9% today to 7.3% in 3 years time.
• Analysts expect earnings to reach $539.6 million (and earnings per share of $1.79) by about April 2028, up from $201.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $761 million in earnings, and the most bearish expecting $353.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.5x on those 2028 earnings, down from 20.1x today. This future PE is greater than the current PE for the GB Energy Services industry at 7.8x.
• Analysts expect the number of shares outstanding to decline by 1.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.34%, as per the Simply Wall St company report.

Subsea 7 Future Earnings Per Share Growth

Risks

• Subsea 7's high effective tax rate, which is expected to remain between 40% and 45%, could constrain net income growth despite improving profitability.
  
• Increasing competition in the Brazilian SURF market, with new entrants like Allseas and McDermott, may impact Subsea 7's pricing power and margins in a key market.
  
• Project execution risks, particularly in new regions like Namibia and large-scale offshore wind operations, could impact revenue and profitability if unforeseen challenges arise.
  
• A significant increase in planned maintenance days for vessels, from 460 to 600 days in the first quarter of 2025, could reduce operational efficiency and affect quarterly earnings.
  
• Volatility in foreign exchange markets has led to substantial non-cash losses, creating uncertainty in financial results and potentially impacting net income unpredictably.

Valuation

• The analysts have a consensus price target of NOK220.257 for Subsea 7 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 NOK257.28, and the most bearish reporting a price target of just NOK160.81.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.4 billion, earnings will come to $539.6 million, and it would be trading on a PE ratio of 13.5x, assuming you use a discount rate of 7.3%.
• Given the current share price of NOK145.5, the analyst price target of NOK220.26 is 33.9% 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.