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MASTERS IN FINANCE
EQUITY RESEARCH
Engineering and Construction: has a backlog of €3,3 bn, or
roughly two years of revenues, with E&C representing 85% of this
value. International activity will be the driver of future growth.
Environment and Services: is expected to present interesting
margins despite modest growth in revenues. Internationalization
reinforced with Geo Vision.
Ascendi: Concessions theoretically with no risk, as they are run
under the availability of network system, and therefore not
depending on traffic. However, amendments to the contracts are
expected in March 2012.
Martifer: increasing pressure on metallic constructions business
with declining revenues and negative EBITDA margins. Solar is
expected to drive Martifer’s growth for the next years, despite the
increasing uncertainty affecting the renewables sector.
Additionally, asset sales are expected to enable significant net
debt reductions.
Asset’s sale: Mota has 200M€ in assets for sale, which will
considerably impact the price target.
Sector’s consolidation: even if the company has denied its
intention to participate.
Company description
Mota-Engil SGPS SA is a Portuguese company operating in three
major business areas: Engineering and Construction (E&C),
Environment and Services (E&S) and Transport Concessions. It
carries on its business in 19 countries through branches and
subsidiaries around the world. Among the most important markets
are Portugal, Poland, Angola, Mozambique, Peru and Mexico.
MOTA-ENGIL COMPANY REPORT
CONSTRUCTION 06 JANUARY 2012
DUARTE MORAIS SANTOS [email protected]
Asset’s sale...
...a big question mark!
Recommendation: Buy
Price Target FY12: 1.57 €
Price (as of 6-Jan-12) 1.04 €
Reuters: MOTA.LS, Bloomberg: EGL:PL
52-week range (€) 0.99-2.09
Market Cap (€m) 200.422
Outstanding Shares (m) 193.600
Source: Bloomberg and NOVA SBE Equity Research Team
Source: Bloomberg
(Values in € millions) 2010 2011E 2012F
Revenues 2.005 2.088 2.120
EBITDA 237,3 267,8 269,2
EBITDA margin 11,8% 12,8% 12,7%
Net Profit 37,0 31,5 19,3
EPS 0,19 0,16 0,10
P/E 5,7
Net Debt/EBITDA(1)
4,3 3,8 3,8
Source: Mota-Engil and NOVA SBE Equity Research Team
(1) Excluding Ascendi’s debt.
-15
5
25
45
65
85
105
125
03-01-2008 03-01-2009 03-01-2010 03-01-2011
Historical Share Price Performance
Mota-Engil PSI20
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Table of Contents
COMPANY OVERVIEW ........................................................................... 4
THE SECTOR ........................................................................................... 5
OVERVIEW............................................................................................................. 5 COMPARABLES ..................................................................................................... 7
VALUATION ............................................................................................10
GLOBAL METHODOLOGY .................................................................................... 10 MULTIPLES VALUATION....................................................................................... 12 ENGINEERING AND CONSTRUCTION ................................................................... 13
Iberia .................................................................................................. 13 Africa .................................................................................................. 14 America .............................................................................................. 14 Central Europe .................................................................................. 15 Total Backlog .................................................................................... 16 Conclusion ......................................................................................... 16
ENVIRONMENT AND SERVICES ........................................................................... 17 Waste ................................................................................................. 18 Water .................................................................................................. 18 Logistics ............................................................................................. 19 Multi-services .................................................................................... 20 Backlog .............................................................................................. 20 Conclusion ......................................................................................... 20
MARTIFER ........................................................................................................... 21 Metallic Constructions...................................................................... 21 Solar ................................................................................................... 22 Conclusion ......................................................................................... 24 Total Backlog .................................................................................... 25
ASCENDI .............................................................................................................. 25 Valuation ............................................................................................ 26
DEBT POSITION .....................................................................................27
IS MOTA-ENGIL REALLY CREATING VALUE? ....................................29
M&A SCENARIO .....................................................................................30
METHODOLOGY................................................................................................... 31 OPWAY ................................................................................................................ 32 EDIFER ................................................................................................................ 32 SYNERGIES ......................................................................................................... 33
APPENDIX ..............................................................................................35
1) FCF CALCULATION – THE END OF THE EUROZONE ............................ 35 2) PROBABILITIES OF DEFAULT ACCORDING TO RATING ........................ 37
DISCLOSURES AND DISCLAIMER .......................................................39
RESEARCH RECOMMENDATIONS ........................................................................ 39
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Investment Considerations
We are rating Mota-Engil BUY with a price target of 1,57€, despite some important
risks to our valuation:
1) Rising interest rates.
Mitigation: we have considered a significant increase in interest rates paid,
namely from 5% in 2010 to 8,9% in 2013. We then expect them to decrease to
7,9% by 2016, as the credit markets unfrozen.
2) Failure in assuming the €200 mn.
Mitigation: in our analysis we have considered that the company will only be
able to sell 35% of the €200 mn, with impairment losses amounting to 10%. A
sensitivity analysis to the price target was conducted in table 14.
3) Not being able to rollover short term debt.
Mitigation: The company can always sell either or both Ascendi’s and
Martifer’s positions. This would give the company a value of nearly 223M€,
representing 43% of 2010’s short term debt.
4) Portugal entering in bankruptcy and exiting the Eurozone.
Mitigation. We tried to mitigate such risk by decreasing Mota-Engil’s FCF. We
did it by introducing additional scenarios (for further details see appendix 1).
5) Amendments to Mota’s concessions contracts.
Mitigation: We have mitigated this risk by not considering the concessions
Douro Interior and Pinhal interior in our valuation, and by valuing Copexa and
Marechal Rondon Leste only through invested capital. Additionally, when
calculating the value under the availability of network system, we have
introduced the probability of changes in the contracts previously signed
(besides Ascendi’s default probability).
6) Angolan recession. Angola is completely dependent on oil prices. Given the
current situation in Europe, some retraction in consumption and, consequently
in oil prices, is possible.
Mitigation: We have mitigated this risk with conservative revenues growth
forecasts for the country, with a CAGR of 5,4%, from 2010 to 2016.
7) Working capital position.
Mitigation: We have considered a CAGR of 4,3% for the period between 2011
and 2016, in order to account for further payment delays or even client’s
bankruptcies.
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64%
5%
2%
2%
2% 25%
Figure 2 - Mota-Engil's Shareholder structure
Mota Family
Privado Holding
NMAS Asset Management
QMC Development Capital
Morgan Stanley
Other
30th
largest European construction company in 2010…
Source: Bloomberg and NOVA SBE Equity
Research Team
Company Overview
Mota-Engil has been the largest Portuguese civil and public construction
contractor for the last decade. According to Bloomberg data, it was the 30th
largest European construction group in 2010 when considering total revenues.
The group history started in 2000 with the merger between Mota and Engil.
However, the know-how accumulated goes well beyond that until 1946 when
Mota was originally created. By 1952 Mota was awarded with the construction of
Luanda’s International Airport, initiating its internationalization process.
Diversification and internationalization have been a major concern of Mota-Engil
due to its declining domestic construction market. The company has taken an
astute option and expanded into other business areas, namely waste and water
management, logistics, and concessions through a 60% participation in Ascendi.
Mota-Engil is also present in the metallic construction and renewable energies
markets, through a 37,5% stake in Martifer SGPS. Mota-engil is, nowadays, a
true international group, with its structure divided in 3 major areas: Engineering
and Construction (E&C), Environment and Services (E&S) and Investments.
