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“All you gotta do is plug me in . . .” sang Bon Scott of rock band AC/DC. The same applies to high-voltage power generation. Political instability and rising renewables capacity has increased demand for interconnectors. The subsea cable industry is booming.
Nexans confirmed the trend last week with some good news. The French group won a €1.4bn deal to build the Greece-Cyprus segment of the EuroAsia interconnector. The ambitious project will lay the longest subsea power cable ever, linking Israel to the European grid.
Nexans, Denmark’s NKT and Italy’s Prysmian all ply a trade in international linkages. The growing number of offshore wind farms are one reason for this. Investors recognise the buzz; shares in Nexans and NKT have almost trebled in the past five years. A recent pullback might be a chance for new shareholders to plug in too.
Nexans counts communications cables and metal manufacturing in its business mix but hopes to transform into a purer play on electrification. The shares are trading at 9 times forward operating profits to enterprise value, down from 11 times at the start of the year.
A shortage of high-voltage capacity will boost orders this year. Generators need cables for projects going live in the second half of the decade. Total contract awards might surpass €20bn this year, thinks Credit Suisse, up from €8bn in 2022. The bank forecasts a 25 per cent deficit in cable capacity by 2026.
Nexans’ generation and transmission sales should hit €1bn this year. Analysts expect this to be the best-performing division. Compound growth should run at 8 per cent between 2021 and 2025, according to Visible Alpha. Industry undersupply is expected to push operating margins up to almost 15 per cent by 2025. The EuroAsia win boosts the orders backlog to about €6bn.
The main risk for Nexans investors is the divestment programme. If this succeeds, the company would merit a rating closer to that of purer play NKT, which trades on a 19 times multiple. Deep structural trends and insulation from the cycle underpin cable investments.