Execution Risks At Abu Dhabi Plant Will Shape Long Term Earnings Trajectory

Catalysts

About Tubacex

Tubacex produces seamless steel tubes and related solutions for energy, industrial, and emerging low carbon applications.

What are the underlying business or industry changes driving this perspective?

• Although the multi year ADNOC pipe and connection contract offers volume visibility with a take or pay structure, execution risk around ramping the Abu Dhabi plant to full capacity and managing $120 million of project working capital could pressure free cash flow and net debt reduction if schedules slip, which would feed through to earnings.
• Despite Tubacex highlighting strong positions in nuclear power and ultra supercritical boiler projects in Asia and India, actual investment decisions in these projects are being pushed out, so revenue conversion from the current pipeline may be slower than hoped, limiting top line and margin contribution in the near term.
• While the Sentinel Prime license with ADNOC is framed as a potential long term business line across CRA and non CRA pipes, the need for technical approvals, tender cycles and customer adoption in carbon steel and chrome alloys means monetisation beyond the roughly $50 million contract could take years, which tempers expectations for rapid growth in high margin licensing income and earnings.
• Even though aerospace and defense orders in North America currently cover more than 12 months, Tubacex is still early in expanding this activity to Asia and Europe, so any slowdown in global airframe or defense programmes would hit this growth leg quickly and limit diversification benefits for revenue and margin stability.
• Although the company is focusing on higher value products and long duration agreements in OCTG and Subsea, the ongoing slowdown in order intake, a book to bill ratio of 0.7x and delays in investment decisions at Petrobras and other oil and gas operators point to a risk that the €1.4b backlog normalises at lower levels over time, which could cap future revenue and keep EBITDA margins closer to the current 14% to 15% ambition rather than above it.

Assumptions

This narrative explores a more pessimistic perspective on Tubacex compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Tubacex's revenue will grow by 11.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.4% today to 6.5% in 3 years time.
• The bearish analysts expect earnings to reach €65.0 million (and earnings per share of €0.51) by about January 2029, up from €32.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.0x on those 2029 earnings, down from 12.9x today. This future PE is lower than the current PE for the GB Metals and Mining industry at 13.1x.
• The bearish analysts expect the number of shares outstanding to grow by 0.92% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.78%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Execution at the Abu Dhabi OCTG plant could scale smoothly, with the take or pay ADNOC contract and the $120 million of already manufactured product converting into cash as billing ramps. This would support deleveraging, strengthen the balance sheet and potentially lift earnings and net margins over time.
• The Sentinel Prime connection, already validated by ADNOC with a $50 million license payable through 2028, could gain wider adoption across CRA, chrome alloy and carbon steel pipes. This could turn licensing into a recurring business line that broadens revenue and supports higher margin contribution in the long term.
• Long duration contracts and premium positioning in Subsea, nuclear, ultra supercritical boilers and low carbon applications such as carbon capture could translate the current €1.4b backlog and pipeline of opportunities into sustained high value project flow. This would support revenue resilience and keep EBITDA margins closer to or above the current mid teens target range.
• Expanding presence in higher growth end markets such as aerospace and defense in North America, with more than 12 months of order coverage and potential extensions into Asia and Europe, could increase diversification away from more commoditised segments. This would support revenue stability and potentially improve overall group margins and earnings quality.
• If working capital genuinely has peaked around €384.6 million and begins to contract as ADNOC and Petrobras projects are invoiced and collected, the resulting fall in net debt from the current €369 million and improvement from the 3.1 times net debt to EBITDA ratio could improve financial flexibility, reduce interest costs and support higher net profit over the medium term.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Tubacex is €3.5, which represents up to two standard deviations below the consensus price target of €4.61. This valuation is based on what can be assumed as the expectations of Tubacex's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €5.6, and the most bearish reporting a price target of just €3.5.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be €1.0 billion, earnings will come to €65.0 million, and it would be trading on a PE ratio of 10.0x, assuming you use a discount rate of 13.8%.
  
• Given the current share price of €3.37, the analyst price target of €3.5 is 3.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.