Jefferies downgrades Hochtief to “hold” on valuation concerns

Investing.com -- Jefferies analysts have downgraded Hochtief (ETR:HOTG) to a “hold” rating from a “buy” rating. This decision is based on the analysts’ assessment that Hochtief’s recent stock rally is not justified by its underlying business exposure.  

Hochtief’s stock has re-rated strongly, with a greater than 20% year-to-date increase, and a 53% rise over the past 12 months. 

However, the company has limited exposure to Germany, at only 3%, while a major portion (~50%) of its earnings are derived from the US. 

The analysts believe that other European-focused construction companies, such as Balfour Beatty (OTC:BAFYY) and Eiffage (EPA:FOUG), offer better leverage and still trade at attractive valuations. These alternative stocks present a more compelling investment case compared to Hochtief.  

While Jefferies remains positive on the construction sector overall, they view Hochtief’s re-rating as misaligned with its geographical footprint. 

Additionally, there are concerns that the increasing focus on AI efficiency could pose a risk to Hochtief’s premium valuation. 

The company’s current valuation stands at 17.4 times its forward earnings, which is higher than its European peers (at around 12x) and also above the company’s 10-year average. 

This premium valuation, coupled with the fact that approximately 50% of Hochtief’s earnings are USD-exposed, creates additional risks, particularly with a strengthening EUR.  

Jefferies has increased its price target for Hochtief to €158, reflecting higher construction multiples in Europe due to a stronger overall outlook for the sector. 

However, they believe that other infrastructure plays with more European exposure, such as Balfour Beatty, Eiffage and Vinci (EPA:SGEF), are more attractive. 

At current levels, Hochtief is seen as fairly valued, with limited total shareholder return (TSR) potential over the next 12 months.  

The analysts also flag Germany’s new Infrastructure fund, which represents fresh investment, unlike in many markets where new investment often involves reallocation of funds. 

This fund is expected to boost growth across construction and energy contracting businesses in Germany over the next decade. 

However, there is an anticipated lag of 1-2 years before projects begin to impact order books. 

Hochtief’s limited exposure to this growth means that even a doubling of sales in Germany (to approximately €3 billion) would have a limited effect on earnings (4-5% accretion) and would require a significant capacity increase.  

Jefferies maintains a positive outlook on Hochtief’s earnings and remains near the top end of guidance for 2025. 

They believe that cautious sentiment around US construction is overdone and that the majority of Hochtief’s contracts are B2B and long term, making them less likely to be affected by near-term policy volatility.

However, the analysts caution that Hochtief’s valuation at 17.4x PE leaves little room for error, and any weakness could lead to a larger move down in the stock price.  

Jefferies has updated its estimates, reflecting a small underlying upgrade to offset foreign exchange headwinds, and has increased outer year growth estimates for Europe. 

This is reflected in a higher EBIT multiple for the European business (6x, up from 4x). 

Despite these adjustments, the new price target of €158 implies a modest downside from current levels.  

The brokerage emphasizes that the construction sector remains attractive with demand outpacing supply, supporting margin improvement and lower risk. 

There is a shift in focus from the US towards Europe, as the US economic outlook is less certain, while Europe is beginning to improve from a low base. Jefferies favors Balfour Beatty and Eiffage, which offer compelling valuations and the potential for increased European exposure.  

The analysts provide a broader view of the European construction market, noting that European-focused contractors have re-rated positively year-to-date, while US contractors have derated. 

Hochtief’s performance is seen as an outlier in this context, given its geographic footprint.