Figure 1 – Mota-Engil’s Corporate Structure
Source: Mota-Engil; NOVA SBE Equity Research Team
Shareholders’ structure is composed mainly by Mota family (see figure 2),
which can be seen as positive for the day to day activity of the company, as it
provides considerable stability. On the other side, however, it poses a true
threat to small investors, since management may be taking actions in the
interest of only a group of shareholders, eventually driven by non-economical
reasons. Moreover, it is likely to be an obstacle to capital increases, as the
Mota family may be limited in terms of capital and unwilling to dilute their
current position. Hostile takeovers are also much less probable, due to
difficulties in gaining major shareholder approval.
Mota-Engil
Engineering & Construction
Infrastructure Building Real
Estate Others
Environment & Services
Waste Water Logistics Multi-
services
Investments
Ascendi Martifer
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The Sector
Overview
Triggered by the Sovereign debt crisis in Greece, Europe and particularly Portugal
are now facing demanding restructuring plans, with severe consequences for the
construction sector. Recent estimations are pointing towards a recession between
2,5% and 3% in Portugal, according to the Portuguese government and the
European Union, respectively.
In figure 3 we make a comparison of the gross value added by construction
activity among several countries in Europe. Portugal seems to be in line with other
European economies. However, in figure 4 we can also conclude that Portuguese
evolution in the last decade as been consistently negative, both in terms of value
added and employment, gradually decreasing its weight in the Portuguese
economy.
Figure 4 – Portuguese Gross Value Added evolution; Employment index
(base 100; July 2005)
Source: Eurostat; INE; NOVA SBE Equity Research Team
According to Eurocontruct1, the residential new housing market is expected to
continue its decline until 2013. Renovation works will experience a smaller
decline, with recovery starting one year sooner – 2012. However we expect a
significantly higher decrease given the current reality in the 3rd
Q 2011 and a
recent forecast of a lower GDP and Public investment, factors that were not
included in Euroconstruct’s projections. In figure 5 we compare both expectations.
1Euroconstruct, 2010. 70th Euroconstruct Country Book, European Construction: Market trends until 2013. Budapeste, 2-3 December 2010.
7,6% 7,7% 7,6%
7,1% 7,1% 6,9%
6,7% 6,8% 6,7%
6,0% 6,0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
4,0%
4,2%
4,8%
5,3%
5,5%
5,9%
6,0%
6,1%
6,4%
6,6%
7,0%
7,1%
9,0%
10,2%
Hungary
Germany
Norway
Belgium
Sweden
Italy
Portugal
United Kingdom
France
Finland
Czech Republic
Poland
Slovakia
Spain
Figure 3 - Gross Value Added Contruction (2010)
Decreasing weight of
construction on GDP…
Sovereign debt crisis pressuring construction companies…
29 2622 20
55
54
2007 2008 2009 2010
Figure 5 - Concluded new construction (thousands)
Residential Non-residential
CAGR=-10,4%
112 117 97 91 89 86 79 72 101 105 111 Employment Index
Source: Eurostat and NOVA SBE Equity Research Team
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Figure 5 – Total Construction Output (base 2000)2
Source: Euroconstruct and NOVA SBE Equity Research Team
According to INE, the total number of concluded residential new buildings declined
8,8% in 2010, while non-residential new buildings declined by 7% (figure 6). When
considering renovation works, the decline is much smaller – only 2,4%. To what
2011 is concerned, until October the total decrease was 7,4%, already in line with
our forecast of an accumulated 9% decrease for total 2011.
To what new permits for new housing is concerned, 2011 is witnessing a 16,7%
decline, leading to an accumulated decline since 2008 of 45%. The decline is
considerably larger for residential construction, as can be seen in figure 7.
Several reasons contribute to this decreasing tendency in the sector. The number
of inhabitants per dwelling decreased over the last years from 2,1 in 1999 to 1,9 in
2010, among the lowest values in Europe (figure 9).
Figure 9 – Number of inhabitants per dwelling (2010)
Source: European Mortgage Federation and NOVA SBE Equity Research Team.
To what residential debt is concerned (figure 10) we can see that Portuguese
families are among the most indebted in Europe.
2 Euroconstruct’s projections did not include the recent events such as a decline in GDP projections or in public investment forecasts. For the year
2011 we have already included the values until October in our analysis. 2012 was computed considering a 9,5% reduction in Public and Private
investment, according to the public budget proposal of 2012. Notwithstanding, growth is expected in 2015.
32.528 33.261 32.642 29.946 29.331 28.230
26.707 26.601 25.383 23.096
21.373 19.449
15.949 14.992 14.692
100 102 100 92 90 87 82 82 78
71 66 63 62 63 63
60 49 46 45
-15
5
25
45
65
85
105
0
5.000
10.000
15.000
20.000
25.000
30.000
35.000
40.000
45.000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E
Mill
ion
(€)
Total Output Construction Index Euroconstruct Index NOVA SBE
1,7 1,8 1,8 1,9 1,9 2,0 2,0 2,0 2,1 2,1 2,2 2,2 2,3 2,3 2,3 2,5 2,6 2,7 2,8
Lost decade for the Portuguese construction market…
29 2622 20
55
54
2007 2008 2009 2010
Figure 6 - Concluded new construction (thousands)
Residential Non-residential
CAGR=-10,4%
24
16 1512
6
5 44
2008 2009 2010 2011
Figure 7 - New construction permits (thousands)
Residential Non-residential
CAGR=-18,2%
6 5 5 5
55
4 4
2008 2009 2010 2011
Figure 8 - Renovation permits (thousands)
Residential Non-residential
CAGR=-6,8%
Source: INE and NOVA SBE Equity Research Team
Source: INE and NOVA SBE Equity Research Team
Source: INE and NOVA SBE Equity
Research Team
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The number of bankruptcies has been increasing over the last months. This year
several major players in the Portuguese market filed in for bankruptcy3. According
to AECOPS4 the number of bankruptcies until September 2011 was 1446, a
number much higher than the total number for 2010 – 970 companies. As a
consequence, banks overdue credit conceded to Portuguese construction
companies has reached astonishing values. According to Banco de Portugal, the
ratio of overdue debt in the construction sector increased from 2% in December
2006 to 10,5% of total credit conceded in September 2011 – Figure 11. This
corresponds to an increase from €457mn in December 2006 to €2.552mn in
September 20115.
In terms of public works, it is relevant to notice that major investments were
dropped. Tagus Bridge, the new international airport of Lisbon, the high speed
train and several other infrastructure plans have been postponed. Also, when
observing the motorway extension in Portugal we can conclude that Portugal is
among the countries with more km of motorways (figure 12).
Conclusion: Euroconstruct’s forecasts did not include important variables that
were recently disclosed. Given current family’s indebtedness levels, as well as
lending restrictions being imposed and the delay in public works, we expect a
higher and more prolonged decline in total production (see figure 5).
Comparables
The industry in Portugal is characterized by three major players – Mota-Engil,
Teixeira Duarte and Soares da Costa - and a reasonable number of other
considerably big construtors – Somague, Lena, Opway, Edifer, Monte Adriano,
MSF, FDO and DST. The three major players together represented only 9,4% of
the market in 20106.
