AST - Astaldi

[rickh]

Astaldi Group is an Italian EPC contractor and PPP/project financing operator (#1 PPP operator globally, #3 contractor in bridges globally, #5 in hydro plants globally). The company currently trades at €3.87/share (EV €1.6bn, 5.3x LTM 1Q16 EBITDA).

 

In FY15A, Astaldi generated €2.2bn in revenues (17% Italy, 46% rest of Europe, 31% America, 2% Asia and 5% Africa) with €286mm EBITDA (12.9% margin) while being levered 3.9x net debt/EBITDA.

The segmental breakdown in FY15A was 69% transport infrastructure, 16% hydraulics and energy production plants, 9% civil and industrial constructions, 6% management services, and 1% concessions.

Recent notables projects include Line 4 of the Milan underground in Italy, the Third Bosphorus Bridge in Turkey and WHSD in St. Petersburg, Russia.

 

The company has c. €18bn backlog in execution and an additional €11bn in backlog options. The backlog in execution has grown at a 15.6% CAGR since 2011. Contract split has moved from 96% traditional contracts vs. 4% EPC contracts in 2006 to 47% traditional contracts vs. 53% EPC contracts in 2015. It is expected that EPC contracts will make up 60% of the total from 2018E onwards. The focus on EPC should secure margins and allow for better long-term cash flow visibility. Strict EBIT margin thresholds determine initial project selection and allow for a consistent track-record of margins.

 

The current total backlog is 83% in transport infrastructure and covers 100% of 2016E revenues targets, 74% of 2017E revenue targets and 51% of 2018E revenue targets. Based on the backlog, management foresees a revenue growth of 7% p.a. throughout 2020E. In the mid-term, management has mentioned decreasing leverage as the main priority, and wants to facilitate this via asset disposals, rationalisation of capex, a "capital light" business model and enhanced working capital discipline (target net debt / EBITDA < 2.0x).

 

Asset disposals are expected to equal c. €750mm until 2020E, with the first €110mm having been closed in July 2016. The proceeds will be used to pay down debt. Company estimates call for c. €650mm of capex spend between 15-20E or c. €130mm p.a. Concession capex peaked in 2015A and is expected to fall significantly over time. Net working capital amounted to c. 24% of sales in 2015A and is expected to decline to below 20% of total revenues by 2020E. Astaldi has ample liquidity with €611mm in cash and €300mm in undrawn credit facilities and we do not foresee any refinancing risk in the forecast period.

 

Assuming 7% revenue growth rate p.a., EBITDA and EBIT margins below historical average and management guidance at 12% and 9.5%, respectively, a 35.9% tax rate, capex spend and NWC based on company guidance and assuming a 8.5% WACC and a 2% growth rate into perpetuity, we arrive at an intrinsic valuation of €8.90/share allowing for a 129% upside to the current share price.

 

I would go long the equity at the current market price. Any opinions on this?

[benjamin1978]

Thanks. What's their historical record on project management and execution? Any cost overruns etc.?

 

Backlog seems healthy but personally I find investing in levered E&Cs with no book value very difficult unless there's you can argue the business is somehow differentiated.

[rickh]

Projects have been executed as agreed and the few delays were caused by unforeseeable events.

I didn't find any major cost overruns, despite the ones associated with the aforementioned events.

 

I agree, it's a levered company, but the emphasis on de-leveraging and plan to dispose of assets sends a strong signal to shareholders. The company additionally plans to start distributing a dividend to shareholders from 2018E onwards, aiming at a 20% payout ratio.

 

I think that they are a top 3 player in terms of profitability in their industry and that they have been involved in a number of high-profile, difficult to execute projects in the past. These seem to be the major differentiators to the rest of the peer group.

 

Overall, the assumptions I've used a very conservative and the company still comes out to be significantly higher valued than the market currently views it.

[benjamin1978]

yeah, I think with these E&Cs you're basically betting on the people i.e. do they have the right project managers in place, are they chasing new projects to build backlog, how accurate are they able to scope the projects in order to make sure bids are reasonable etc. Definitely could work out very well but personally I'm never smart enough to figure these things out

 

 

[handycap5]

I really like this general idea. I do not like the 63% exposure to Europe. Do you know of any competitors which have more exposure to the US? Thanks for the thoughts.

 

Why do you think they are top 3 in terms of profitability? What gives them the margins. Nature of projects? Costs? Appreciate your thoughts.

[rickh]

yeah, I think with these E&Cs you're basically betting on the people i.e. do they have the right project managers in place, are they chasing new projects to build backlog, how accurate are they able to scope the projects in order to make sure bids are reasonable etc. Definitely could work out very well but personally I'm never smart enough to figure these things out

 

I understand what you are saying, but I think that the margin of safety should provide ample downside protection.

[rickh]

I really like this general idea. I do not like the 63% exposure to Europe. Do you know of any competitors which have more exposure to the US? Thanks for the thoughts.

 

Why do you think they are top 3 in terms of profitability? What gives them the margins. Nature of projects? Costs? Appreciate your thoughts.

 

Good question, haven't looked at competitors regional exposure.

The margins are a result of a mixture of complicated projects and focused cost control.

[Okta]

I remember they have some outstanding receivables in Southern America which were not written down. Do you think they will receive 100 on the dollar? Otherwise this looks cheap and I am long.

[rickh]

I remember they have some outstanding receivables in Southern America which were not written down. Do you think they will receive 100 on the dollar? Otherwise this looks cheap and I am long.

I haven't heard any estimates about how much they'll recover. However, I don't think it'll drag on overall performance.