UBS downgrades ACS to "neutral," citing limited upside after strong rally

Investing.com -- ACS (BME:ACS) has been downgraded to a “neutral” rating by UBS Global Research, marking a shift in outlook following a rally in the company’s shares. 

After gaining 25% since October 2024, the stock is now perceived as having a more balanced risk-reward profile, leading to the revised stance.

The downgrade comes amid concerns that the current valuation has reached a point where further upside is constrained. 

The stock is now trading at about 18 times its estimated 2025 earnings, a substantial re-rating from the 15x valuation seen in October 2024. 

Meanwhile, the broader sector, particularly key U.S. peers, has experienced a de-rating, which could act as a drag on ACS’s valuation going forward.

While ACS’s core assets remain attractive, particularly Turner Construction in the U.S. and CIMIC in Australasia, expectations for earnings in 2025 have already been priced at the higher end of the company’s guidance. 

Turner, which represents 42% of the sum-of-the-parts valuation, continues to show strong growth potential, and CIMIC is positioned to benefit from infrastructure developments in its region. 

However, with 60% of ACS’s revenue exposed to the U.S., the recent de-rating of comparable construction firms in that market presents a potential headwind.

ACS does have potential upside drivers, including opportunities in data center investments. The company has highlighted plans for a €7 billion equity investment into data centers between 2024 and 2030 in partnership with financial backers, which is not yet fully factored into the valuation. 

Additionally, ongoing infrastructure spending, particularly in Germany, is expected to support long-term revenue. However, German exposure remains limited, accounting for just 2% of total sales.

Downside risks remain a consideration. The fast-evolving nature of data centers introduces an element of uncertainty regarding ACS’s investment strategy in that space. 

A potential downward adjustment in construction sector valuation multiples in the U.S. could weigh on ACS’s sum-of-the-parts assessment. 

Additionally, Abertis, the company’s toll road business, may require further capital injections, adding to financial risk.

UBS has made minor adjustments to ACS’s earnings forecasts following the company’s 2024 results. 

While EBITDA projections for 2025-2028 have been slightly raised by 1-3%, net profit estimates for 2025 have been trimmed from €805 million to €793 million, aligning with the company’s implied guidance of €746-800 million for the year.

ACS’s price target has been increased to €56 per share from €49, driven by the incorporation of data centers and SR-400 into the valuation model. 

However, with shares already trading close to this target at €54.50, the limited upside potential further supports the downgrade.