Teixeira Duarte is the most diversified of the three major players. Besides
construction, they develop activity in several other areas: concessions, logistics,
Energy, Automobiles and own several financial participations, namely in
Millennium BCP and BBVA. Soares da Costa, on the contrary, is the least
diversified company. Nevertheless, it does business in non-construction areas
such as concessions (road, water and waste) and environment and energy
through SelfEnergy.
3 This was, for instance, what happened with NOVOPCA, a construction company with more than 60 year of activity, or Mesquita with more than 50 years of emblematic works. 4 Engenharia Portugal, 2011. Falências de mais de 1400 construtoras em 2011. [online] Available at: <http://www.engenhariaportugal.com/falencia-
de-mais-de-1400-construtoras-em-2011> [accessed September 2011]. 5 Banco de Portugal, Ocotber 2011, Boletim Estatístico. 6 Based on financial reports and Euroconstruct data
2,0% 2,0% 3,3%
5,6%
7,2%
10,5%
0,0%
2,0%
4,0%
6,0%
8,0%
10,0%
12,0%
2006 2007 2008 2009 2010 2011
Figure 11 - Bad debt levels
Source: Banco de Portugal and NOVA SBE
Equity Research Team
13.515
12.645
11.042
6.629
3.673
2693
2.637
1.922
1.855
1.763
1.696
1.383
1.128
765
696
423
418
253
Spain
Germany
France
Italy
UK
Portugal
Netherlands
Turkey
Sweden
Belgium
Austria
Switzerland
Denmark
Poland
Slovenia
Ireland
Bulgaria
Norway
Figure 12 - Motorway km's (2008)
Source: Eurostat and NOVA SBE Equity
Research Team
249% 178%
147% 145%
129% 122%
90% 89%
84% 79%
66% 47% 44%
Netherla…
Norway
Sweden
UK
Portugal
Spain
Austria
Germany
Belgium
France
Italy
Slovenia
Lithuania
Figure 10 - Families' total debt / disposable income
Source: Banco de Portugal and NOVA SBE Equity Research Team
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Table 1 allows for a comparison between the three companies in terms of several
of the major and most relevant ratios for 2009 and 2010:
Table 1 – Comparison between major portuguese construction companies
Mota-Engil Teixeira Duarte Soares da Costa
2009 2010 2009 2010 2009 2010 Total Revenues (million) 1.979 2.005 1.320 1.380 944 894 Revenues Growth (%) 5,9% 1,3% 2,2% 4,5% 13,1% -5,4% EBITDA Margin (%) 9,9% 11,8% 16,1% 10,9% 9,4% 9,9% ROE (%) 21,2% 9,0% 22,3% 7,0% 3,7% 7,0% Working Capital / Revenues (%) 13,4% 12,4% 30,3% 31,2% 17,4% 21,3% Net Debt / EBITDA
7 5,0 4,3 9,4 7,1 7,6 8,4
ROIC 6,0% 9,5% 4,8% 1,8% 5,4% 6,2%
Source: Companies’ Financial reports
Mota-Engil is clearly the biggest and most deleveraged of the three. Teixeira
Duarte, despite interesting margins, has a significantly high NWC, due to
increasing inventory levels (almost €400mn). The majority of its EBITDA is
generated by construction and Real Estate activities. Both Mota-Engil and Teixeira
Duarte present very good ROEs in 2009, with Soares da Costa presenting the
lowest of the three, as well as negative revenues growth in 2010. This two facts
are justified by the considerable decrease in national activity faced by the
company (-15,5%). In terms of value creation, Mota-Engil seems the most
consistent of the three and the only actually creating value in 20108.
In terms of diversification and internationalization, when compared to major
European players, portuguese companies seem to be on average, resorting to
both criteria.
Figure 13 – Internationalization vs. Diversification
Source: European Powers of Construction and Companies’ Financial Reports
7 Without onsidering Ascendi’s debt. 8 Based on Mota-Engil’s average WACC of 7,5%.
Mota-Engil Teixeira Duarte Soares da Costa
Vinci Bouygues
Hochtief
ACS
Eiffage
Skanska Strabag
Balfour Beatty
Ferrovial
FCC
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0% 10% 20% 30% 40% 50% 60% 70%
Inte
rnat
ion
al R
even
ue
s
Non-Construction Revenues
Mota-Engil, better than
Portuguese competition…
Good internationalization levels of Portuguese construction companies…
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Looking at the major construction companies in Europe and to Odebrecht is an
interesting exercise to assess the Portuguese companies and their financial ratios.
Table 2 shows our findings.
Table 2 – Comparison between Mota and international construction groups
2010 Mota-Engil
ACS Ferrovial Vinci Eiffage Hochtief Odebrecht Average
Total Revenues (million) 2.005 15.380 12.169 33.376 13.553 20.159 24.7809
Revenues Growth (%) 1,3% 0% -0,1% 8,6% 0,7% 11% 32,9% 8,9% EBITDA Margin (%) 11,8% 9,8% 20,7% 10,1% 13,8% 6,9% 11,6% 12,2% ROE (%) 9,0% 32,5% 27,4% 9% 9,3% 12,8% 31% 20,3% Net Debt / EBITDA 4,3 5,3 8,1 4,1 6,9 0,6 Rating (S&P) - - BBB- BBB+ - - -
Source: Companies’ Financial reports
Mota-Engil is still very small compared to major European players. This fact
constitutes a major obstacle to all Portuguese companies in the international
markets, since they may not be able to compete for bigger projects. In terms of
revenues growth, all the companies considered exhibited small changes in 2010,
with the exception of Hochtief and Odebrecht. Hochtief revenues increase was
driven by their presence in emerging markets, while Odebrecht’s were the result of
being one of the major players in Brazil, a fast growing economy. To what the
EBITDA margin is concerned, it is pretty much in line with the average. Ferrovial’s
EBITDA margin is a result of the increase of airports business, fully consolidated
in 2010, presenting above average margins. In terms of net debt to EBITDA,
Mota-Engil is in line with average values, even when considering Ascendi’s debt.
Ferrovial’s debt level is a consequence mainly of the €10.3 bn deal to acquire
BAA.
9 Based on revenues of 32.325 million USD converted at an exchange rate of 1,3045.
Mota-Engil still very small…
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Valuation
We valued Mota-Engil using a sum-of-the-parts approach. Table 3 summarizes
each valuation and the respective method used.
Table 3 – Sum of the Parts Valuation
Sum of the Parts Valuation Values Method Equity Value E&C + E&S 10,7 Engineering and Construction 586,1 DCF-WACC Environment and Services 483,0 DCF-WACC Adjustments -20,1 DCF-WACC
Net Debt (@ market value) 1035,2
Equity Value 13,8
Minotities 3,0
Ascendi 174,4
Lusoponte 128,7 Book Value
Availability regime 78,9 APV
Copexa 43,0 Book Value/IC
Marechal Rondon Leste 40,0 Book Value/IC
Minorities 116,3
Martifer 48,8
Metallic Construction 2,6 DCF-WACC
Solar 10,7 DCF-WACC
Renewables 24,0 DCF-WACC
Adjustments 8,1 DCF-WACC Prio Energy and Prio Foods 3,3 Book Value Minorities 5,5
Disposable Assets 70,0 Equity Value 303,9 Target Price 1,57
Source: Mota-Engil and NOVA SBE Equity Research Team
Global Methodology
The value found in each DCF valuation was obtained considering a terminal value
in accordance with the expected sustainable growth rate for emerging markets
and mature markets. To calculate the potential growth rate we have considered
both the reinvestment rate and the return on invested capital10. Then, assuming
that Mota-Engil will not be able to sustain its competitive advantage as
opportunities are exhausted in existing geographies, we assumed a nominal
growth of 2,5% for the E&C unit. For E&S we assumed 3% as it still offers
interesting opportunities of expansion into emerging markets11
. For the risk free
we have assumed a 12 month average of the 10 year German Bunds.
