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THIRD QUARTER 2010<br />
Prysmian<br />
Order book recovering, profits will follow<br />
Prysmian’s orderbook for higher margin products has recovered<br />
during the 2Q which gives us increased confidence on 2010 earnings.<br />
2011 should see strong earnings growth due to more profitable<br />
Transmission, Submarine and OGP projects flowing through<br />
Prysmian’s P&L. We continue to believe the stock is inexpensive,<br />
trading on 6.9x 2011E EV/EBITA versus the sector on 9.2x. Our target<br />
multiple of 9.0x 2011E EV/EBITA implies a fair value of €17.5 per<br />
share. We reiterate our Buy rating.<br />
T&D newsflow and orderbook are recovering<br />
Prysmian’s order book fell from 5.4 months to 4.7 months during 1Q2010, due to<br />
unfavorable weather conditions for the T&D businesses and continued investment<br />
uncertainty. Over the 2Q, newsflow and orders have improved markedly, with<br />
Siemens now publicly stating power orders have troughed, some high profile T&D<br />
orders and most other power players reporting more supportive conditions. This<br />
has bolstered Prysmian’s order book materially and the company now has 5.9<br />
months of orders for the group. High Voltage has increased from 6.0 to 9.0<br />
months during the 2Q, Power Distribution from 3.0 to 4.5 and Industrial from 4.0<br />
to 5.3. This should give investors improved confidence both on 2010 guidance and<br />
the potential for growth in 2011.<br />
2011 earnings growth driven by Utilities and OGP<br />
Our 2011 adj EBITDA growth is primarily driven the Utilities business (which<br />
comprises the High Voltage, Distribution and Submarine businesses) and Industrial<br />
(which includes Oil, Gas and Petrochemicals (OGP) and Nuclear). Both of these<br />
businesses are long-cycle and order-driven and the recovery in orderbook gives<br />
considerable visibility on 2011 earnings. In the case of the OGP business, Prysmian<br />
has a firm order from Petrobras for flexible flowlines worth $600mn in revenues<br />
with a 30% EBITDA margin. In the Utilities business the recent Borwind2 order<br />
carries a value of €200mn and will impact revenues over the next three years. We<br />
have not assumed a dramatic improvement in the more cyclical short-cycle<br />
businesses such as Trade and Installer (T&I) and the remainder of Industrial: we<br />
assume T&I generates only €9mn additional EBITDA in 2011 and that Industrial<br />
(excluding Nuclear and OGP) is flat. We believe our estimates are achievable even<br />
without incremental economic recovery.<br />
Optical fibre a big potential positive for Telecom<br />
We continue to believe that it is a matter of when, rather than if, European<br />
Telecom operators implement a large expansion of European fibre networks.<br />
Smaller cable companies are able to offer higher performance and a more<br />
competitive price than incumbent operators which is allowing the cable players to<br />
take significant market share. TEF and DT recently raised capex guidance for 2010<br />
to reflect the requirement for increased fibre rollout but this is yet to be confirmed<br />
as orders. We estimate the European market could see between €1bn and €2bn<br />
incremental revenues during the rollout phase, which given Prysmian’s 15% market<br />
share and 15% EBITDA margin in the business could generate between €23 and<br />
€45 additional EBITDA, or 6% to 11% upside to FY2009 reported adj EBITDA. .<br />
Valuation: €17.5 price target on xxx 2011E EV/EBITA<br />
With the sector now trading on 9.2x 2011E EV/EBITA and Prysmian’s outlook<br />
relative to the remainder of the sector looking highly attractive, we feel<br />
comfortable at a target multiple of 9.0x 2011EV/EBITA giving a price target of<br />
€17.5. On DCF we find fair value of €18.0 for Prysmian and we note that Prysmian<br />
offers very good value on 15% 2011E FCF yield at the current price. The dividend<br />
yield of 3.7% for 2011E is very well supported in our view.<br />
http://www.execution-noble.com<br />
BUY<br />
41% upside<br />
Fair Value € 17.5<br />
RIC, Bloomberg Code PRY.MI, PRY IM<br />
Share Price € 12.4<br />
Market Capitalisation $3,654m<br />
Free Float 83%<br />
€m (unless stated) 2009 2010E 2011E 2012E<br />
Sales 3,731 3,881 4,254 4,530<br />
Adjusted EBITA 315 307 394 451<br />
Adjusted EPS 1.1 1.0 1.4 1.7<br />
Dividend 0.4 0.3 0.4 0.5<br />
FCF* 252 214 324 301<br />
EV Adjustments** 23 174 235 297<br />
Net Debt 544 410 145 -71<br />
* FCF = EBITDA - capex - NWC - int ex. - tax<br />
** Pension, Tax, Equity and non-consolidated assets<br />
X (unless stated) 2009 2010E 2011E 2012E<br />
EV/Sales 0.7 0.7 0.6 0.5<br />
EV/EBITA Adjusted 8.1 9.2 6.7 5.5<br />
P/E Adjusted 10.0 12.5 8.6 7.1<br />
Dividend Yield (%) 3.4% 2.4% 3.5% 4.3%<br />
FCF Yield (%) 12.7% 9.5% 14.4% 13.3%<br />
Net Debt/EBITDA 1.4 1.1 0.3 -0.1<br />
Analysts<br />
Nick Paton, CFA<br />
+44 20 7456 1190<br />
nick.paton@execution-noble.com<br />
Rob Virdee<br />
+44 20 7456 9222<br />
rob.virdee@execution-noble.com<br />
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