Energy Transition And Electrification Tailwinds Will Still Leave This Business Overvalued

Catalysts

About Elecnor

Elecnor operates services, projects and concessions focused on electricity, telecommunications, energy infrastructure and related maintenance across multiple regions.

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

• Energy transition and electrification are supporting a large international projects pipeline. However, if execution on complex transmission lines, combined cycle plants and renewable farms in countries such as Brazil, Australia and the Dominican Republic slips, cost overruns and delays could pressure project margins that currently sit at 6.8% and weigh on EBITDA growth.
• Rising demand for network reinforcement and digital infrastructure is feeding electricity and telecommunications services in Spain, Italy and the United States. A sharp slowdown in awarded contracts or tougher pricing on long term maintenance deals could compress the 6% EBITDA margin in Services and cap revenue expansion.
• Heavy reliance on eight core countries that together account for 88% of sales concentrates exposure to local regulatory and concession frameworks. Adverse tariff reviews or contract changes in Brazil, Chile, Peru or Spain could hit Celeo’s transmission and renewables cash flows and reduce Elecnor’s share of profit, currently €16.1m on about €214m of EBITDA generated at that platform.
• The plan to allocate more than €400m to new concession and own project investments assumes a steady supply of high yielding opportunities. Overpaying for assets or facing tighter returns on future bids could dilute return on capital and drag on net profit and free cash flow, limiting flexibility after dividend commitments that target more than €220m between 2025 and 2027.
• Urbanization and digitalization are supporting long duration utility and telecom contracts. Wage inflation, stricter safety and environmental requirements across a 28,000 plus workforce and higher compliance costs along the full supply chain could lift operating expenses faster than service price adjustments, eroding net margins and constraining earnings growth.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on Elecnor compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Elecnor's revenue will grow by 2.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.5% today to 3.0% in 3 years time.
• The bearish analysts expect earnings to reach €141.7 million (and earnings per share of €1.67) by about July 2029, up from €110.7 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €240.5 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 27.6x on those 2029 earnings, down from 29.0x today. This future PE is lower than the current PE for the GB Construction industry at 29.0x.
• The bearish 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 9.78%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Energy transition, electrification and sustainability are explicitly cited as macro trends supporting Elecnor's outlook. If these long term themes fail to underpin demand for electricity, renewables and grid projects, the company may find it challenging to add to its €4.4b turnover or support revenue and EBITDA.
• The Services segment is described as essential to energy distribution, telecommunications and maintenance, with €2.4b of sales and a 6% EBITDA margin. If long duration service contracts in Spain, Italy and the United States weaken or are not renewed, recurring activity may be insufficient to support revenue, margins and earnings.
• The Projects segment has a strong international orientation, with 91% of sales outside Spain and activity across Brazil, Australia, the Dominican Republic and other countries. If global demand for transmission lines, substations and renewable farms falls short, the €2,000m turnover in Projects may not provide the same level of support for overall group revenue and net profit.
• Celeo manages nearly 8,000 kilometers of transmission lines and 350 megawatts of renewable energy with turnover close to €300m, EBITDA of €200m and earnings of €32m. If this asset base does not operate steadily or generate the expected cash flows, Elecnor's €16.1m share of profit and the €214m EBITDA attributable to Celeo may not support earnings or improve net margins.
• The group reports a 12 month executable backlog that is 5% higher than the prior year and about 70% of that backlog is international. If this contracted work does not convert as planned or is not replenished by new awards linked to long term trends like urbanization and digitalization, visibility on future revenue, EBITDA and net profit could be reduced.

Valuation

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

• The assumed bearish price target for Elecnor is €34.95, which represents up to two standard deviations below the consensus price target of €42.02. 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 more bearish 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 €34.95.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be €4.8 billion, earnings will come to €141.7 million, and it would be trading on a PE ratio of 27.6x, assuming you use a discount rate of 9.8%.
• Given the current share price of €37.95, the analyst price target of €34.95 is 8.6% 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.