10 Sustainable Growth Rate = , where:
ROIC =
Reivestment Rate =
11 We have assumed a 2% inflation rate for developed economies and 3% for developing economies.
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To what the calculation of betas is concerned, we have resorted to bottom-up
betas (unadjusted regression betas from comparable companies)12
. We then
delevered them13
, and computed an average unlevered beta for the industry,
leveraging it again using the company’s target capital structure. This was usually
obtained by applying the debt structure forecasted for 2014 and was calculated
using market prices both for equity and debt (when possible)14
.
In order to obtain an adjusted equity premium that would correspond to the
systematic risk of each country we have considered a country Beta15
instead of a
country risk premium (as we include diversifiable risks in the FCF calculation16
).
To calculate it we resorted to the relative volatility of the country index to the S&P
and considered a correlation of 1, since in economic recessions correlations tend
to increase17
. Then we resorted to the standard CAPM equation, adjusted to the
country Beta18
.
Since Mota-Engil is not rated, we applied a synthetic rating to find a suitable cost
of debt for each company/segment using Moody’s methodology for global
construction companies19
. Table 4 summarizes our computations.
Table 4 – Rating scores and correspondent overall rating (Moody’s)
Moody's Methodology weight Mota-Engil
Martifer Opway Edifer
Scale and Profitability 25,00%
Total Revenues 12,50% B Caa Caa Caa
EBITA 12,50% Ba Caa Ca Ca
Business Profile 35,00%
Geographic Diversity 11,67% Baa Baa B Baa
Segment Diversity 11,67% Baa Baa Baa Baa
Order Backlog 11,67% Baa Ba B Aa
Financial Policy 15,00% B Caa Ca B
Financial strength 25,00%
Debt/EBITDA 6,25% B Caa Ca Caa
Cash/Debt 6,25% B B Ca B
EBITA/Interest expense 6,25% B Ba Ca B
FFO/Debt 6,25% B B Ca B
Total 100% Ba2 B1 Caa1 Ba3
Source: Moodys and NOVA SBE Equity Research Team
Afterwards, we have looked for companies with the same rating20
and computed
an average yield to maturity. By comparing other Portuguese rated companies to
12 For E&C we have considered NCC, BAM, YIT Group, Hochtief, Strabag and Skanska. E&S: Suez Environnement, Veolia Environnement, Acque
Potabili, Pennon and Severn Trent. Ascendi: Brisa, Abertis, Atlantia and Societe des Autoroutes. Martifer Metallic Constructions: Ruukki, Pomimex-Mostostal and Lindab International. Martifer Solar: several companies from the Bloomberg solar index. 13 β unlevered =
14 Debt Market Value =
, where n stands for debt’s average maturity
15 βcountry =
16 See exhibit 1 17
Elaine Jones, 2009. Recession and International Market Correlations. University of Central Missouri, Warrensburg, Missouri, US 18 Rlevered equity = Risk Free + β levered*βcountry* Market Premium 19 Moody’s Investors Service, 2010. Rating Methodology, Global Construction Methodology. Moody’s.
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the average yield of their specific rating we concluded that investors are
demanding a premium to hold Portuguese debt21
. Bearing in mind that the cost of
debt will be the expected return22
, we have considered a probability of default for
each company (see appendix 2)23
. Under the default case debt holders would
receive only a recovery rate, calculated resorting to the following criteria: (1)
Goodwill and intangible assets were not considered; (2) tangible assets sold for
50% of book value; (3) Current assets valued at 75% of book value; (4) cash and
derivative financial instruments considered at 100% of book value24
.
Then, we were in conditions to calculate the weighted average cost of capital for
the company/segment25
. A summary of the calculations realized for each
company/segment can be seen in table 5.
Table 5 – Cost of Capital calculation
E&C E&S Ascendi Martifer Met. Const. Martifer Solar Martifer Renew.
Risk-Free 2,8% 2,8% 2,8% 2,8% 2,8% 2,8% Market Premium Base 5,0% 5,0% 5,0% 5,0% 5,0% 5,0%
Beta country 1,30 1,24 1,28 1,16 1,03 1,29
Beta unlevered 0,78 0,51 0,42 0,80 0,78 0,67
Beta levered 2,22 1,46
1,42 1,39 1,19
Cost of Equity 17,2% 11,8% 5,5%26
11,1% 9,9% 10,5%
Pre-tax Cost of debt 6,3% 6,3% 4,8% 6,1% 6,1% 6,1% Tax rate 26,5% 26,5% 26,5% 26,5% 26,5% 26,5%
Target D/E 2,53 2,53
1,06 1,06 1,06
D/(D+E) 71,7% 71,7% 51,5% 51,5% 51,5%
Stable growth rate (g) 2,5% 3,0% 2,2% 2,2% 0,0%
WACC 8,2% 6,7% 7,7% 7,1% 7,4%
Source: Companies’ reports and NOVA SBE Equity Research Team
Multiples Valuation
In order to evaluate the accuracy of our analysis, we conducted a relative
valuation for Mota-Engil (table 6) concluding that the company is being
undervalued by the market.
20 Companies complying with the following criteria: (1) issuing amount superior to 300M€ to guarantee liquidity; (2) maturity in 2021, to match cash flows; (3) and finally, yields converted to Euros20. 21 PT long term emission and average Bloomberg BB composite indexes 22 Debt Expected Return = , where stands for probability of default. 23 Moody’s Global Credit Policy, 2008. Corporate Default and Recovery Rates, 1920-2008. Moody’s. 24 Although there is no consensus in the field, we have adapted Benjamin Grahams conclusions. 25 WACC =
26 Cost of unlevered equity
Potential upside…
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Source: Mota-Engil and NOVA SBE Equity Research Team
Source: Mota-Engil and NOVA SBE Equity Research Team
Source: Mota-Engil and NOVA SBE Equity Research Team
Table 6 – Multiples valuation
Company PER EV/EBITDA EV/Sales
2009 2010 2011E 2009 2010 2011E 2009 2010 2011E
NCC 7,8 10,5 8,1 5,1 6,6 4,6 0,3 0,3 0,3
YIT Group 26,5 16,6 10,3 12,3 11,3 8,1 0,7 0,8 0,5
Hctchief 18,6 14,7 9,9 4,8 4,2 2,9 0,3 0,3 0,3
Strabag 14,6 13,4 14,6 3,7 3,0 2,9 0,2 0,2 0,2
Skanska 12,0 13,7 10,8 6,5 8,5 6,6 0,3 0,4 0,4 E&C 15,9 13,8 10,7 6,9 7,5 5,7 0,3 0,4 0,3
Acque Potabili - - - 10,0 7,8 5,6 2,0 1,6 1,3
Pennon 13,3 13,2 14,1 9,5 10,5 10,9 3,5 3,6 3,6
Suez Environnement 19,7 13,4 7,9 8,4 8,3 6,8 1,2 1,2 1,1
Veolia Environnement 17,8 17,4 7,0 8,7 8,5 6,6 0,9 0,8 0,8
Severn Trent 10,3 12,8 12,9 7,8 9,5 9,5 3,9 4,4 4,4 E&S 15,3 14,2 10,5 8,9 8,9 7,9 2,3 2,3 2,2
Weighted average(1)
15,8 13,9 10,7 7,2 7,8 6,2 0,7 0,8 0,8
Mota-Engil 10,5 9,1 5,5 9,5 6,6 5,9 0,9 0,7 0,7
Source: Bloomberg and NOVA SBE Equity Research Team
Engineering and Construction
Mota-Engil Engineering has more than 60 years of experience and constitutes
Mota-Engil’s core business. Mota-Engil Engineering performs the full range of
engineering and construction activities. It can be divided in four main areas:
Infrastructures, Buildings, Real Estate and Other, where the remaining activities
covering the spectrum of engineering and construction are included.
