Investment In Tunnel Boring Machines Will Position Company For Future Success

Key Takeaways

• Strategic focus on low-risk and sustainable projects enhances revenue stability and improves net margins due to lower risk and high demand.
  
• Expansion into high-margin sectors and innovative projects, combined with cost efficiency, boosts future growth and profitability.
  
• Heavy investment in high-cost projects could strain cash flows, while regional dependencies and new market risks may impact overall revenue and profitability.

Catalysts

Operates in construction businesses worldwide.

• Webuild's strong financial performance, surpassing its 2024 revenue and EBITDA targets, and a robust order backlog of €63 billion, provide a solid foundation for future revenue growth and profitability.
  
• The company's strategic focus on low-risk markets (90% of its backlog) and sustainable development projects (over 70% of the backlog) is anticipated to enhance revenue stability and potentially improve net margins due to the lower risk and higher demand for sustainable infrastructure.
  
• Webuild's significant investments in CapEx, including expanding its tunneling capabilities with a large fleet of TBMs, position the company well for future growth and operational efficiencies, potentially enhancing earnings.
  
• The group's entry into high-margin business opportunities, such as water production and distribution, and anticipated participation in large-scale projects, including the potential Messina Bridge and Ukraine reconstruction, are expected to drive future revenue growth and profitability.
  
• Implementation of a cost efficiency plan, improved contract management, and collaboration in new contract models are likely to enhance operating margins and result in stronger earnings performance.

Webuild Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Webuild's revenue will grow by 9.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.7% today to 2.7% in 3 years time.
• Analysts expect earnings to reach €382.9 million (and earnings per share of €0.34) by about April 2028, up from €188.6 million 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 15.2x on those 2028 earnings, down from 15.7x today. This future PE is greater than the current PE for the GB Construction industry at 13.1x.
• 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 13.57%, as per the Simply Wall St company report.

Webuild Future Earnings Per Share Growth

Risks

• Webuild's significant investment in CapEx, particularly driven by high-cost projects such as tunneling for high-speed railways in Italy, could strain cash flows and potentially impact net margins.
  
• The North American subsidiary's ongoing efforts to bring operations back to profitability indicate existing challenges in that region, which might affect overall earnings if not resolved promptly.
  
• Webuild's focus on entering new markets like Ukraine and Germany, coupled with existing macroeconomic uncertainties and geopolitical risks, could introduce execution risks and impact future revenue forecasts.
  
• High reliance on the Italian market for order intake and revenue generation, while showing potential for growth, might expose the company to regional economic downturns, impacting overall revenue stability.
  
• Potential increases in gross debt, despite maintaining net cash positions, could lead to higher interest expenses, impacting net profit margins if leverage is not effectively controlled.

Valuation

• The analysts have a consensus price target of €4.0 for Webuild based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €14.4 billion, earnings will come to €382.9 million, and it would be trading on a PE ratio of 15.2x, assuming you use a discount rate of 13.6%.
• Given the current share price of €2.98, the analyst price target of €4.0 is 25.4% 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.