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On Friday, Citi analysts downgraded Snam SpA (SRG:IM) (OTC: OTC:SNMRY) stock from Neutral to Sell and reduced the price target to EUR4.30 from EUR4.40. The stock, currently trading at $10.44, has shown resilience with a 20.86% return over the past year. According to InvestingPro analysis, the stock appears overvalued at current levels. The revision follows a detailed analysis of the company's growth prospects and financial health, particularly in comparison to its industry counterparts.
Citi's assessment indicates that Snam's current premium over its FY25 Regulated Asset Base (RAB) is unwarranted. The analysts forecast a 2% five-year earnings per share (EPS) compound annual growth rate (CAGR), which is substantially lower than the 6% sector average. This projection contrasts with Snam's own business plan, which estimates approximately 4.6% CAGR. The difference in expectations stems from Citi's use of a market-to-market (M2M) Weighted Average Cost of Capital (WACC) for FY28, whereas Snam's calculations are based on a WACC that is 30 basis points higher. Additionally, Citi factors in the potential increase in hybrid interest resulting from Snam's acquisition of OGE.
The analysis also raised concerns over Snam's balance sheet due to its significant net capital expenditure plan of €12.4 billion and the financial implications of acquiring OGE. With a debt-to-equity ratio of 1.82 and total debt of $16.8 billion, InvestingPro data confirms the company operates with a significant debt burden, though its overall Financial Health score remains "GOOD" at 2.71 out of 5. Citi anticipates that Snam's funds from operations (FFO) to net debt (ND) ratio will decline from 12.6% in FY24 to 10.8% by FY29. This projection suggests a tightening financial position for the company in the coming years.
Citi's new price target of EUR4.30 implies a 13% premium over Snam's FY25 RAB, which aligns with the stock's historical trading premium. This adjustment also takes into account the current 3.9% nominal 10-year bond yield, which is a benchmark for evaluating investment returns.
Snam's stock rating downgrade and price target reduction reflect Citi's cautious stance on the company's growth and financial strategy, particularly in the context of the broader utilities sector. The analysts' commentary underscores the importance of realistic WACC assumptions and the potential impact of large-scale acquisitions on a company's balance sheet.
In other recent news, Citi has adjusted its price target for Snam SpA, setting it at EUR 4.20, down from the previous EUR 4.60, while maintaining a Neutral stance on the stock. This revision is made ahead of Snam's upcoming 2025-29 strategy update. Citi analysts anticipate that Snam's future capital expenditure plan will involve approximately €12 billion for the 2023-2027 period, an increase from the earlier estimate of €11.5 billion. The updated plan indicates a shift in focus towards hydrogen, carbon capture and storage, and biogas. Concerns have been raised by Citi regarding the speculative nature of these new investment areas, which may impact medium-term guidance. Despite these challenges, Snam has shown stronger performance compared to its peers in the regulated stock sector recently. Citi highlights Snam's attractive dividend yield of 7% as a positive factor, contributing to its cautious yet neutral outlook. The market remains attentive to Snam's forthcoming strategy details and potential financial implications.
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