Geotechnical Fleet Expansion With 'Resolve' And 'Resilience' Will Meet Rising Demand In Oil And Gas

Key Takeaways

• Expansion of geotechnical fleet and innovation in remote operations could improve margins and revenue by increasing utilization rates and reducing operational costs.
  
• Backlog growth and strategic collaborations signal potential revenue increases, with projects reactivated by policy changes and strong market fundamentals in key regions.
  
• Geopolitical tensions and market uncertainties could undermine revenue and financial stability, with risks in project execution and potential overcapacity in the geotechnical fleet.

Catalysts

Provides geo-data services for infrastructure, energy, and water industries in Europe, Africa, the Americas, the Asia Pacific, the Middle East, and India.

• Fugro's expansion of its geotechnical fleet with assets like the Fugro Resolve and Resilience is expected to increase the fleet's utilization rates and generate higher margins due to increased demand for these services in both oil and gas and renewables, which should positively impact revenue and operational leverage.
  
• The company's innovation in remote operations and USV technology, such as deploying the Blue Dragon and Blue Snake, offers scalable solutions that could reduce operational costs and enhance project efficiencies, likely improving net margins as these technologies become integrated into more projects.
  
• Fugro's robust 16.8% backlog growth, particularly in Europe-Africa and Asia Pacific, signals potential for future revenue growth, as these regions are driven by solid market fundamentals in geotechnical and marine services which are less affected by current geopolitical and economic challenges.
  
• The Biden administration lifting the LNG export ban is expected to reactivate projects that were put on hold, potentially boosting revenue in the Americas and improving Fugro's regional business performance which has been under strain due to regulatory uncertainties and project delays.
  
• Fugro's strategic collaboration with Autodesk, combining subsurface information with construction design, should enhance their offering in infrastructure projects and likely attracts more business, potentially increasing revenue and positioning Fugro as a leader in digital solutions for site characterization and infrastructure planning.

Fugro Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fugro's revenue will grow by 6.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 13.1% today to 10.6% in 3 years time.
• Analysts expect earnings to reach €293.1 million (and earnings per share of €2.6) by about February 2028, down from €295.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €337.6 million in earnings, and the most bearish expecting €251 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.8x on those 2028 earnings, up from 5.5x today. This future PE is greater than the current PE for the GB Construction industry at 6.6x.
• Analysts expect the number of shares outstanding to grow by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.15%, as per the Simply Wall St company report.

Fugro Future Earnings Per Share Growth

Risks

• Fugro's business in the Americas is facing short-term market-driven challenges, including postponements in the offshore wind sector and uncertainty in U.S. markets due to upcoming elections, which could impact revenue and delay future earnings.
  
• Geopolitical instability, particularly in the Middle East and Ukraine, has affected activity levels in the Middle East, potentially impacting revenue from projects in this region.
  
• Economic growth slowdowns and factors such as weaker oil demand from China could impact Fugro's revenue from oil and gas markets.
  
• The geotechnical fleet expansion, while providing high demand, could lead to overcapacity if market conditions change, impacting net margins.
  
• Fugro's reliance on project execution in volatile regions means unpredictability in cash flow and could impact overall financial stability if delays or geopolitical tensions continue.

Valuation

• The analysts have a consensus price target of €27.45 for Fugro based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €33.0, and the most bearish reporting a price target of just €18.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €2.8 billion, earnings will come to €293.1 million, and it would be trading on a PE ratio of 12.8x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of €14.21, the analyst price target of €27.45 is 48.2% 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.