On Thursday, CFRA raised the price target on Snam SpA (SRG:IM) (OTC: OTC:SNMRY) to EUR5.00 from the previous EUR4.50 while maintaining a Hold rating. The adjustment came after Snam reported a 17.8% year-over-year increase in EBITDA for the first quarter of 2024, reaching EUR703 million, which was below the consensus estimate of EUR934 million. This growth was attributed to strong regulated revenues, although it was partially offset by a lower contribution from the energy transition business.
The firm upgraded its 2024 EBITDA guidance to more than EUR2.75 billion from EUR2.7 billion and increased its investment target to EUR3 billion from EUR2.9 billion. This optimistic outlook follows the company's performance in the first quarter. Despite these positive adjustments, Snam forecasts a slight decrease in Italian gas demand for 2024, expecting a 2.6% year-over-year decline. This projection aligns with the anticipated drop in thermoelectric production and reflects broader expectations of reduced electricity demand in Italy.
The analyst from CFRA pointed out that Snam's valuation, based on a 2024 EV/EBITDA multiple of 10.9x, remains below its five-year forward average EV/EBITDA of 12.5x. This valuation takes into account the weaker outlook for Italian gas demand. While recognizing Snam's solid financial results, the analyst noted that the company's stable yet unappealing earnings prospects, combined with uncertainty regarding declining allowed returns and slowing dividend growth, warrant a continuation of the Hold rating.
In summary, Snam has shown resilience with its recent financial performance and has proactively updated its financial guidance for 2024. However, the tempered expectations for gas demand in Italy and the potential for reduced returns contribute to the firm's decision to maintain a cautious stance on the stock with a Hold rating, despite the increase in the price target.
InvestingPro Insights
Recent data from InvestingPro presents a nuanced picture of Snam SpA's financial health and market position. The company's market capitalization stands at $16.42 billion, reflecting its significant presence in the energy sector. A low P/E ratio of 13.33, adjusted to 11.7 for the last twelve months as of Q4 2023, suggests that Snam's stock could be undervalued relative to its earnings, which could catch the eye of value investors. Moreover, the PEG ratio for the same period is notably low at 0.2, indicating that the stock's price is potentially undervalued based on its earnings growth projections.
InvestingPro Tips highlight that Snam operates with a significant debt burden, which investors should consider when evaluating the company's financial stability. On the positive side, Snam has a track record of raising its dividend for 7 consecutive years, demonstrating its commitment to returning value to shareholders. Additionally, Snam's dividend yield as of early 2024 is an attractive 5.69%, with a substantial increase of 50.56% in dividend growth for the last twelve months as of Q4 2023. This could be particularly appealing to income-focused investors.
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