Nexans Aims High as Demand for Subsea Cables Surges

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AC/DC’s Bon Scott once sang, “All you gotta do is plug me in.” A similar sentiment applies to high-voltage power generation, especially given the current political instability and the growing capacity of renewable energy sources. This has led to an increased demand for interconnectors, driving the boom in the subsea cable industry.

Last week, Nexans confirmed this trend with exciting news. The French group secured a €1.4bn contract to construct the Greece-Cyprus segment of the EuroAsia interconnector, which will lay the longest subsea power cable ever, connecting Israel to the European grid.

Nexans, along with Denmark’s NKT and Italy’s Prysmian, plays a significant role in international linkages, driven in part by the rise of offshore wind farms. This has attracted investors, resulting in nearly tripled shares for Nexans and NKT over the past five years. The recent pullback in shares may present an opportunity for new shareholders to join in.

While Nexans is involved in communications cables and metal manufacturing, it aims to transform into a more focused player in electrification. Currently, its shares are trading at a multiple of 9 times forward operating profits to enterprise value, down from 11 times earlier this year.

A shortage of high-voltage capacity will drive increased orders in the coming year, as generators require cables for projects scheduled for the second half of the decade. Credit Suisse predicts that total contract awards might exceed €20bn this year, compared to €8bn in 2022. The bank also forecasts a 25% deficit in cable capacity by 2026.

Nexans’ generation and transmission sales are expected to reach €1bn this year, with analysts projecting this division to be the best-performing. Visible Alpha estimates a compound growth rate of 8% between 2021 and 2025, and the industry’s undersupply is anticipated to drive operating margins close to 15% by 2025. The EuroAsia win has boosted Nexans’ order backlog to approximately €6bn.

The divestment program poses the main risk for investors in Nexans. If successful, the company could see a rating more comparable to that of its purer play counterpart, NKT, which trades at a multiple of 19 times. However, cable investments are underpinned by strong structural trends and insulation from economic cycles.

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