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Cenergy Holdings | Charging ahead with a backlog surge

Smooth project execution to propel further growth – Following an impressive FY’22 performance, with EBITDA rising to €137mn (+31% yoy), Cenergy’s H1’23 results confirmed that the Group remains on a solid footing. Notably, Group H1’23 EBITDA settled at €86mn (+67% yoy) on account of strong growth in both the cables and the steel pipes segments, with the latter also aided by the easy comp. In addition to the robust results, we draw attention to the rapidly growing backlog, which has jumped to €2.5bn as of June 2023, recording an impressive 127% growth vs Q2’22 and representing >3x the FY’23e project sales. Looking ahead, we anticipate accelerated project execution in the second half of the year and are now envisaging FY’23 EBITDA of c€200mn, landing at the upper end of management guidance.

Key energy transition play – The ever-growing backlog affirms demand remains strong, with the group having evolved into a key player in both segments where it is present. Within the cables subset (H1’23 EBITDA: €59mn; +26% yoy), we stress that demand for interconnection projects is in a sense inelastic, thus rendering Cenergy relatively immune to external economic shocks, as corporations and governments push for accelerated energy transition. The Group has also been shifting focus to the underwater cables subsector, which offers higher profitability margins and enjoys accelerating demand. We remind that Cenergy’s subsea water plant operates at full utilization, while the scheduled expansion is poised to effectively double its capacity by 2025, allowing the group to meet the strong demand. As for steel pipes, the segment has recovered fast in H1’23 thanks to rising demand for gas projects further underpinned by market rationalization, with its backlog surging to €650mn.

Growing backlog boosts short-term and medium-term estimates – In the light of ongoing project execution and backlog ramp-up, we have raised our 2023-24e EBITDA by 2-3%, still eyeing very robust growth (+46% in 2023e, 6% in 2024e). Looking further out, we have lifted our EBITDA estimates by 5-6% on account of faster than previously envisaged growing backlog and thus higher replenishment rate. In addition to the higher backlog, we are looking for wider margin expansion (by >2pps over 2023e-26e), as we anticipate improved mix from more specialized projects to be margin-accretive. Given the healthy demand vs supply backdrop, we expect the increase in profitability to boost further returns on capital, with pre-tax ROIC ticking higher to >20% in the coming years from c17% in 2022.

Valuation: PT to €7.9; compelling valuation given growth prospects – Following the stock’s 125% ytd rally, Cenergy shares have re-rated to >8.5x 1yr fwd EV/EBITDA, namely at a small premium vs the blended peer group median. Despite the re-rating, we still find the valuation compelling, as we argue that Cenergy’s growth prospects justify an even higher valuation. Following on from the upgrade to our estimates, we have raised our PT to €7.9 (DCF-based at 9.5% WACC), effectively placing Cenergy at c9.7x 1-yr fwd EV EBITDA, a 20% premium vs the blended peer group median, warranted by the superior growth profile.