Decarbonisation And Electrification Will Transform Global Engineering Services

Key Takeaways

• Strategic acquisitions, operational efficiency, and global expansion are set to unlock substantial margin improvement and sustained, above-consensus revenue and profit growth.
  
• Accelerating demand for energy transition and digital solutions will drive recurring, high-margin revenue streams and position Ricardo for premium earnings multiples.
  
• Slow transition to clean mobility, reliance on volatile project revenues, and intensifying competition threaten margins, growth, and earnings predictability.

Catalysts

Provides environmental, technical, and strategic consultancy services in the United Kingdom, Europe, North America, China, rest of Asia, Australia, and internationally.

• While analyst consensus sees profit improvement and enhanced margins from the E3A acquisition and Defense divestment, the full long-term impact is likely underestimated; combining E3A's 20 percent margins with Ricardo's high-growth energy transition focus could drive group margins far beyond current targets, producing sustained double-digit annual EPS growth as the backlog converts and cross-selling intensifies.
  
• Analysts broadly agree that operational efficiency measures will boost profitability, but continuing gains in utilization, rightsizing, and digitization-combined with central cost control and a scalable, variable resourcing model-may unlock margins above 10 percent, supporting significant operational leverage to revenue growth in coming years.
  
• Ricardo stands to be a prime beneficiary of the accelerating global decarbonization agenda and rapidly growing investments in adaptation and infrastructure modernization worldwide, which should result in structural increases in long-term order intake, higher revenue visibility, and above-consensus multi-year revenue growth rates.
  
• The company's expanding digital and software-driven solutions, especially in areas like power planning, air quality, and water infrastructure, are on track to create a high-margin, recurring revenue stream that can re-rate the group towards a SaaS-like valuation and drive premium earnings multiples.
  
• Proactive international expansion into Asia, the Middle East, and North America-where public and private sector demand for energy transition, resilient infrastructure, and regulatory compliance is only in its early phases-positions Ricardo for outsized revenue and profit growth as new geographies ramp up, providing long-term, compounding earnings tailwinds above what consensus currently models.

Ricardo Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Ricardo compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Ricardo's revenue will decrease by 1.0% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -0.3% today to 4.7% in 3 years time.
• The bullish analysts expect earnings to reach £21.7 million (and earnings per share of £0.35) by about July 2028, up from £-1.2 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 bullish analyst cohort, the company would need to trade at a PE ratio of 19.3x on those 2028 earnings, up from -220.9x today. This future PE is lower than the current PE for the GB Professional Services industry at 22.1x.
• 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 8.02%, as per the Simply Wall St company report.

Ricardo Future Earnings Per Share Growth

Risks

• Persistent delays in order intake across key business segments-due to factors such as global elections, changes in government spending reviews, and market disruptions-risk constraining revenue growth and creating significant unpredictability in future earnings.
  
• The ongoing transition away from traditional automotive and internal combustion engine expertise toward electric vehicles and clean mobility solutions has been slower than expected, resulting in a £14 million goodwill impairment and increasing the risk of revenue contraction if Ricardo fails to successfully shift its business mix as the legacy market declines.
  
• Margin pressures are likely to intensify from increasing industry automation, digitization, and competition-not just from traditional peers but also from large diversified and tech entrants-which threaten both Ricardo's pricing power and long-term net margins.
  
• Ricardo's reliance on project-based revenues, particularly large, multi-year contracts that are subject to delays, exposes its earnings and cash flow to cyclical swings and market volatility, exemplified by the lower-than-expected cash conversion rate of just 13 percent in the first half of the year.
  
• Structural industry trends, such as tightening labor markets for skilled STEM professionals and an accelerating shift by clients toward in-house or technology-driven engineering solutions, could drive up wage costs and erode Ricardo's client base over the long term, negatively affecting both net margins and recurring revenue growth.

Valuation

• The assumed bullish price target for Ricardo is £5.35, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Ricardo's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £5.35, and the most bearish reporting a price target of just £2.3.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be £462.0 million, earnings will come to £21.7 million, and it would be trading on a PE ratio of 19.3x, assuming you use a discount rate of 8.0%.
• Given the current share price of £4.26, the bullish analyst price target of £5.35 is 20.4% 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.