Data Center Investments Will Raise Risks But Turner's Performance Could Offset Challenges

Key Takeaways

• Aggressive expansion into data centers could lead to overvaluation risks if growth expectations aren't met, impacting revenue and earnings stability.
  
• Strategic mergers and equity investments pose integration and real estate risks, potentially affecting net margins and competitive positioning.
  
• Strategic market consolidation, strong financials, and tech-driven diversification position HOCHTIEF for growth, profitability, and sustainable value creation.

Catalysts

Engages in the construction business worldwide.

• HOCHTIEF's aggressive expansion into the data center market, including significant equity investments and the strategic acquisition of Dornan Engineering, suggests possible overvaluation if the anticipated growth does not materialize as expected. This expansion is expected to impact revenue growth significantly.
  
• The ongoing transition and consolidation of collaborative contracts, especially within CIMIC, could lead to working capital challenges if new projects do not ramp up as planned, potentially affecting net margins and earnings stability.
  
• HOCHTIEF's strategic shift to owning and operating data centers rather than just building them introduces higher risk associated with real estate development and tenant acquisition, which could impact earnings if not managed effectively.
  
• The strategy to engage in international mergers, such as the Flatiron and Dragados merger, anticipates synergies and increased competitive positioning, but significant integration challenges could dilute intended benefits, affecting net margins and overall earnings growth.
  
• HOCHTIEF's heavy reliance on infrastructure investments driven by macroeconomic and sectoral trends like decarbonization and digitalization might face headwinds if these trends do not continue as expected, impacting future revenue and order book sustainability.

HOCHTIEF Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming HOCHTIEF's revenue will grow by 4.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 2.3% today to 2.2% in 3 years time.
• Analysts expect earnings to reach €848.2 million (and earnings per share of €11.01) by about March 2028, up from €775.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €959.9 million in earnings, and the most bearish expecting €756 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.3x on those 2028 earnings, down from 16.4x today. This future PE is lower than the current PE for the GB Construction industry at 32.4x.
• 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 6.95%, as per the Simply Wall St company report.

HOCHTIEF Future Earnings Per Share Growth

Risks

• HOCHTIEF has a solid growth strategy driven by increased infrastructure investments, which could lead to expanding revenues as it consolidates leading positions in strategic markets.
  
• Its strong order book and high level of cash generation could positively impact net margins and earnings, enhancing the company's financial stability.
  
• Turner's standout performance, with significant revenue and margin growth, suggests potential continued profitability, contributing positively to overall group earnings.
  
• The company's strategic shift into advanced tech sectors like data centers, along with substantial M&A activities, provides avenues for further revenue diversification and growth.
  
• HOCHTIEF's focus on sustainable value creation, including ESG efforts and efficient capital allocation, demonstrates a commitment to maintaining and potentially expanding profit margins.

Valuation

• The analysts have a consensus price target of €150.467 for HOCHTIEF based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €178.2, and the most bearish reporting a price target of just €123.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €38.5 billion, earnings will come to €848.2 million, and it would be trading on a PE ratio of 16.3x, assuming you use a discount rate of 7.0%.
• Given the current share price of €169.4, the analyst price target of €150.47 is 12.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.