Energy Transition And Electrification Tailwinds Will Support Stronger Long Term Prospects

Catalysts

About Elecnor

Elecnor is an engineering and services group focused on electricity, telecommunications, infrastructure projects and concessions across Europe, the Americas, Africa and Australia.

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

• Rising investment in energy transition and electrification, with more than 50% of activity linked to electricity networks and renewable projects, positions Elecnor to take on large grid, transmission and generation works, which can support revenue growth and scale driven margin gains over time.
• Ongoing urbanization and digitalization, reflected in growing electricity distribution, telecommunications and energy efficiency services in Spain, the U.S. and Italy, can deepen recurring contracts in Services and support steadier EBITDA and net margins.
• International exposure, with about 70% of the 12 month executable backlog outside Spain and an emphasis on eight core countries that already account for 88% of sales, gives Elecnor access to large project pipelines in markets such as Brazil, Chile, Dominican Republic and Australia, which can underpin future revenue and earnings.
• Ownership in Celeo, which manages nearly 8,000 kilometers of transmission lines and 350 megawatts of renewable capacity with around €300 million of turnover and about €200 million of EBITDA, offers Elecnor a source of long duration, contracted cash flows that can support group cash generation and earnings quality.
• Planned investment of more than €400 million in concessions and own projects through 2027, combined with a focus on improving project margins and a 12 month executable backlog that is 5% higher year on year, can support higher EBITDA and net profit while also reinforcing Elecnor’s capacity to keep generating cash.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more optimistic perspective on Elecnor compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Elecnor's revenue will grow by 10.9% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 2.5% today to 3.9% in 3 years time.
• The bullish analysts expect earnings to reach €235.5 million (and earnings per share of €2.74) by about May 2029, up from €110.7 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €138.8 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 24.1x on those 2029 earnings, down from 31.4x today. This future PE is lower than the current PE for the GB Construction industry at 32.6x.
• The bullish 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 9.89%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Heavy dependence on energy transition, electrification, urbanization and digitalization as growth themes means a slowdown or policy reversal in these long term trends could reduce new grid, transmission and renewable project awards across Elecnor’s key regions, which would pressure turnover and EBITDA.
• The Projects segment is targeting higher margins than Services, but large multi year contracts in countries such as Brazil, Australia, Dominican Republic, Angola and others expose Elecnor to execution, permitting and counterparty risks that could erode the current 6.8% Projects EBITDA margin and reduce net profit.
• The concessions and own projects activity, mainly through Celeo, relies on long duration transmission and renewable assets in Brazil, Chile, Peru, Spain and Brazil again for solar and PV, so adverse regulatory changes or lower allowed returns in these markets could weaken Celeo’s cash flow contribution and lower Elecnor’s attributable earnings.
• The group’s plan to invest more than €400 million in concessions and own projects and the recent net investment effort of about €104 million, combined with higher dividend payouts such as the €44 million proposed for 2025 and the goal to exceed €220 million in dividends between 2025 and 2027, could stretch the balance sheet if cash generation slows, which would affect net cash flow and net profit available to shareholders.
• International exposure, with about 70% of the 12 month executable backlog and 48% of sales outside Spain, concentrates Elecnor in a small set of top 8 countries, so long term political, currency or economic stress in any of these markets could reduce backlog conversion into revenue and weigh on group earnings.

Valuation

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

• The assumed bullish price target for Elecnor is €50.5, which represents up to two standard deviations above the consensus price target of €37.45. This valuation is based on what can be assumed as the expectations of Elecnor's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €50.5, and the most bearish reporting a price target of just €26.9.
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be €6.0 billion, earnings will come to €235.5 million, and it would be trading on a PE ratio of 24.1x, assuming you use a discount rate of 9.9%.
• Given the current share price of €41.1, the analyst price target of €50.5 is 18.6% 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.