Key Takeaway
We initiate on Technip with a Buy rating and €51/sh price target. Our forward
estimates for revenue and margin are conservative, leading to below consensus
estimates for 2016/17/18, and while that implies consensus de-rating ahead
we are confident that Technip's proprietary technology and manufacturing
capability, particularly in Subsea, provides valuation support and can soften
the impact of Subsea slow down.
Subsea - Brazil still needs pipe. Subsea clearly dominates the bottom line of the
company and with a “high” floor margin possible, renewal of Subsea revenues/backlog
in the coming years is key. In order to hit our FY16e Subsea revenue estimate of €5bn
(€4,958m) we require €0.8bn (€875m) new Subsea awards in the next 18 months. This
amount of awards is 32% lower than the previous low (18 months leading up to FY10).
Technip's position as a supplier of flexpipe as well as an installer, particularly in Brazil, helps
our confidence of delivery.
Onshore/Offshore - The Arctic Convoy. Successful execution of the €4.5bn Yamal LNG
Lump sum EPC, in order to maintain (or at least not take away from) the Onshore/Offshore
~3% OIFRA we estimate out to FY17 and ahead of the US$4bn reimbursable construction
phase (yet to be booked), is both an opportunity as well as being a key risk. Modular
fabrication in Asian yards followed by shipment to Yamal is the risk mitigation method
employed, and we back the project engineers on this one.
Cash flow cycle - Possible to pay shareholders organically. While holding significant
cash (>€3bn on average) Technip has grown drawn debt almost exactly in line with total
shareholder distributions over the cycle. However, moving out of a significant capital
investment program, Technip is better placed than most to pay dividends or enter the A&D
market from organic free cash flow.
Valuation/Risks
Our $51/sh PT is derived from the average of four valuations (EV/EBITDA, P/E, DCF and SoP)
ranging from €38-65/sh. We see the 5yr average 5.8x FY+1 EV/EBITDA as a fair metric for
Technip. However, which EBITDA? We arrive at €58/sh on our €893m FY16 estimate, but
€46/sh using the same metric on our €603m FY17 estimate. Both show upside, and taking
all the competing questions into account we choose to use an average of the four valuation
methods and initiate with a Buy and €51/sh PT. Risks to our thesis include poor execution/
cost over runs on the multi-year Yamal LNG project and a continued slowdown in offshore/
subsea developments.