Global Contracts In Argentina And Emirates Will Lead To Resuming Dividends By 2026

Key Takeaways

• Strategic projects and new contracts in Argentina and the Emirates are anticipated to significantly boost revenue and improve EBIT margins through 2025.
  
• Focus on higher-margin energy transition projects and resumption of dividend payments by 2026 signal strong cash flow and enhanced shareholder value.
  
• The company's ambitious growth projections, reliance on large projects, and external market pressures may challenge revenue stability and profitability, posing risks to earnings and liquidity.

Catalysts

An engineering and construction company, designs and manages industrial plant projects worldwide.

• Técnicas Reunidas expects to increase its revenues significantly in 2025 with projections above €5.2 billion, driven by new contracts like Vaca Muerta in Argentina and a €3.3 billion project in the Emirates, impacting revenue growth positively.
  
• The company's EBIT margin is projected to improve, reaching close to 4.5% in 2025, supported by strategic projects such as those in Vaca Muerta and new contracts in power projects, which would enhance overall earnings.
  
• Técnicas Reunidas is positioned to resume dividend payments by 2026, signaling positive cash flow management and increased profitability that enhances shareholder value and impacts dividend payout ratios.
  
• With a backlog of €12.5 billion, Técnicas Reunidas is well-positioned for sustained revenue growth, as ongoing and new project engagements are expected to enhance future earnings.
  
• Expansion of services and focus on higher-margin projects, particularly in the energy transition sector, are anticipated to progressively increase Técnicas Reunidas’ net margins, especially between 2025 and 2026, providing upward pressure on earnings.

Técnicas Reunidas Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Técnicas Reunidas's revenue will grow by 6.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.0% today to 3.0% in 3 years time.
• Analysts expect earnings to reach €163.0 million (and earnings per share of €2.27) by about April 2028, up from €89.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €206 million in earnings, and the most bearish expecting €112 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.8x on those 2028 earnings, up from 11.0x today. This future PE is greater than the current PE for the GB Energy Services industry at 11.4x.
• 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 10.94%, as per the Simply Wall St company report.

Técnicas Reunidas Future Earnings Per Share Growth

Risks

• The company’s reliance on ambitious projections for growth in revenues and EBIT, especially by 2026, could face challenges if market conditions or internal execution do not align with these expectations, potentially impacting future revenue forecasts and profit margins.
  
• Competition and geopolitical factors, such as economic shifts and policy changes in regions like the Middle East, could affect Técnicas Reunidas' ability to secure contracts and maintain profitability, creating a risk to revenue stability.
  
• The dependency on a few large-scale projects, such as those in Vaca Muerta, Algeria, and the Emirates, introduces execution risks and possible revenue recognition delays if any setbacks occur, influencing the net margins and earnings.
  
• The company's substantial accounts receivable in relation to its sales, which it anticipates will improve but remain significant, might pose liquidity challenges and affect net cash flow, ultimately impacting earnings.
  
• External market pressures like fluctuations in prices or demand in the oil and gas sector, where much of Técnicas Reunidas’ revenue is concentrated, can lead to volatile earnings, especially if these pressures affect project financing or cost structures.

Valuation

• The analysts have a consensus price target of €18.031 for Técnicas Reunidas 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 €22.0, and the most bearish reporting a price target of just €12.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €5.4 billion, earnings will come to €163.0 million, and it would be trading on a PE ratio of 11.8x, assuming you use a discount rate of 10.9%.
• Given the current share price of €12.61, the analyst price target of €18.03 is 30.1% 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.