Construction Backlog And Telecom Innovation Drive Bright Future Despite Economic Hurdles

Key Takeaways

• Bouygues' construction backlog and strategic telecom launches support future revenue growth and enhance market presence.
  
• Effective cost control and strategic execution bolster margins and strengthen Bouygues’ financial structure.
  
• Challenging market conditions and financial constraints in Bouygues' construction and telecom sectors could limit growth and profitability in upcoming years.

Catalysts

Operates in the construction, energy, telecom, media, and transport infrastructure sectors in France and internationally.

• Bouygues' strong backlog, especially in the construction businesses, provides visibility and a pipeline for future activity, which is likely to support revenue growth as these projects translate into sales.
  
• Equans continues to improve its sales and operating margins through the successful execution of its Perform plan, with expectations of near-term profitability improvement and margin expansion, potentially increasing earnings.
  
• Bouygues Telecom's strategic launches, including the B.iG brand and B&YOU Pure fiber offer, aim to capture new customer segments and reduce churn, supporting potential revenue growth and margin stability in the competitive telecom market.
  
• The completion of the La Poste Telecom transaction is expected to close before the end of the year, potentially increasing Bouygues Telecom's customer base and sales revenue once integrated.
  
• Continued efforts in cost control and strategic asset management, as demonstrated by the reduction in net debt and improvements in net cash flow, can enhance net margins and strengthen Bouygues’ overall financial structure.

Bouygues Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bouygues's revenue will grow by 1.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.9% today to 2.7% in 3 years time.
• Analysts expect earnings to reach €1.6 billion (and earnings per share of €4.18) by about November 2027, up from €1.1 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.6x on those 2027 earnings, up from 10.3x today. This future PE is lower than the current PE for the GB Construction industry at 35.1x.
• Analysts expect the number of shares outstanding to grow by 0.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.46%, as per the Simply Wall St company report.

Bouygues Future Earnings Per Share Growth

Risks

• Bouygues' construction businesses face challenging market conditions, particularly in the commercial property sector, which could limit revenue growth and impact net margins.
  
• The future increase in the French tax rate, as proposed in the Finance Act, would lead to significant additional tax charges in 2024 and 2025, potentially reducing net earnings.
  
• Bouygues Immobilier's backlog is down 18% year-on-year due to unfavorable market conditions, indicating potential issues in revenue generation and profit margins.
  
• Despite solid performance, Bouygues Telecom faces a competitive mobile market environment, which has led to a decrease in mobile ABPU and could further pressure revenue and profitability.
  
• Bouygues’ net debt remains significant at €8.5 billion, which could strain financial flexibility and negatively impact future profitability if economic conditions worsen or interest rates rise.

Valuation

• The analysts have a consensus price target of €36.97 for Bouygues 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 €44.5, and the most bearish reporting a price target of just €30.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €59.5 billion, earnings will come to €1.6 billion, and it would be trading on a PE ratio of 11.6x, assuming you use a discount rate of 9.5%.
  
• Given the current share price of €29.11, the analyst's price target of €36.97 is 21.3% 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.