Angola was Mota’s first international experience. After that, the company
expanded into several other Portuguese speaking countries. As a consequence
of the international experience, engineering and construction activity is nowadays
grouped in: Iberia, Africa and America, and Central Europe. Mota-Engil’s main
objective is to focus on fast growing foreign markets as Angola, Poland, Brazil,
Peru and Mexico, while decreasing domestic market weight.
Iberia The Portuguese business segment includes not only Portugal but also residual
activity in Spain and Ireland. Nevertheless, Portugal accounts for the majority of
the turnover.
Europe is confronted with one of the most severe crisis of its history. Portugal’s
GDP is expected to fall by 3% in 201227
, Ireland will face a marginal growth of
0,4%, while Spain is forecasted to grow 0,8%, the last two according to IMF.
As previously shown, Portugal has undergone a systematic crisis in the sector for
the last decade. The austerity measures taken by the new executive and imposed
by the Troika will pressure even more the fragile Portuguese construction industry.
Bottom line: We expect revenues to decrease at a CAGR of -1,8% from 2011 until
2016. EBITDA margin is expected to remain stable at 6,5% by 2016.
27 According to European Union statistics.
301 539
709 330 287 239
700 879 664
2008 2009 2010
Figure 14 - Historical sales by geography (million)
Africa & America Central Europe Iberia
61 74
113 5
4 8 64 53 42
2008 2009 2010
Figure 15 - Historical EBITDA by geography (million)
Africa & America Central Europe Iberia
700
879
664 638552 540
0,0%
2,0%
4,0%
6,0%
8,0%
10,0%
0
200
400
600
800
1.000
2008 2009 2010 2011 (F) 2012 (F) 2013 (F)
Mill
ion
s
Figure 16 - Iberia
Revenues EBITDA margin
CAGR=-5,1%
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Africa
With more than 60 years of activity in Angola, in 2010 the group decided to
constitute Mota-Engil Angola, as a result of a partnership with Sonangol.
Historically Angola has been one of the fastest growing economies in the world –
average real GDP growth rate of 12% during the period 2003-201028
- and is
expected to continue its growth after a sluggish period precipitated by
commodities decrease in price in the aftermath of the 2008 crisis. IMF projections
point towards a 3,7% real GDP growth in 2011 and a 10,8% increase in 2012,
followed by a more stable growth of 6% afterwards.
Growth rates in real GDP are also very interesting in Mozambique. Again,
according to IMF projections, Mozambique will grow 7,2% in 2011 and 7,5% in
2012, maintaining growth at these levels after that year. During the year of 2011
Mota-Engil started road works in Mozambique worth €108 mn. As the majority of
the construction works in Mozambique, this construction project will be paid in
80% by the World Bank. The Olympic village involving the construction of 106
buildings within a 15 hectares area was inaugurated in August, 10 months after its
beginning, sealing Mota-Engil’s reputation in the market.
Malawi business profile is considerably different, with mining being Mota-Engil’s
main activity in this market, posing an opportunity to diversify. Even though, IMF
predicts 4,6% in 2011 and 4,2% in 2012, well above European growth rates.
Bottom line: In the first 9 months revenues declined 22%, mainly due to delays in
Angola. EBITDA margin increased from 18,5% to 20,3%, result of the effort to
increase efficiency, namely through centralized purchasing. Bearing this in mind,
we expect EBITDA margins to increase to 20,6% by the end of 2011. Revenues
are expected to increase at a CAGR of 7,4% in Euros from 2011 until 2016,
reaching an EBITDA margin of 17,8% in that year. Angola is expected to grow at a
CAGR of 5,4% over the same period.
America
The most significant countries for Mota-Engil in America are Mexico and Peru.
Mota-Engil intends to enter the Columbian market and, as António Mota stated
last year, Mota-Engil expects to announce an entry in the Brazilian market very
soon.
Brazil will receive the Football World Cup in 2014 (estimated total investment of
$55bn) and the Olympic Games in 2016 (forecasted investment of $15bn)29
.
28 International Monetary Fund, September 2011. World Economic Outlook, IMF. 29 Deloitte, 2010. Brasil, bola da vez. Negócios e investimentos a caminho dos megaeventos desportivos.
0
20
40
60
80
100
120
140
160
No
v-0
6
Feb
20
07
May
20
07
Au
g 20
07
No
v-0
7
Feb
20
08
May
20
08
Au
g 20
08
No
v-0
8
Feb
20
09
May
20
09
Au
g 20
09
No
v-0
9
USD
Figure 17 - WTI Crude Oil Price
Source: Bloomberg and NOVA SBE Equity Research Team
Source: Mota-Engil and NOVA SBE Equity Research Team
Source: Mota-Engil and NOVA SBE Equity
Research Team
301
403 452
312 328 339
0
100
200
300
400
500
2008 2009 2010 2011 (F)
2012 (F)
2013 (F)
Mill
ion
s
Figure 19 - Turnover Angola
Source: Mota-Engil and NOVA SBE Equity Research Team
301
497
626
481523
552
0,0%
5,0%
10,0%
15,0%
20,0%
25,0%
0
100
200
300
400
500
600
700
2008 2009 2010 2011 (F) 2012 (F) 2013 (F)
Mill
ion
s
Figure 18 - Africa
Revenues EBITDA margin
CAGR =12,9%
42
83
134
176
201
0,0%
2,0%
4,0%
6,0%
8,0%
10,0%
12,0%
0
50
100
150
200
250
2009 2010 2011 (F) 2012 (F) 2013 (F)
Mill
ion
s
Figure 20 - America
Revenues EBITDA margin
CAGR=48%
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Furthermore, according to BNDES (Banco Nacional do Desenvolvimento), Brazil
will invest near €120 bn in infrastructures until 2013. Allied to this, the IMF expects
a real GDP growth of 3,8% and 3,6% for 2011 and 2012, respectively, hence,
substantial construction activity is expected for the next few years. Portuguese
construction companies entering the market are, though, facing substantial
difficulties: obtaining the recognition of Portuguese engineering certificates is
taking, typically, more than 12 months30
; bureaucracy is a constant in every step
you take; and, it is already a rather competitive environment. Nevertheless,
several diplomatic efforts are being taken, framing the conditions for Mota-Engil
entrance.
Mota-Engil announced the adjudication of 4 contracts worth €125mn for the
construction and recovery of roads giving access to a mine in Cusco’s region of
Peru. The company has also announced in March the adjudication of another
contract worth €59,5mn. Also during the year the company’s headquarters in the
country were inaugurated, signaling Mota-Engil’s commitment to this geography.
