International Expansion And High-Margin Projects Boost Prospects, But Rising Costs And Currency Risks May Erode Margins

Key Takeaways

• Strategic acquisitions and expansions in the Environment and Water sectors are expected to drive significant revenue growth and bolster international presence.
  
• Focus on high-margin Concessions and potential listing of Inmocemento unit could enhance earnings, operational margins, and shareholder value.
  
• Rising financial expenses and currency depreciation could pressure margins, while investments and project transitions may challenge financial stability and revenue.

Catalysts

Engages in the environmental services, water management, infrastructure development, and real estate businesses in Europe and internationally.

• FCC's significant investment efforts, exceeding €1 billion, particularly in the Environment sector with transactions like the acquisition of Urbaser in the U.K., are poised to bolster future revenue growth and strengthen the company's international footprint.
  
• The expansion in the Water sector, including the incorporation of businesses in the U.S. and rate hikes in European markets like the Czech Republic and Georgia, suggests potential for revenue growth and improved earnings from a diversified and expanding geographical presence.
  
• FCC's focus on high-margin areas such as Concessions, with projects like the A465 in Wales and Lima Metro in Peru, indicates an opportunity to enhance long-term earnings and operational margins through stable and recurring income streams.
  
• The partial financial separation and potential listing of the Inmocemento unit could unlock shareholder value, improve net margins, and provide better visibility into FCC’s core businesses, potentially impacting earnings positively.
  
• The anticipated continuation of infrastructure projects and focus on utility-based operations, especially in the U.S., could lead to sustained revenue growth and stable EBITDA as FCC further consolidates its position in key markets.

Fomento de Construcciones y Contratas Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fomento de Construcciones y Contratas's revenue will grow by 2.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.4% today to 5.4% in 3 years time.
• Analysts expect earnings to reach €549.4 million (and earnings per share of €1.15) by about December 2027, down from €613.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €618 million in earnings, and the most bearish expecting €400 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.7x on those 2027 earnings, up from 6.8x today. This future PE is lower than the current PE for the GB Commercial Services industry at 31.0x.
• Analysts expect the number of shares outstanding to grow by 1.53% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.76%, as per the Simply Wall St company report.

Fomento de Construcciones y Contratas Future Earnings Per Share Growth

Risks

• The increase in financial expenses due to rising base rates could negatively impact net margins and overall earnings.
  
• The significant investment of over €1 billion, while potentially beneficial long-term, could strain current financial resources and affect net margins.
  
• The ongoing financial separation of Real Estate and Cement activities introduces the risk of transitional challenges, which might impact future revenue stability.
  
• Depreciation of foreign currencies such as the Czech koruna and Georgian currency could adversely affect revenue and profit margins from international operations.
  
• The end of major projects like the Maya Train could lead to reduced revenues in the short term if not compensated by new projects.
  

Valuation

• The analysts have a consensus price target of €14.2 for Fomento de Construcciones y Contratas 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 €16.4, and the most bearish reporting a price target of just €11.7.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €10.1 billion, earnings will come to €549.4 million, and it would be trading on a PE ratio of 16.7x, assuming you use a discount rate of 10.8%.
• Given the current share price of €9.18, the analyst's price target of €14.2 is 35.4% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.