AI Infrastructure Supercycle And Energy Transition Will Fuel Powerful Long Term Upside

Catalysts

About HOCHTIEF

HOCHTIEF is a global engineering and construction group specializing in advanced technology infrastructure, energy transition assets and critical resources projects.

What are the underlying business or industry changes driving this perspective?

• Explosive global investment in AI driven digital infrastructure, with data center and compute CapEx expected to reach USD 600 billion in 2025 and AI infrastructure spend potentially rising to USD 3 trillion to USD 4 trillion by decade end, combined with Turner's leading hyperscaler relationships and accelerating multi region backlog, creates multi year visibility for double digit revenue growth and structurally higher earnings.
• Shift toward more complex advanced technology projects in data centers, semiconductors and biopharma, supported by Source Blue global procurement and modularized offsite manufacturing, is raising project mix quality and enabling sustained operational margin expansion at Turner and group level net margin improvement.
• Rapid build out of low carbon and energy security infrastructure, including nuclear, transmission networks and large scale battery storage, underpinned by long duration framework contracts such as the up to EUR 685 million Sellafield partnership and major Australian grid projects, supports high quality recurring revenue and resilient cash flows.
• Global race to secure critical minerals for clean energy, electrification and defense, where Sedgman and Thiess hold more than 100 active engineering projects and expanding positions in lithium, nickel, copper and rare earths across multiple continents, provides a deep pipeline of potential EPCM conversions that can accelerate revenue and lift group earnings quality.
• Government backed investment waves in transport and defense infrastructure, including Germany's EUR 500 billion infrastructure fund and Australia's AUD 765 billion defense spending plan, combined with HOCHTIEF's strengthened civil platform in North America and growing defense order book, underpin long term backlog growth, higher revenue visibility and rising operating cash generation.

Assumptions

This narrative explores a more optimistic perspective on HOCHTIEF compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming HOCHTIEF's revenue will grow by 13.7% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 2.3% today to 2.7% in 3 years time.
• The bullish analysts expect earnings to reach €1.5 billion (and earnings per share of €20.07) by about December 2028, up from €852.3 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €1.2 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 22.8x on those 2028 earnings, down from 28.9x today. This future PE is lower than the current PE for the GB Construction industry at 28.9x.
• The bullish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.06%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The group is highly exposed to an investment super cycle in AI data centers and digital infrastructure. If hyperscalers or large AI platforms slow or reprioritize their multiyear CapEx plans, the currently exceptional Turner growth in sales and its 3.4% to 3.7% margin trajectory could normalize or reverse, reducing group revenue growth and constraining earnings.
• A pronounced downturn or delay in other advanced technology and industrial segments such as semiconductors, battery manufacturing facilities and EV related projects, which management already flags as paused or significantly slowed, could leave HOCHTIEF with an order book skewed to fewer verticals and intensify competition, putting pressure on revenue diversification, net margins and medium term earnings resilience.
• Reliance on large public infrastructure, defense and energy transition programs in Germany, Australia, the U.S. and other regions exposes HOCHTIEF to policy reversals, fiscal tightening or execution delays. Any scaling back of the German EUR 500 billion infrastructure fund, Australian AUD 765 billion defense plan or nuclear and grid frameworks could weaken the long duration backlog and reduce visibility on revenue and operating profit.
• The strategy of expanding through bolt on M&A, equity investments in concessions and large long dated framework contracts increases balance sheet intensity and integration risk. If recently acquired businesses like Dornan or future critical minerals and data center platforms underperform, or if concession assets such as Abertis require further capital injections, this could dilute return on invested capital and weigh on net profit growth despite rising sales.
• Execution complexity is ramping up as HOCHTIEF pivots toward global advanced tech mega projects, modularized offsite manufacturing and AI enabled delivery. Any failure to manage skilled labor constraints, supply chain bottlenecks or project risk in this higher stakes mix could lead to cost overruns, margin slippage at Turner and CIMIC and ultimately lower group operational net profit than the upgraded guidance path implies.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for HOCHTIEF is €375.0, which represents up to two standard deviations above the consensus price target of €284.71. This valuation is based on what can be assumed as the expectations of HOCHTIEF's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €375.0, and the most bearish reporting a price target of just €163.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be €55.6 billion, earnings will come to €1.5 billion, and it would be trading on a PE ratio of 22.8x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of €327.6, the analyst price target of €375.0 is 12.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.