Europe Regulations And Telecom Rivalry Will Weaken Future Performance

Key Takeaways

• Stricter climate regulations, labor shortages, and high capital costs threaten profitability and visibility across Bouygues' construction and infrastructure segments.
  
• Telecom segment faces eroding margins from fierce competition, rising costs, and execution risks in large, complex projects, impacting group-wide earnings stability.
  
• Strong construction backlog, improved margins in core businesses, and focus on sustainability position the company for resilient, long-term revenue and profit growth.

Catalysts

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

• Intensifying climate change regulations and rapidly evolving environmental standards across Europe are set to sharply increase compliance costs and capital expenditure for Bouygues, putting sustained pressure on net margins and reducing long-term earnings visibility in both the construction and infrastructure segments.
  
• Aging demographics and persistent labor shortages in Europe are likely to escalate labor costs and trigger chronic project delays, directly eroding project profitability and potentially causing double-digit percentage drops in construction segment margins over time.
  
• With global interest rates remaining stubbornly high and tighter credit conditions curbing infrastructure and real estate investment, demand for Bouygues' core construction, property development, and PPP services could structurally decline, stalling top-line revenue growth for multiple years.
  
• Bouygues Telecom's profitability faces structural threat as hyper-competition and price wars in both fixed and mobile segments drive average revenue per user down, while energy costs and regulatory levies (such as rising IFER tax and expiring energy price hedges) further compress EBITDA and accelerate net income decline.
  
• Execution risk in large-scale and technologically complex projects-including delayed gigafactories, data center project slowdowns, and persistent underperformance in certain international operations (notably the UK)-is likely to result in more frequent cost overruns and earnings volatility, undermining group-wide revenue resilience and margin recovery for the foreseeable future.

Bouygues Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Bouygues compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Bouygues's revenue will decrease by 0.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.8% today to 2.4% in 3 years time.
• The bearish analysts expect earnings to reach €1.4 billion (and earnings per share of €4.28) by about August 2028, up from €1.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 12.9x on those 2028 earnings, down from 14.3x today. This future PE is greater than the current PE for the GB Construction industry at 12.8x.
• Analysts expect the number of shares outstanding to grow by 0.95% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.37%, as per the Simply Wall St company report.

Bouygues Future Earnings Per Share Growth

Risks

• A record high construction backlog of €33 billion, growing year-on-year, and driven by both domestic and international contracts, gives Bouygues strong multi-year revenue visibility and resilience against short-term market volatility.
  
• Equans is exceeding its margin improvement milestones, targeting a COPA margin of 5% by 2027, and expanding into higher value-added markets like US data centers, which is likely to enhance group net profit and cash flow generation.
  
• Bouygues Telecom continues to post solid subscriber net additions, improvements in churn, and progress in fiber uptake, while also benefiting from potential market consolidation that could elevate future earnings and margin prospects.
  
• The group's focus on energy transition and large-scale rollout of low-carbon technologies, such as its ACT cement, positions it to capitalize on growing demand for sustainable infrastructure, supporting both revenue growth and improved blended project margins.
  
• Despite headwinds in some areas, construction and infrastructure units like Colas and Bouygues Construction are reporting order books and sales up versus last year, with margin normalization or improvement expected in 2025 and beyond, driving sustainable growth in both revenues and net income.

Valuation

• The assumed bearish price target for Bouygues is €35.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Bouygues's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €52.0, and the most bearish reporting a price target of just €35.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €58.8 billion, earnings will come to €1.4 billion, and it would be trading on a PE ratio of 12.9x, assuming you use a discount rate of 10.4%.
• Given the current share price of €39.28, the bearish analyst price target of €35.0 is 12.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.