Record US Order Backlog And Increased Investments Will Drive Future Development Projects

Key Takeaways

• Record high order backlog in the U.S. suggests robust future revenue growth as projects commence.
  
• Ongoing diversification and increased investments could improve future earnings and market expansion.
  
• Operational challenges, including underperformance in development margins and capital returns, alongside unsustainable working capital fluctuations, present risks to profitability and cash flow management.

Catalysts

Operates as a construction and project development company in the Nordic region, Europe, and the United States.

• Skanska has a record high order backlog, particularly strong in the U.S. at 152%, which suggests robust future revenue growth as these projects commence.
  
• The strong order bookings trend, especially in the Nordics and Europe, indicates potential increases in revenue as future projects are secured and executed.
  
• Gradual improvement in the project development segment and a focus on starting more residential projects, especially in regions like Central Europe, where the market has been stable, is expected to enhance future profitability and revenue growth.
  
• Skanska's ongoing diversification efforts in commercial property development, including potential investments in life sciences and residential properties for rent, can allow it to tap into new markets, potentially improving future earnings.
  
• Planned increases in investment pace in both residential and commercial development could lead to future revenue and earnings growth, assuming market conditions stabilize or improve.

Skanska Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Skanska's revenue will grow by 6.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.1% today to 3.9% in 3 years time.
• Analysts expect earnings to reach SEK 8.3 billion (and earnings per share of SEK 20.04) by about March 2028, up from SEK 5.6 billion 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 14.5x on those 2028 earnings, down from 18.1x today. This future PE is lower than the current PE for the GB Construction industry at 20.1x.
• Analysts expect the number of shares outstanding to grow by 0.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.22%, as per the Simply Wall St company report.

Skanska Future Earnings Per Share Growth

Risks

• The residential development operating margin is below the target of 10% and currently stands at 8%, indicating pressure on profitability, which may affect future earnings.
  
• The order backlog in the U.S. market has a longer duration, potentially causing delays in revenue recognition and impacting cash flow timing.
  
• Commercial property development has a return on capital employed of only 3% in rolling 12 months, below the company target of 6%, which could pressure returns on investment and future profits.
  
• Operational losses from BoKlok in residential development highlight potential inefficiencies, impacting the overall operating income and net margins.
  
• Fluctuations in free working capital, influenced by factors such as early client payments, may not be sustainable, potentially affecting liquidity and operational cash flow management in the future.

Valuation

• The analysts have a consensus price target of SEK241.79 for Skanska 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 SEK285.0, and the most bearish reporting a price target of just SEK160.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK210.4 billion, earnings will come to SEK8.3 billion, and it would be trading on a PE ratio of 14.5x, assuming you use a discount rate of 6.2%.
• Given the current share price of SEK244.2, the analyst price target of SEK241.79 is 1.0% lower. 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.