Prysmian: Encore Wire Integration Will Boost Cash Flows

seekingalpha08-05

Prysmian's stock has increased by 60% in the past year, with strong financial performance and the recently closed acquisition of Encore Wire as catalysts.Despite a decrease in revenue and profit, ...

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I thought that was pretty low for a company that is a world leader in submarine cables. The market agreed, and the stock is currently trading about 60% higher than where it was trading at a year ago. The financial results remain strong, and the company is also working on the acquisition of Encore Wire (WIRE).   Yahoo FinancePrysmian has its primary listing in Italy, where it's trading on the Milan Stock Exchange with PRY as its ticker symbol. The average daily volume in Italy is approximately 860,000 shares per day and there are options available in Italy. Prysmian currently has approximately 284.5M shares outstanding and the current market capitalization is approximately 16.2B EUR and that’s pretty flat compared to where the company was trading at about four months ago. This article is meant as an update to earlier coverage. You can read all my older articles on Prysmian here. A strong first semester despite a revenue decrease Before discussing the acquisition of Encore Wire, I wanted to briefly discuss the company’s H1 results, as that of course provides useful insights in how the company is doing. The total revenue in the first half of the year was approximately 7.82B EUR from the sale of goods, while there was an additional 256M EUR related to the change in value of certain inventory related elements. Although the total revenue decrease of 2.5% isn’t great to see, a substantial portion of the operating expenses decreased as well. The COGS decreased and although there was an increase in the personnel-related expenses and other expenses, the total decrease in the operating income was ‘just’ 44M EUR. That’s still a decent amount of money, representing a 7% decrease compared to the first half of last year.   Prysmian Investor RelationsThe net finance expenses were 53M EUR, which is flat on a YoY basis, resulting in a pre-tax profit of 539M EUR and a net income of 410M EUR. About 8M EUR of that profit was attributable to the non-controlling interests, which means the net profit attributable to Prysmian’s shareholders was approximately 402M EUR, for an EPS of 1.47 EUR per share. That’s approximately 2 cents per share lower due to the combination of a 3M EUR lower net income and the increased share count after accounting for a settlement of a convertible debenture in common shares. In my previous article, I was optimistic about Prysmian’s future because of its strong cash flows. And despite the revenue decrease and profit decrease, Prysmian’s free cash flow remains pretty strong. As you can see below, the reported operating cash flow was just 69M EUR, but that’s mainly because of a seasonal buildup in the working capital elements. As shown below, the total investment in the working capital elements was approximately 603M EUR.   Prysmian Investor RelationsTo be correct, we should also deduct the 27M EUR in net finance expenses and the 6M EUR difference between taxes paid and taxes owed. Additionally, I’m deducting 35M EUR in lease payments. This results in an adjusted operating cash flow of 604M EUR. The total capex was 218M EUR, resulting in an underlying free cash flow result of 386M EUR. Divided over the current share count of 284.5M shares, this represents a free cash flow result of 1.36 EUR per share. The recently completed Encore acquisition should add value Prysmian ended the first semester with a positive working capital of 1.25B EUR and a total net debt of 1.43B EUR. Keep in mind, the net debt level will continue to fluctuate as the company has to invest in its working capital position in certain quarters, where after we sometimes see a release in the subsequent quarters. And with an H1 EBITDA of in excess of 800M EUR and a full-year guidance to see an adjusted EBITDA of 1.9-1.95B EUR, the debt ratio was less than 1x EBITDA. That being said, the full-year EBITDA guidance includes a six-month contribution from the recently-closed Encore acquisition.   Prysmian Investor RelationsThe balance sheet will change substantially in the current quarter, as Prysmian closed the acquisition of Encore Wire (WIRE). Prysmian initially announced it was bidding for the company in April and as a go-shop period ended without any other buyers, the deal was closed early last month. Prysmian acquired Encore for $290/share in cash, representing an enterprise value of approximately $4.3B. As this was an all-cash deal, the pro forma net debt will increase to approximately 5.3B EUR. But this, of course, means Prysmian will now also absorb the EBITDA generated by Encore Wire, and that was just under 500M EUR in FY 2023. It’s fair to assume the consolidated EBITDA will increase by 2.1B EUR in a first phase, before the anticipated 140M EUR run-rate EBITDA synergies kick in in Y4. The expanded capex means the debt ratio will remain pretty moderate at just around 2.5 by the end of this year, assuming a positive free cash flow and using the anticipated normalized EBITDA run rate for 2025. I’m even a bit more conservative than the consensus estimates as the analyst consensus calls for a 2.3B EUR EBITDA in 2025, increasing to almost 2.5B EUR in 2026. I also anticipate the net debt to fall below 4B EUR by the end of 2025 (or, subject to working capital changes, definitely before mid-2026), in which case the forward EV/EBITDA multiple should drop down to just around 8 by the end of 2025. Investment thesis It is rare to see such a large all-cash acquisition, but Prysmian should be able to walk down its net debt level pretty fast and reach an EV/EBITDA multiple of 8 by the end of next year. I initially thought the stock was getting pretty expensive and while Prysmian certainly isn’t cheap, the anticipated synergy benefits from the Encore purchase will create a lot of value for the company. I currently have no position anymore in Prysmian, but I’m starting to think I sold my position too soon. If the current correction on the financial markets continues, I would be interested in re-establishing a long position.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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