Data Center Backlog And Modular Capacity Will Support Durable Multi Sector Demand

Catalysts

About Legence

Legence provides engineering, installation, fabrication, and maintenance services for mission critical building systems across sectors such as data centers, technology, healthcare, life sciences, education, and government.

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

• Concentrated exposure to large scale data center and technology projects, supported by a record US$5.4b backlog and awards, gives multi year visibility on project activity and can support revenue growth and operating leverage as those projects convert to sales and earnings.
• Expansion of custom fabrication and modular construction capacity to 1.3 million square feet, combined with learning curve benefits and higher throughput on repetitive data center work, creates room for higher project efficiency and can support gross margin and EBITDA margin improvement.
• Cross selling between Installation & Maintenance and Engineering & Consulting, especially as long standing high tech, semiconductor, and life science clients adopt more end to end services, can increase wallet share per customer and support both revenue and margin resilience across cycles.
• Growing demand from life sciences, healthcare, education, and state & local government, alongside data centers, broadens the end market base so the company is not reliant on one sector and this diversification can smooth cash flow and earnings while supporting backlog quality.
• Disciplined M&A, illustrated by the Bowers acquisition contributing to revenue, backlog and margin expansion while net leverage moves to 1.8x, suggests further capacity to add scale and capabilities over time, which can support higher absolute EBITDA and potentially stronger free cash flow.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Legence's revenue will grow by 22.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.1% today to 6.7% in 3 years time.
• Analysts expect earnings to reach $380.2 million (and earnings per share of $1.76) by about May 2029, up from $3.5 million 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 32.3x on those 2029 earnings, down from 1823.9x today. This future PE is lower than the current PE for the US Construction industry at 49.4x.
• 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 9.22%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Concentration in data center and technology projects, including fabrication work where orders already extend to late 2028, means any long term slowdown in that end market or a shift in customer capital spending priorities could weigh on backlog conversion and revenue.
• The business relies heavily on large, complex projects and a growing modular fabrication footprint, so persistent project timing shifts, schedule compression or execution issues could reduce efficiency gains and put pressure on gross margin and EBITDA margin.
• Growth has been supported by acquisitions such as Bowers. A future period of fewer suitable targets, higher acquisition prices or integration challenges could limit the ability to add scale and capabilities, which could slow revenue growth and earnings expansion.
• Engineering & Consulting margins are currently in the low to mid 30% range and are affected by mix toward lower margin Program & Project Management services. A lasting mix shift or softer demand for higher margin offerings like sustainability consulting could constrain segment margins and overall profitability.

Valuation

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

• The analysts have a consensus price target of $100.12 for Legence 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 $120.0, and the most bearish reporting a price target of just $45.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $5.6 billion, earnings will come to $380.2 million, and it would be trading on a PE ratio of 32.3x, assuming you use a discount rate of 9.2%.
• Given the current share price of $83.31, the analyst price target of $100.12 is 16.8% 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.