Prysmian Stock: Well On Track To Deliver The ‘Connect To Lead’ Results (OTCMKTS:PRYMF)

Since our initiation of coverage, Positive Megatrends & Supportive Capital Allocation Priorities, Prysmian (OTCPK:PRYMF) delivered a >30% total return. Our team has already increased the target price to €43 per share, but after the results for the fiscal year 2023, the company is now > €46 per share. Our supportive equity story was supported by a new high-voltage commission and lower cancellation risk in Prysmian‘s order book. That said, we supported the company’s investment due to higher “renewable energy needs and growing electricity demand.” More efficient grid requirements also back this.

Ongoing Positive Upside

Before commenting on the just-released results, it is essential to follow our update called Supportive Trends Ahead. Recently, Prysmian communicated that it would supply a crucial high-voltage cable system for the Eastern Green Link 2 development network. This commission is now included in Prysmian’s order backlog and follows the company’s previous selection as the exclusive preferred bidder in May 2023. The new cable is expected to be operational in 2029 and will have a transmission capacity of approximately 2GW. In number, the finalized contract is worth around €1.9 billion. This cable will connect England and Scotland. Once completed, this infrastructure will unlock Scotland’s clean energy generation and further increase the United Kingdom’s ability to provide renewable energy for approximately two million homes.

The contract is significant, and it is likely to have above-average margins. In addition, the Projects division represents approximately 25% of the adjusted EBITDA, which is the main 2024 growth driver.

To support Prysmian’s investment case, the company also announced three new projects. This plan aims to install 70GW of offshore wind power by 2045 in Germany. Similarly to the Scotland-England cable, this project will connect North Sea renewable energy to consumers in Germany’s southern and western regions. BalWin1 and BalWin2 will each transmit up to 2GW of offshore North Sea wind energy. These contracts with Amprion represent a key milestone for the Italian company. This cable connection is a crucial infrastructure for the country’s energy transition.

In number, the three finalized contracts are worth approximately €5 billion. This is the most extensive package of contracts, both in terms of value and kilometers of cables, ever awarded to the group.

Q4 and Fiscal Year Results

After the Q3 results, we forecasted an EBITDA of €1.65 billion with an annual net debt of €930 million. Prysmian closed the 2023 financial statements with a 2023 profit below consensus but a higher-than-expected cash flow generation.

Top-line sales reached €15.35 billion and were down by 1.1% compared to 2022 results. In line with our thesis, the Projects Business performed very well, recording double-digit organic growth thanks to interconnection and offshore wind farm execution. Revenues from the Energy Business fell by 1.3%. An even more marked decline was recorded in the Telecom Business volumes, which signed at a minus 18.9% to 1.489 billion. The company’s adjusted EBITDA increased by 9.4% and reached approximately 1.63 billion, with margins improving to 10.6% versus a consensus estimate of 10.3%. The Projects Business now has greater profitability, while the sharp decline in the US Telco market had a negative impact, with an adjusted EBITDA falling to €140 million from €271 million achieved in 2022. The CEO confirmed this was due to accumulated inventories and supply chain interruptions. However, he explained that he is optimistic for H2 2024. The company’s clean EBITDA reached €1.49 billion, including net charges related to corporate reorganizations, for €143 million. This was the reason for lower profit against consensus expectations.

Source: Prysmian Q4 and FY results presentation

FCF increased by 29.5% to €724 million and was well above guidance. The strong cash generation decreased net financial debt to €1.18 billion. Based on these results, the board will propose a dividend of €0.70 per share. This is up by 16.7% versus the 2022 dividend payment. In numbers, the total payment amount will be approximately €191 million. The CEO confirms a trajectory to arrive at €1 per share payment in 2027. This is aligned with our estimates

Change in Estimates and Valuation

Starting with the CEO’s words, Prysmian “sound margins expansion and the strong cash generation achieved in 2023 confirmed the company’s resilience and the market leading position, thanks to our complete and balanced portfolio well exposed to the structural trends of the electrification and the energy transition.” The CEO also explained that he is confident in achieving the mid-term targets outlined on the capital market day. Here at the Lab, we believe the company has M&A upside, given its solid balance sheet and consolidated market position.

Our team was already ahead of the company’s target. In 2024, Prysmian expects to achieve an adjusted EBITDA between €1.57 and €1.67 billion with an FCF between €675 and €775 million. Looking at the 2027 targets, the company’s objectives are ambitious, with an adjusted EBITDA of €2 billion and an FCF of around €900 million. These objectives underlined limited geopolitical tensions as well as favorable price dynamics. We believe Wall Street had a negative view of the Prysmian 2024 forecast, and these numbers outlined a 5% increase in the consensus EBITDA estimate. Our disappointment came from the Telecom Business, which recorded a loss of €22 million in Q4. Even if a negative performance was expected, this net loss was due to a €20 million inventory write-off.

When we initiated Prysmian, the company was trading at a 15% discount compared to its closest comps (Nexans SA). This valuation gap is now closed. Prysmian trades at a 17x P/E in line with its normalized historical average and an EV/EBITA of 9x. Given that we were expecting higher EBITDA deliveries and lower indebtedness, we decided to maintain our target price of €43 per share, moving Prysmian to a neutral rating.

Downside risks include the decline of the telecom division and softness in the construction markets. There is also potential higher competition from Chinese fiber players on the medium-term horizon. Project execution due to geopolitical tension is another risk to consider.

Conclusion

Dividends represent an essential pillar of the group’s capital allocation strategy and reinforce our downside protection. Prysmian plans to progressively increase the total dividend distributed to shareholders by approximately 10% annually. In addition, the company has also in place a buyback. Maximum share repurchase is set at 10% of the share capital with a duration of 18 months. Prysmian’s strong position in high-voltage cables exposes it to an attractive market segment with excellent structural growth dynamics. That said, the valuation gap is closed, and the company entered into key agreements in the UK and Germany. We believe Prysmian valuation looks full, and even if the company has great potential, we feel satisfied with a plus 30% re-rating improvement.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.