Bernstein SocGen Group issued a downgrade for Subsea 7 (OTC:SUBCY) SA (SUBC:NO) (OTC: SUBCY), shifting its rating from Outperform to Market Perform. The firm also adjusted the price target to NOK214.00, a slight decrease from the previous NOK218.00. The revision follows a period of strong performance for the stock, which has seen its value increase fourfold over the past four years.
The downgrade is primarily based on valuation grounds, with the analyst noting that the stock's current price already reflects a return on capital employed (ROCE) higher than what is projected for the company in the coming years.
The analyst's estimates for ROCE range from 1.3% in 2023 to 9.2% by 2027, which still falls short of covering the estimated weighted average cost of capital (WACC) of 10%.
Subsea 7's stock is trading at a forward-year 2024 enterprise value to capital employed (EV/CE) ratio of 1.14 times, which is significantly higher than the average ratios from 2005 to 2023 (1.06x) and from 2011 to 2023 (0.72x).
With the firm's third-quarter 2024 earnings before interest and taxes (EBIT) estimate of $126 million being 11% below the consensus of $141 million, the analyst does not anticipate the upcoming reporting period to act as a positive catalyst for the stock.
Despite the downgrade, the report acknowledges Subsea 7's potential for strong free cash flow (FCF) generation as the company enters what is described as a harvesting period. Cumulative FCF 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.
This robust FCF generation could lead to upside potential for the company's current policy of returning at least $1 billion to shareholders through 2024-2027, with two-thirds proposed to be distributed via dividends and one-third through share buybacks.
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