Backlog Expansion And Rail Demand Trends Will Support A Long-Term Earnings Turnaround

Catalysts

About Talgo

Talgo designs, manufactures and maintains innovative passenger rolling stock for high speed, intercity and regional rail operators worldwide.

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

• Reinforced equity of 150 million euros and expanded long term bank and bond lines to 2031 materially de risk liquidity and support bid capacity. This should underpin revenue growth and reduce financing costs that weigh on net profit.
• A 4.8 billion euros backlog with potential conversion toward 7 billion euros as new Northern Europe and Middle East contracts are closed increases multi year visibility on production volumes. This supports higher top line and better fixed cost absorption, which is positive for EBITDA margins.
• First platform deployments in Germany and Denmark moving into commercial service, with satisfied operators and growing route usage, position Talgo to leverage repeat orders on standardized platforms. This can lift future revenue per engineering euro spent and structurally improve operating margins.
• Stricter contract discipline on indexation, cash flow positivity and penalty exposure in new awards directly addresses legacy low margin projects. A mix shift toward these newer contracts should translate into more stable EBITDA and higher recurring earnings through 2026 to 2030.
• Global policy and customer focus on rail as a low emission, high efficiency transport mode, especially in Northern Europe, Eastern Europe and Gulf corridors, underpins a sustained tender pipeline that can support higher annual order intake and scale benefits. This can improve both revenue growth and net margins over time.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Talgo's revenue will grow by 12.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -31.0% today to 2.9% in 3 years time.
• Analysts expect earnings to reach €24.4 million (and earnings per share of €0.2) by about December 2028, up from €-185.1 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 27.4x on those 2028 earnings, up from -1.9x today. This future PE is greater than the current PE for the GB Machinery industry at 12.4x.
• 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 15.53%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The business remains dependent on a small number of large rail operators such as DB, Renfe and national networks in Northern Europe and the Middle East. Any contract delays, scaling back of state rail investment or loss of key tenders could reduce backlog conversion and slow revenue growth over the long term.
• Talgo is still loss making at EBITDA level and relies on assumptions that higher margin, better indexed new contracts will replace legacy low margin projects. If execution issues persist or new programs encounter technical or acceptance problems, structural net margin and earnings improvement may fail to materialize.
• The penalty dispute with Renfe, withheld payments and ongoing settlement negotiations with DB highlight legal and commercial friction with key customers. An unfavorable court outcome or further penalties could erode cash generation, compress net margins and weaken earnings.
• The reinforced capital structure and expanded syndicated loans and bond lines extend maturities to 2031 but also increase leverage and financial commitments. If interest rates stay elevated or cash flow underperforms internal projections, higher financing costs and refinancing risk could weigh on net profit and equity value.
• Management is reluctant to disclose a detailed business plan or long term margin guidance to the market, which may limit investor visibility on the path from negative EBITDA today to targeted profitability. If performance remains volatile or below expectations, this could lead to a lower valuation multiple and weaker share price performance through 2030.

Valuation

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

• The analysts have a consensus price target of €3.52 for Talgo 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 €3.9, and the most bearish reporting a price target of just €3.1.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be €847.3 million, earnings will come to €24.4 million, and it would be trading on a PE ratio of 27.4x, assuming you use a discount rate of 15.5%.
  
• Given the current share price of €2.83, the analyst price target of €3.52 is 19.7% 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.