Peru is expected to present interesting GDP growth rates in 2011 and 2012 of
6,2% and 5,6%, according to IMF forecasts.
Mota-Engil has also improved its position in Mexico with the extension of the
Perote-Xalapa contract, both in terms of time and size. Mota-Engil’s activity in
Mexico is done through IDINSA, a jointly owned company with Opway. It is
through this company that the Group expects to drive its growth in the Mexican
market, continuing taking advantage of the Mexican government’s 2007-2012
National Infrastructure Programme, estimated at €300 bn31
.
Bottom line: In the first 9 months of 2011 the company registered an increase of
292% in its turnover (€). We expect America to continue its top-notch performance
and to sustain 2010 margins, with revenues growing at a CAGR of 15% in Euros
until 2016, reaching an EBITDA margin of 10% vs 7% in 2010.
Central Europe
The Engineering and Construction area, although doing business in other
countries of the region, concentrates its activity in Poland.
Poland is expected to exhibit GDP growth rates of 3,8% in 2011 and 3% in 2012.
Besides being the host of the Euro 2012, Poland has currently a huge shortage of
infrastructures. The total amount of funds allocated to the road construction
30Sol, 2011. Brasil bloqueia participação de engenheiros portugueses no Mundial e Jogos Olímpicos. [online] Available at: <http://sol.sapo.pt/inicio/Internacional/Interior.aspx?content_id=30790> [Accessed November 2011]. 31 Mexican Infrastructure, 2007. [online] Available at <http://www.infraestructura.gob.mx/> [Accessed on November 2011].
Brazil as an opportunity for Mota-Engil expansion’s in America…
Source: Mota-Engil and NOVA SBE Equity Research Team
330287
239
365 365 377
0,0%
1,0%
2,0%
3,0%
4,0%
5,0%
6,0%
0
50
100
150
200
250
300
350
400
2008 2009 2010 2011 (F) 2012 (F) 2013 (F)
Mill
ion
s
Figure 21 - Central Europe
Revenues EBITDA margin
CAGR=2,7%
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PAGE 16/39
30%
18% 25%
13% 14%
Figure 22 - Total Backlog
E&C Portugal
E&C Central Europe
E&C Africa
E&C America
E&S
program starting in 2013 will amount to €20,7 bn , which poses a good opportunity
for Mota-Engil in the market32
given its current know-how and positioning.
Historically, Mota-Engil’s margins in the country have been substantially low. In
order to improve it, the Group implemented changes to the Corporate
Management Model and a modernization of the Management Systems of Mota-
Engil Central Europe. In September Mota-Engil won the construction of 16,6km of
the S8 motorway worth €127 mn, reinforcing its backlog in the country to €600 mn.
In March the company was awarded with the construction of 24,5km of the S17
motorway, worth €158 mn.
Bottom line: In the first 9 months of 2011, revenues grew by 64% (€) when
compared to the same period of the previous year. EBITDA margin, after a good
growth to 6,4% in the second quarter of 2011, fell again to 2,6% in the third
quarter. We expect revenues to grow at a CAGR of 4,9% in Euros until 2016, with
EBITDA margins improving from 3,3% in 2010 to 6,5% in 2016.
Total Backlog
Figure 22 shows the backlog distribution by geography and business area in the
third quarter of 2011. The total backlog remained relatively stable, amounting to
€3,3 bn, the same value as at the end of 2010. More than 60% of this value
comes from international activity, which represents a noticeable increase from
€1.7 bn in 2010 to €2 bn in 2011. The estimated backlog for the E&C area still
represents the majority of total value – €2,9 bn. Total backlog represents 1 year
and 8 months of sales, very good indicator since according to AECOPS33
, the
average backlog for Portuguese construction companies corresponds to 8 months
of sales.
Conclusion
All in all, we expect the national market to represent only 29,2% of total group's
revenues in 2016 vs 41,5% in 2010. EBITDA margins from international markets
will also be considerable higher compared to the domestic market, reaching
12,8% in 2016 vs. 6,5% for the Iberian market.
32 Jornal Construir, 2011. Polónia apresenta na Concreta plano de investimento de 20,7 mil milhões de euros. [online] Available at:
<http://www.construir.pt/2011/10/18/polonia-apresenta-na-concreta-plano-de-investimento-de-207-mil-milhoes-de-euros/> [accessed on December
2011]. 33 Jornal da Construção, 2011. Carteira de encomendas das empresas é inferior a oito meses. [online] Available at:
<http://www.jornaldaconstrucao.pt/index.php?id=10&n=2140&fp=1> [Accessed November 2011].
Improving margins in Central
Europe…
Source: Mota-Engil and NOVA SBE Equity
Research Team
Source: Mota-Engil and NOVA SBE Equity Research Team
709
611 677 732 799 868 942
83134 170 195 219 241 265
239 369415 439 479 524 598
664 638 552 540 536 558 582
2010 2011 (F) 2012 (F) 2013 (F) 2014 (F) 2015 (F) 2016 (F)
Figure 23 - Revenues by geography (million)
Africa America Central Europe Iberia
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PAGE 17/39
Table 7 – E&C revenue’s growth rates and EBITDA margin estimates:
Revenues (million) 2010 2011(F) 2012(F) 2013(F) 2014(F) 2015(F) 2016(F)
Angola (€) 452 312 328 339 360 383 406 Growth rate ($) 12,2% -27,5% -2,0% 4,0% 6,5% 6,5% 6,5% Average exchange
rate EUR/USD(1)
1,33 1,39 1,30 1,31 1,31 1,31 1,32
EBITDA Margin 16,1% 20,0% 19,0% 18,0% 17,0% 17,0% 17,0% Mozambique (€) 58 56 65 71 78 86 94
Growth rate ($) 263% 2% 8% 10% 10% 10% 10% Average exchange
rate EUR/USD(1)
1,33 1,39 1,30 1,31 1,31 1,31 1,32
EBITDA Margin 20% 22% 19% 19% 19% 19% 19% America (€) 83 134 176 201 224 246 270
Growth rate ($) 98% 70% 22% 15% 12% 10% 10% Average exchange
rate EUR/USD(1)
1,33 1,39 1,30 1,31 1,31 1,31 1,32
EBITDA Margin 7% 10% 10% 10% 10% 10% 10% Other (€) 116 113 130 143 156 172 188
Growth rate ($) 49% 2% 8% 10% 10% 10% 10% Average exchange
rate EUR/USD(1)
1,33 1,39 1,30 1,31 1,31 1,31 1,32
EBITDA Margin 20% 22% 19% 19% 19% 19% 19% Central Europe (€) 239 365 365 377 397 419 464
Construction Market(PLN)
152.732 175.559 196.209 206.608 212.806 219.190 225.766
Growth rate (PLN) 3,99 4,12 4,60 4,69 4,83 4,97 5,11 Average exchange
rate EUR/PLN (1)
-4% 15% 12% 5% 3% 3% 3%
EBITDA Margin 3% 4% 4% 5% 6% 6% 7% Iberia (€) 641 638 552 540 536 558 582
Construction Market 21.373 19.449 15.949 14.992 14.692 14.692 14.912 Growth rate -7% -9% -18% -6% -2% 0% 2% EBITDA Margin 6,4% 7,3% 6,0% 6,0% 6,0% 6,2% 6,5%
Source: Mota-Engil and NOVA SBE Equity Research Team (1) Data collected Monday, January 02, 2012.
