As promised, Technip released guidance on 2014 last month, two months earlier
than usual. As stated in our note (Technip: Disappointing ’14 guidance, but some
comfort, 18 Dec 2013), our estimates for Technip's 2014 earnings had already come
down sharply since 3Q13 results. This has largely been driven by a reduction in our
expectations for the Subsea division, which saw our operating margin estimate fall
to 15.2% from 17.5% at that point in time. However, the factors influencing it -
enhanced maintenance, the ramp up of the new Brazilian plant, issues in the Gulf of
Mexico operations and late profit recognition – now appear to have had a greater
than expected impact with guidance now given for Subsea margins greater than
12%. Importantly, however, the late profit recognition policy of Technip and strong
backlog have enabled it to give early 2015 guidance which implies that those
numbers are in the realm of possibility and could be 42% higher than 2014. This, it
promises, is excluding any large contract awards, such as Yamal, which we expect
Technip to be well placed for. While this could be seen as cold comfort by those
disheartened at the 38% underperformance of the sector relative to the Eurostoxx
index in 2013, it should help moderate the negative implications that we see from
the outlook statement. As such, we have taken down our 2014F eps by 17%, but
2015 is largely unchanged at a (2)% decrease. Given this leaves plenty of room for
upside surprise from new contract awards across the group (outlined in our Global
Top Picks 2014, 10 Dec 2013), we remain Overweight, with a reduced DCF-based
price target of EUR100/share.
2014 is weak but there is still room for surprise: Guidance provided was excluding
any benefit from the roll out of US petrochemicals facilities; the potential sanctioning
of Yamal LNG or Kaombo; Floating LNG or Petrobras's stated desire to use more
high-end flexible pipe in its protracted pre-salt development programme. With
expectations reset, and a conservative base case scenario now in our numbers, we
see room for positive surprise.
Medium term is still intact: With 2014F taking most of the pain, 2015F is the year
that stands to gain. Maintenance in 1H14 is in preparation for a heavy workload that
should include the offshore phasing of zero margin contracts from 2014F. Guidance
given due to strong visibility and positive market outlook gives us comfort that the
medium term story is still moving in the right direction.