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CENERGY HOLDINGS | Tackling the Interconnection Shortage

Sustained high levels of execution; optionality from entry into the US – Operating momentum from the profitability step-up in FY’23 appears to have been carried into 2024 thus far, with results supported by greater execution and better-priced backlog in both core divisions. Considering the positive YTD trend, we recalibrate our estimates for 2024e, now penciling FY’24 group adj. EBITDA at €255m (+19% yoy, +5% vs our previous projection) and expecting particularly robust performance in H2’24. Going forward, we envisage 2-digit growth at both revenue and EBITDA levels. We view the effect from expected capacity increases in existing facilities, along with the group’s prospective entry into the US, as 2 significant catalysts adding to the story and argue that these moves have not yet been fully priced in by the market.

Backlog accumulation boosts estimates, provides high visibility ahead – Strong project replenishment affirms that demand tailwinds remain intact across all core activities, with Cenergy now firmly established as a deserving contender in both cables and steel pipes. We continue to view prospects in cables as especially underpinned, thanks to the unwavering demand for interconnections and grid replacement among EU TSOs/DSOs and the improving rates of offshore wind capacity buildout as the energy transition takes center stage. We highlight that CENER’s ratio of cables backlog to cables projects revenue stood at an impressive 6.7x in FY’23. On to steel pipes (€650m backlog in FY’23), our forecasts continue to envision a solid near-term outlook given strong pricing optionality from market rationalization and the proliferation of LNG imports in the EU.

Revised estimates point to c16% 3-yr EBITDA CAGR, impact from US facility in 2028 – Taking into account our expectations for improved near-term profitability thanks to higher-quality backlog and stronger overall execution, we raise our 2024-25e group revenue estimate by 10-13% (better unit pricing), which filters through to a +5-8% uplift in EBITDA. Looking at the medium term, we anticipate greater contributions from HV cables and scale benefits from the capacity ramp-up to drive 2027e adj. EBITDA to near €390m (+5% vs previous EEe). This corresponds to an adj. EBITDA margin of c15% for 2027e, a near 2pps expansion vs 2023. Our outer year forecasts (2028 onwards) incorporate an added boost from the US facility, which we estimate could be operational by end-2027 and could deliver post-tax returns near 20%.

Valuation – Cenergy shares have rallied >260% in the last 2 years, but the >85% increase in EBITDA over 2022-24e has kept the valuation at compelling levels, namely still c8x 1-yr fwd EV/EBITDA, at small discount vs. the blended peer group median. Despite the strong performance, we argue that CENER’s growth-adjusted valuation continues to look compelling, especially when factoring in upside risk from the group’s entry into the US. Following on from our estimate upgrades, we raise our PT to €12.7 (DCF-based at 9.0% WACC) effectively placing the stock at c9.8x 1-yr fwd EV/EBITDA, still some 10% discount vs. best-in-class cables peers as Cenergy’s smaller size is partially offset by its superior growth profile.