Morningstar | Increasing Saipem Fair Value Estimate Due Chiefly to Strong Offshore E&C Performance in 2018. See Updated Analyst Note from 13 Mar 2019
We are increasing our fair value estimate for oilfield services conglomerate Saipem to EUR 3.75 from EUR 3.25 previously. The higher fair value estimate comes chiefly from more positive forecasts for the company's Offshore Engineering and Construction segment as well as from slightly more positive forecasts for its drilling segments. Our no-moat rating remains unchanged.Specifically, we are increasing our revenue forecasts for the Offshore E&C segment (with our 2022 midcycle forecast moving up about 15% vs. our prior forecast). Saipem's Offshore E&C revenue increased an impressive 9% in 2018. This outperformed peers (TechnipFMC's comparative business down 8% and Subsea 7 company revenue up just 2%) as well as our original expectations of a modest decline for Saipem. Strong inbound orders (we project trailing 12-month book-to-bill will hit 1.28 times by the end of the first quarter) mean that this strong performance should continue in the medium term.
This strong performance doesn't seem to be the product of any strategic shift by management. In particular, Saipem doesn't appear to be buying market share, as adjusted operating margins only fell modestly to 7.9% in 2018 vs. 9% in 2017, outperforming peers. Still, we are maintaining our long-term adjusted operating margin assumptions for Saipem (including our forecast that the company's midcycle margins will be below peers TechnipFMC and Subsea 7), as we think the company's long-term history of underperformance is relevant. Crucially, Saipem remains well behind peers in developing an integrated offshore development strategy.
We've also slightly increased our expectations for Saipem's Offshore Drilling and Onshore Drilling segments, as profits in those segments outperformed our expectations in 2018. Although these businesses are both sub-scale relative to peers, management has done a good job in cutting costs and to sustain profitability in spite of industry headwinds.
Saipem is a global contractor with local presence in Africa, Central Asia, America, the Middle East and South East Asia. Co. provides engineering, procurement, construction and installation services; and engineering, procurement and construction services to the oil and gas industry, both onshore and offshore, with a focus on projects, including activities in remote areas, in deep waters and on projects that involve difficult gas or crude supplies.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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