Energy Transition And Grid Expansion Are Expected To Support Long Term Earnings Quality

Catalysts

About Tesmec

Tesmec designs and manufactures specialist equipment and integrated solutions for energy transmission, rail diagnostics and trenching for infrastructure and mining.

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

• Global reinforcement and expansion of electricity transmission grids to meet rising power demand is driving sustained growth in Stringing and Energy Automation orders. This is supporting higher group revenues and operating leverage in the Energy segment.
• Ongoing energy transition investments, particularly in markets such as the United States, Australia and the Middle East, are increasing demand for automation and digitalized grid solutions. These carry structurally higher margins and are expected to lift group EBITDA margin and earnings quality over time.
• Rising rail infrastructure and safety requirements are accelerating adoption of diagnostic vehicles and systems. This is shifting the Railway division toward more technology‑rich contracts with better pricing power, which is already visible in stronger EBITDA margins and is expected to support earnings expansion.
• The managerial focus on cash generation over volumes, combined with destocking and tighter working capital management, is progressively converting backlog into cash and reducing industrial debt. This lowers financial charges and improves the trajectory of net profit.
• Geographic and customer diversification, including the French joint venture and expansion in the United States, South America and the Middle East, is broadening Tesmec's addressable market and reducing reliance on single clients. This underpins more resilient revenue growth and smoother net margins through the cycle.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Tesmec's revenue will grow by 8.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.2% today to 6.6% in 3 years time.
• Analysts expect earnings to reach €21.0 million (and earnings per share of €0.05) by about December 2028, up from €-621.0 thousand today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 14.3x on those 2028 earnings, up from -158.9x today. This future PE is lower than the current PE for the GB Machinery industry at 16.3x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 17.92%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The accelerating global build out of electricity transmission lines and energy transition investments is already driving strong demand for Tesmec's Stringing and Energy Automation solutions, and management expects this trend to strengthen next year. This could lift revenues and EBITDA faster than the market currently discounts and push the share price higher.
• Railway profitability has inflected sharply upward as the business shifts toward higher margin diagnostic systems, diversified customers and international tenders. If this structurally richer mix continues, it could materially expand group EBITDA margins and net margins, supporting a re rating of the equity over time.
• Management is targeting a return of the Trencher division to mid to high teens EBITDA margins through focus on strategic geographies such as the United States, Middle East and South America and on energy and mining applications. A successful turnaround in this largest business unit would significantly enhance group earnings growth.
• The company has already reduced net financial debt by around EUR 40 million on a 12 month rolling basis, refinanced into longer term facilities and is prioritizing industrial debt reduction. Continued deleveraging and improved cash generation could lower financial charges and support higher net profit and valuation multiples.
• Backlog in the Energy segment is significantly stronger than last year and management expects further growth driven by high value markets like Australia, the United States and the Middle East. If this robust order visibility translates into sustained double digit growth, it could drive revenues and earnings above expectations.

Valuation

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

• The analysts have a consensus price target of €0.17 for Tesmec based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be €319.6 million, earnings will come to €21.0 million, and it would be trading on a PE ratio of 14.3x, assuming you use a discount rate of 17.9%.
  
• Given the current share price of €0.16, the analyst price target of €0.17 is 3.5% 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.