Morningstar | Saipem Posts Mixed 4Q as Settlement Provision Weighs on Profits
Saipem reported mixed fourth-quarter results, with revenue up 10% sequentially but adjusted operating margins falling to 4.7% from 7.2%. Our fair value estimate and no-moat rating are unchanged.The top-line improvement was driven by the onshore engineering and construction segment, which posted a 24% sequential revenue increase as the strong order flow of the previous four quarters (with an average book/bill of 1.38) materialized as increased project work. The bottom-line decrease was due to the offshore E&C segment, where margins fell to 4.4% from 10.5%. Management indicated that some part of the decrease in profit was due to a provision for a settlement charge associated with the long-running South Stream dispute, but refused to quantify it. Still, the outlook for the offshore E&C segment is as positive as it’s been in years, thanks to an improving industry environment as well as strong order flow for Saipem in particular. Based on orders announced through March 1, we estimate the segment book/bill will reach about 1.25 on a trailing 12-month basis through the end of the first quarter 2019.
The onshore E&C segment posted a 2.1% adjusted operating margin for full-year 2018. Astonishingly, this is the first positive full-year adjusted operating profit for the segment since 2012. Altogether, the segment's average profit over the last decade remains in the red, thanks to very large losses from 2013 to 2016. Our midcycle forecast is that the segment can sustain a positive operating margin, but we are still skeptical that management can achieve its 5% long-term margin goal for the segment.
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.
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