On Thursday, Subsea 7 (OTC:SUBCY) SA (SUBC:NO) (OTC: SUBCY) experienced a revision in its stock outlook as Jefferies adjusted the price target to NOK230.00, down from the previous NOK240.00, while retaining a Buy rating on the company's stock. The adjustment follows a strong second quarter, which set high expectations for the subsequent quarter.
Despite a generally softer sentiment projected for the third quarter of 2024, with market consensus anticipating a marginal decrease in EBITDA margin quarter-over-quarter, Jefferies anticipates a slight increase in the Group margin, driven by the company's continued strong performance in the Renewables sector.
Jefferies' stance diverges from the market expectations primarily concerning the backlog, which is estimated to be around $11.5 million after a relatively quiet third quarter for new work. This figure falls short of the consensus. The analyst also noted that the free cash flow (FCF) might be partly influenced by investments in the fleet, specifically mentioning the acquisition of the vessel Seven Merlin.
The statement from Jefferies highlights the company's second-quarter achievements as a significant factor in current market attitudes, despite the softer outlook for the third quarter. The firm remains optimistic about Subsea 7's performance moving forward, particularly in the area of renewable energy projects, which is expected to contribute positively to the Group's overall profit margins.
The forecast for Subsea 7's backlog and free cash flow reflects the company's strategic decisions, including the investment in its fleet expansion. The acquisition of Seven Merlin is seen as a notable investment that may affect the company's financials in the short term.
In summary, while Jefferies has lowered the price target for Subsea 7, the investment firm maintains a positive outlook on the stock, underpinned by the company's robust performance in the renewables sector and its potential to improve profit margins. The revised price target reflects a more cautious expectation for the company's backlog and free cash flow due to recent investments.
In other recent news, offshore energy services provider Subsea 7 reported a significant increase in its financial performance for the second quarter of 2024. The company saw a record high in order intake and backlog, amounting to $4 billion in new awards. The firm's adjusted EBITDA surged by 80% year-over-year to $292 million, and net income rose to $63 million, up from $14 million in the same period the previous year. The company forecasts full-year revenue to be between $6.5 billion and $6.8 billion, with adjusted EBITDA between $1 billion and $1.05 billion.
However, Bernstein SocGen Group has downgraded Subsea 7, shifting its rating from Outperform to Market Perform, primarily based on valuation grounds. The firm also adjusted the price target to NOK214.00, a slight decrease from the previous NOK218.00. The analyst's estimates for return on capital employed range from 1.3% in 2023 to 9.2% by 2027, which still falls short of covering the estimated weighted average cost of capital of 10%.
Despite the downgrade, the report acknowledges Subsea 7's potential for strong free cash flow generation as the company enters what is described as a harvesting period. Cumulative free cash flow is expected to reach approximately $2.1 billion over the years 2025 to 2027, with yields potentially hitting 9-10%, 11-12%, and 16-18% respectively. These are the recent developments for Subsea 7.
InvestingPro Insights
To complement Jefferies' analysis, InvestingPro data provides additional context on Subsea 7's financial performance and market position. The company's market capitalization stands at $4.93 billion, with a P/E ratio of 35.31 based on the last twelve months as of Q2 2024. This valuation metric aligns with one of the InvestingPro Tips, which notes that Subsea 7 is "Trading at a high earnings multiple."
Despite the high P/E ratio, another InvestingPro Tip suggests that the stock is "Trading at a low P/E ratio relative to near-term earnings growth," with a PEG ratio of 0.17. This indicates potential undervaluation considering the company's growth prospects. The revenue growth of 16.21% over the last twelve months supports this view, showing strong top-line expansion.
The company's financial health appears solid, with InvestingPro Tips indicating that Subsea 7 "Operates with a moderate level of debt" and has been "Profitable over the last twelve months." These factors may contribute to the company's ability to invest in fleet expansion, as mentioned in the article.
Investors seeking more comprehensive analysis can access additional InvestingPro Tips, with 6 more tips available for Subsea 7 on the InvestingPro platform.
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