Morningstar | Despite Preannounced Weak Margins, Bouygues Reports Better 3Q Revenue Growth; Shares Undervalued
Bouygues' preannounced margin shortfall in the construction business didn’t prevent the firm from reporting better nine-month revenue growth than we expected. However, just as we didn’t lower our EUR 45 per share fair value estimate then, we don’t expect to raise it now. We continue to believe the company has no moat and the shares are undervalued.The firm reported strong third-quarter revenue growth of 9.3% year over year. However, part of this was from acquisitions and positive currency movements. On a like-for-like and constant-currency basis, revenue for the nine-month period increased 4.3%, which is still ahead of our full-year projection of 2.4%. The construction businesses grew revenue 5.9%, but 2.2% was from foreign exchange movements. Colas, Bouygues' roads and rails business, performed particularly well with revenue up 11.4%. The firm’s backlog also hit a new high at EUR 33.8 billion, which provides lots of visibility into the next couple of years.
Bouygues Telecom is also doing well with revenue up 6.5%. We expected a slowdown this year, but that hasn’t occurred yet. It added 76,000 fiber broadband customers during the third quarter, taking its total base to 467,000. It also grew its wireless base by 475,000 moving it to 15.8 million. This was particularly impressive versus Iliad’s loss of subscribers during the quarter. However, we believe Iliad’s subscriber growth will resume, and Bouygues Telecom’s subscriber and revenue growth will slow next year.
Due to the previously announced problems with several construction contracts, Bouygues’ EBITDA margin dropped one percentage point year over year during the third quarter to 10.7%. We believe these were one-time issues that periodically occur in construction and aren’t signs of ongoing problems with the business that will permanently reduce the firm’s EBITDA margin. As a reminder first-quarter EBITDA is very low, so the nine-month EBITDA margin is now 7.6%, and we project the full year to be about 9%.
Bouygues is a global industrial group engaged in designing, building and operating structures in public and private buildings, transportation infrastructure and energy and communication networks. Co. operates in three sectors - Construction (Bouygues Construction, Bouygues Immobilier and Colas), Media (TF1) and Telecom (Bouygues Telecom). Construction is engaged in the design and maintenance of projects in the areas of building, civil works, energies and services; Media offers activities covering the audiovisual sector; and Telecom offers mobile broadband services and prepaid card services for smart phones, as well as a range of services including telemessaging, voice mail and WAP
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