After a small decrease in 2011 due to payments from the Angolan government
that were due in 2009 and 2010, we expect net working capital to increase
slightly as a percentage of revenues until 2013, period after which we expect it to
stabilize as uncertainty is reduced. Both growth and maintenance capex are
assumed to increase in 2014, when credit restrictions are expected to be
considerably lower than today.
Table 7 – E&C FCF calculation
FREE CASH FLOW 2012(F) 2013(F) 2014(F) 2015(F) 2016(F) Terminal Value
(+) EBIT 102,1 105,7 119,7 191,6 211,3
(-) Income Tax -27,3 -28,3 -32,1 -51,4 -56,5
(+) D&A 55,4 55,4 57,2 0,0 0,0 (+) Provisions & Others 8,0 11,6 7,0 7,4 6,0
(-) Capex -69,8 -72,2 -83,5 -100,0 -110,5
(-) Change in NWC 23,2 -36,2 -0,6 -12,3 -15,2
Free Cash Flow Most Probable 91,6 36,0 67,7 35,3 35,1
Probability 96,1% 91,6% 86,2% 83,6% 81,5%
FCF Bankruptcy 0,0 0,0 0,0 0,0 0,0
Probability 3,9% 8,4% 13,8% 16,4% 18,5%
Weighted FCF 88,0 32,9 58,3 29,5 28,6 512,5
Source: NOVA SBE Equity Research Team
Environment and Services
Mota-Engil Environment and Services has more than 15 years of experience and
is involved in an ample range of activities. The business unit is divided in four
Source: Mota-Engil and NOVA SBE Equity
Research Team
101,4112 119
14 47 76
143151 159
27,5 53 58
0%
20%
40%
60%
80%
100%
2008 2009 2010
Figure 24- Historical sales by segment (million)
Multiservices
Logistics
Water
Waste
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PAGE 18/39
distinct segments: Waste, Water, Logistics and Multi-services. All the segments
are characterized by relative stability and very interesting margins.
Waste
Mota-Engil is the market leader in the privatized solid urban waste management
market, mainly through SUMA and its subsidiaries, representing a core business
of this business unit.
The Waste sector in Portugal is mostly characterized by stagnation due to its
maturity levels. SUMA reached a market share of 54% at the end of 2010, when
considering only the privatized market. Abroad, SUMA expanded its activity to
Poland and Angola. Last year it acquired Geo Vision and entered the Brazilian
market34
. If in 2010 only 20% of the turnover was generate internationally, by
2011 this value is expected to increase to 47%35
. Since a substantial part of the
business is still held in Portugal, we expect the current financial crisis to provoke
a delay in payments from municipalities, impacting net working capital.
Bottom line: In the first 9 months of 2011 revenues increased 53% due to Geo
Vision’s consolidation, with a slight decrease in the margin from 25,9% to 23,6%.
We expect revenues to grow at a CAGR of 5,0% until 2016 vs. 11,5% in the last
3 years. EBITDA Margins are expected to remain stable at 24% until 2016. There
is, however, the risk of adjustments to already celebrated contracts. The risk was
mitigated by considering considerably lower margins in 2016 than the historical
ones.
Water
Mota-Engil Water management business is developed through Indaqua. In
Portugal it includes the concessions of Fafe, Santo Tirso, Trofa, Santa Maria da
Feira, Matosinhos and Vila do Conde. Internationally, Indaqua controls Vista
Water, an Angolan company.
Indaqua is the major private Portuguese Operator to what municipal water
concessions is concerned. Despite of not so interesting prospects due to the
recent financial turmoil the company expects to maintain its current client’s base.
The company is actively seeking for new locations, namely in South America.
Peru and Brazil, due to their macroeconomic environment and Mota-Engil’s
previous experience, are seen as the most interesting targets. Ireland is also an
alternative, due to huge shortfalls of infrastructures in the water segment.
34 Geo Vision’s consolidation was responsible for the recent growth presented in the first 9 months results. 35 SUMA, 2011. Suma em números. [online] Available at: <http://www.suma.pt/conteudos/artigos/detalhe_artigo.aspx?idc=5&idsc=10&idl=1>
[accessed December 2011].
Geo Vision broadening Waste management international
profile…
Source: INE and private operators
Municipal;
3.800.584
Concessions;
1.897.833 E.E.M;
1.859.817
E.M.S.A; 334.109
SMAS; 2.734.907
Figure 27 - Water Management (operator €)
Source: Mota-Engil and NOVA SBE Equity Research Team
Source: Mota-Engil and NOVA SBE Equity Research Team
101 112 119
175192 204
21,0%
22,0%
23,0%
24,0%
25,0%
26,0%
27,0%
28,0%
0
50
100
150
200
250
2008 2009 2010 2011 (F)
2012 (F)
2013 (F)
Mill
ion
s
Figure 25 - Waste
Revenues EBITDA margin
CAGR= 15%
14
47
7686 91 97
0,0%
10,0%
20,0%
30,0%
40,0%
0
20
40
60
80
100
120
2008 2009 2010 2011 (F)
2012 (F)
2013 (F)
Mill
ion
s
Figure 26- Water
Revenues EBITDA margin
CAGR= 47,5%
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PAGE 19/39
Bottom line: Turnover of the segment amounted to €61 mn in the first 9 months of
2011, a 12% increase when compared with 2010. EBITDA margin amounted to
22,6% versus 21,5% in 2010. If on the one hand, revenues growth is expected to
decline to more reasonable values, growing at a CAGR of 4,4% until 2016, on the
other hand EBITDA margins are expected to improve after mid 2012 to 26% in
2016 vs. 23,4% in 2010. We believe there is the risk of adjustments to already
celebrated contracts. Once again, we have mitigated this risk by considering
considerably lower margins in 2016 than historical ones.
Logistics
Mota-Engil, through its subsidiary Tertir, is the national market leader in ports. It
explores Leixões, Aveiro, Lisboa, Setúbal and Sines marine terminals, as well as
the logistic platform in Poceirão, allowing an integrated logistics and carriage of
goods by train. However, Portugal is not their solely market. The company
operates a 30 year concession in Peru (Puerto Paita), the second largest in the
country, and has a participation in Transitex, a global player acting in markets
such as Spain, Mexico, Venezuela, amid others. Tertir Group will continue to
focus in its internationalization process, namely through the increase of
Sonauta’s activity, an Angolan company specialized in coastal shipping between
Angolan ports.
Despite of the severe economic crisis affecting Portugal, the logistics segment
increased its turnover during the first 9 months of the year. This was mainly due
to stable imports and increasing exports that contributed to an increase of traffic
on the marine terminals, namely Sines and Leixões.
It is important to highlight that Mota-Engil expects the revocation extending the
Alcantara terminal concession to 2042 to be declared unconstitutional. However,
no decision has yet been made. We have considered the extension in our
analysis. However, under a scenario under which the concession ends in 2015,
we expect it to impact the price target in 0,04€.
A possible driver for the segment will be the expansion of Panama Canal, as it
may impact the world current ship routes. With it, an increase in traffic to Portugal
from Asia may be a reality. The expansion is not expected to be completed
before 2014, though.
