Energy Transmission And Water Framework Delays Will Challenge Margins Yet Support Long-Term Recovery Potential

Catalysts

About Van Elle Holdings

Van Elle Holdings is a UK based specialist ground engineering contractor serving residential, infrastructure and regional construction markets.

What are the underlying business or industry changes driving this perspective?

• Although the long term build out of energy transmission networks is ramping up and Van Elle has secured multi year frameworks with Tier 1 contractors, any slippage in project timetables or scope reductions could limit the anticipated lift in higher margin specialist piling and design revenues that underpin profit growth and ROCE.
• Despite growing regulatory pressure to upgrade water infrastructure and the company’s partnerships with major framework holders, the slower than expected start to AMP8 and potential political or regulatory interference could delay volume recovery, constraining top line expansion and operating margin progression.
• While early signs of improvement in housing demand and complex brownfield development support future use of value added systems such as Smartfoot, a protracted or uneven recovery in housebuilding volumes would leave fixed assets underutilized, depressing revenue leverage and group net margins.
• Although Van Elle is building an integrated, capital light professional services and design offering in energy and ground investigation, difficulties in scaling the design team or integrating recent acquisitions could mean the mix shift toward higher margin work is slower than planned, tempering improvements in EBITDA and ROCE.
• While an increasing pipeline of industrial, data center and social infrastructure projects offers scope for larger, more efficient contracts, any renewed budget constraints or public sector reprioritization could reduce the flow of projects above GBP 1 million, limiting operating margin recovery from better fixed cost absorption and constraining earnings growth.

Assumptions

This narrative explores a more pessimistic perspective on Van Elle Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Van Elle Holdings's revenue will grow by 5.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.4% today to 4.2% in 3 years time.
• The bearish analysts expect earnings to reach £6.4 million (and earnings per share of £0.06) by about December 2028, up from £3.2 million 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 10.0x on those 2028 earnings, down from 11.8x today. This future PE is lower than the current PE for the GB Construction industry at 14.8x.
• The bearish analysts expect the number of shares outstanding to grow by 0.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.63%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent weakness or only a gradual recovery in U.K. housing and commercial building activity, despite government initiatives, could mean that order intake remains below historic peaks for several years, limiting the recovery in group revenue and constraining operating leverage on the fixed cost base, which would hold back earnings growth.
• Structural delays and uncertainty around regulatory regimes such as the Building Safety Act and AMP8 in water, as well as slow starts to rail control periods, could prolong the current pattern of project slippage and hiatuses in infrastructure spending, leading to underutilized rigs and crews and therefore suppressed net margins and lower return on capital employed over the medium term.
• Execution, strategic or exit missteps in Canada, including a protracted strategic review or asset disposals below book value, could absorb management attention and cash that might otherwise support U.K. growth opportunities. This could result in additional discontinued losses and weaker consolidated earnings and balance sheet strength than investors expect.
• Reliance on a relatively small number of large industrial and infrastructure contracts to restore profitability, in combination with high fixed costs, creates downside risk if these projects are delayed, cancelled or competitively priced. A modest revenue shortfall could then quickly translate into a disproportionately large drop in operating profit and net margins.
• Ambitious growth plans in energy transmission, water and professional services, including targets for around GBP 40 million of energy revenue and high margin design work, may prove difficult to deliver if frameworks underperform, competitors capture more share or design capacity cannot be scaled fast enough. In that case, revenue, EBITDA and return on capital employed could remain below the levels implied by the bullish share price view.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Van Elle Holdings is £0.45, which represents up to two standard deviations below the consensus price target of £0.53. This valuation is based on what can be assumed as the expectations of Van Elle Holdings'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 £0.62, and the most bearish reporting a price target of just £0.45.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be £153.5 million, earnings will come to £6.4 million, and it would be trading on a PE ratio of 10.0x, assuming you use a discount rate of 9.6%.
  
• Given the current share price of £0.34, the analyst price target of £0.45 is 23.3% 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.