Equans' Perform Strategy And La Poste Telecom Acquisition Will Improve Future Profitability

Key Takeaways

• Successful execution of strategic plans and acquisitions enhance margins and revenue stability, boosting Bouygues' construction and telecom segments.
  
• Commitment to sustainability and strategic telecom investments foster revenue growth and improve market competitiveness, while aligning with investor eco-preferences.
  
• Competitive pressures, international sales variability, and restructuring costs may strain Bouygues' profitability, impacting margins, revenues, and financial performance across sectors.

Catalysts

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

• The successful execution of Equans' Perform strategy has led to significant improvements in margins and cash flow, with further planned advancements that aim to reach a margin from activities of 5% by 2027. This will potentially boost the group's operating margin and profitability.
  
• Bouygues' record-high construction backlog of €32.2 billion provides strong visibility and stability for future revenues, supporting growth across the construction segments and potentially enhancing overall revenue.
  
• The acquisition of La Poste Telecom is expected to enhance Bouygues Telecom's EBITDA by €140 million through customer migration onto Bouygues Telecom's network, gradually improving earnings through synergies by 2028.
  
• Bouygues has invested in enhancing its telecom operations, particularly in fixed lines, which continue to show strong growth driven by strategic offerings like B.iG and B&YOU Pure fiber. This is expected to sustain revenue growth and market competitiveness in the telecom sector.
  
• The company is focusing on sustainability with its Science-Based Targets initiative and improved external ratings, which could positively impact future cost efficiencies and align with increasing investor preference for eco-friendly companies, potentially benefiting net margins.

Bouygues Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bouygues's revenue will grow by 1.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.9% today to 2.2% in 3 years time.
• Analysts expect earnings to reach €1.3 billion (and earnings per share of €4.16) by about March 2028, up from €1.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.7x on those 2028 earnings, up from 12.9x today. This future PE is greater than the current PE for the GB Construction industry at 13.4x.
• Analysts expect the number of shares outstanding to decline by 0.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.75%, as per the Simply Wall St company report.

Bouygues Future Earnings Per Share Growth

Risks

• The downturn in interest rates and a challenging environment for Bouygues Immobilier have led to a negative COPA with declining residential and commercial property sales, which could impact net margins and overall earnings.
  
• The variability in construction sales, notably in Colas with slight drops due to international operations, particularly in North America, could affect future revenues and profit margins.
  
• Bouygues Telecom may face competitive pressure in the mobile market, with declining ABPU and expectations of continued tension impacting revenue growth and EBITDA margins.
  
• Significant restructuring and integration costs associated with the La Poste Telecom acquisition, along with limited initial contributions to EBITDA, could strain free cash flow and overall financial performance in the short term.
  
• An increase in the effective tax rate and exposure to potential adverse tax law changes could affect net profit margins and overall profitability for the group.

Valuation

• The analysts have a consensus price target of €36.81 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 €46.0, and the most bearish reporting a price target of just €31.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €59.2 billion, earnings will come to €1.3 billion, and it would be trading on a PE ratio of 13.7x, assuming you use a discount rate of 9.7%.
• Given the current share price of €36.32, the analyst price target of €36.81 is 1.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.