We set our target price for Snam at EUR4.4/share using two equally weighted methodologies. First, we conduct a SOTP valuation, in which for gas infrastructure assets we calculated value accretion for the next ten years on top of existing RAB value. We calculate Snam should be able to deliver c.210bps average return above our assumed nominal post-tax WACC of 5.0%. As a second method, we use a DDM model out to 2030. We use an 8% COE and a 2% long-term growth.

We see a number of risks that could prevent the achievement of our target price. First, being a fully regulated company, Snam's revenues are set by the Italian regulator. In a rising bill environment, the Italian regulator may want to trim allowed returns. Second, we think the company may be affected by declining gas demand trends unless we see repurposing of its infrastructure to hydrogen-ready, which could revive its growth potential. Finally, Snam’s valuation largely depends on Italian real bond yields, which are subject to market fluctuations due to macro and political events.