Bottom line: In the first 9 months of the year revenues increased 13%, while
EBITDA margin increased from 19,7% to 21,9%. We expect revenues to grow at
291
0
328
15
163
305
0
337
30
247
0
50
100
150
200
250
300
350
400
LEIXÕES AVEIRO LISBOA SETÚBAL SINES
Tho
usa
nd
s
Figure 29 - Total number of containers
2009 2010
Source: IPTM and NOVA SBE Equity Research Team
INDAQUA 27%
Aquapor 26%
AGS 24%
Veolia 15%
Other 8%
Figure 28 - Percentage of total population served by private water
operators
Source: INE and private operators
Source: Mota-Engil and NOVA SBE Equity Research Team
143 151 159 172186 197
0,0%
5,0%
10,0%
15,0%
20,0%
25,0%
30,0%
0
50
100
150
200
250
2008 2009 2010 2011 (F)
2012 (F)
2013 (F)
Mill
ion
s
Figure 30 - Logistics
Revenues EBITDA margin
CAGR= 6,6%
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PAGE 20/39
a CAGR of 4,8% until 2016 vs. 6,7% in the last 3 years. EBITDA Margins are
expected to remain stable at 22% until 2016, hustled by Portuguese exports.
Multi-services
The multi-services segment involves a widespread set of activities: industrial and
buildings maintenance segments (Manvia), pipeline rehabilitation (Manvia
Condutas), landscape architecture and design (Vibeiras), construction and
maintenance of green spaces and golf courses (Áreagolfe), car-park concession
(Emsa and Parquegil), outsourcing of billing and mail finishing (Lokemark),
development and management of electronic-transactions platform (Vortal).
Despite of being the least internationalized area, Vibeiras is present in Angola
and Mozambique.
Bottom line: The first 9 months of 2011 showed a small decrease in activity, with
revenues decreasing by 4,8%. Even though, efficiency increased – EBITDA
margin amounted to 5,7% versus 5% for the same period of 2010. We expect
turnover to decrease at a CAGR of -1,2% and a constant EBITDA margin until
2016.
Backlog
The backlog for the Environment and Services area represents only the waste and
multiservice segments and amounts to nearly €457 mn. Water and Logistics are
not considered for the calculation of the backlog. Figure 22 summarizes our
findings.
Conclusion
All in all, we expect the E&S revenues to represent 23,1% of total Group's
revenues by 2016 vs. 20,4% in 2010. EBITDA Margins are expected to increase
slowly, reaching 21,3% in 2016 vs. 19,7% in 2010.
Table 8 - E&S revenue’s growth rates and EBITDA margin estimates:
Turnover 2010 2011 (F) 2012 (F) 2013 (F) 2014 (F) 2015 (F) 2016 (F)
Waste 119,0 174,6 192,1 203,6 210,4 216,7 223,2 Growth rate 6,3% 46,7% 10,0% 6,0% 3,3% 3,0% 3,0% EBITDA Margin 26,6% 23,6% 23,6% 23,6% 24,0% 24,0% 24,0%
Water 76,0 86,3 91,5 97,0 100,8 103,9 107,0 Growth rate 61,7% 13,6% 6,0% 6,0% 4,0% 3,0% 3,0% EBITDA Margin 23,4% 23,1% 23,1% 23,5% 25,0% 26,0% 26,0%
Logistics 159,0 172,2 186,0 197,1 205,0 211,2 217,5 Growth rate 5,3% 8,3% 8,0% 6,0% 4,0% 3,0% 3,0% EBITDA Margin 20,3% 22,1% 22,1% 22,1% 22,0% 22,0% 22,0%
Multiservices 58,0 53,6 51,5 50,4 50,4 50,4 50,4 Growth rate 9,4% -7,6% -4,0% -2,0% 0,0% 0,0% 0,0% EBITDA Margin 6,1% 6,0% 6,0% 6,0% 6,0% 6,0% 6,0%
Source: Mota-Engil and NOVA SBE Equity Research Team
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Regarding the free cash flow calculation, capex is expected to remain relatively
stable, as growth capex is reduced. Net working capital is expected to increase
reasonably during the next few years as municipalities are expected to delay
even more on payments, decreasing after 2014. Our forecasts are summarized in
table 10.
Table 9 – E&S FCF calculation
FREE CASH FLOW 2012(F) 2013(F) 2014(F) 2015(F) 2016(F) Terminal Value
(+) EBIT 62,8 64,4 70,0 73,0 75,3
(-) Income Tax -20,6 -21,1 -22,9 -23,9 -24,7
(+) D&A 35,8 38,3 40,3 41,6 42,8
(+) Provisions & Others 7,7 9,8 8,5 8,7 8,9
(-) Capex -62,8 -66,0 -70,5 -75,9 -79,2
(-) Change in NWC -9,2 -4,1 2,7 0,7 -0,5
Free Cash Flow Most Probable 13,8 21,3 28,0 24,2 22,7
Probability 96% 92% 86% 84% 82%
FCF Bankruptcy 0 0 0 0 0
Probability 3,9% 8,4% 13,8% 16,4% 18,5%
Weighted FCF 13,3 19,5 24,1 20,2 18,5 517,2
Source: NOVA SBE Equity Research Team
Martifer
Martifer is a multinational group with more than 3.000 employees and an activity
based on metallic construction and solar energy.
Metallic Constructions
Martifer Metallic Constructions is leader in the Iberian Peninsula and a reference
player in Europe. It develops projects with a high incorporation of metallic
structures made from steel, aluminum and glass facades, and stainless steel
solutions. It is a highly internationalized company with industrial presence in:
France, Germany, Poland, Romania, Australia, Angola, and now Brazil. In the last
year Martifer incorporated Martifer Energy Systems into the Metallic Constructions
business. This fact, associated with negative margins in Eastern Europe and
Australia, and the unexpected rescheduling of several projects, was responsible
for the decrease both in revenues and in margins.
Bottom line: Martifer Metallic Constructions presented disappointing figures, with
turnover decreasing by 31,3% in the first 9 months of 2011, and a negative
EBITDA margin of -10,6% for the same period. We expect revenues to have
declined 35% in 2011, but we expect them to increase afterwards at a CAGR of
6,0% until 2016. Concerning EBITDA we expect it to remain negative until mid
2012, as the company ends the integration plan outlined. By 2016 we expect it to
achieve 9%.
Source: Martifer and NOVA SBE Equity Research Team
517470
364
237 225 229
-10,0%
-5,0%
0,0%
5,0%
10,0%
15,0%
0,0
100,0
200,0
300,0
400,0
500,0
600,0
2008 2009 2010 2011 (F) 2012 (F) 2013 (F)
Mill
ion
Figure 31 - Martifer Metallic Construction
Revenues EBITDA margin
CAGR= -13,5%
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Regarding the free cash flow calculation, capex is expected to decrease until
2013, as a consequence of the need to reduce debt and the sale of real estate
properties – the company disclosed 28 million in real estate for sale. In our
analysis we have considered that they would only be able to sell these assets by
half of their value, registering 14 million as a loss in 2013. NWC is expected to
decline slowly.
Table 10 – Martifer’s Metallic Construction FCF
FREE CASH FLOW 2012(F) 2013(F) 2014(F) 2015(F) 2016(F) Terminal Value
(+) EBIT -19,7 2,2 8,9 13,7 14,5
(-) Income Tax 5,7 -0,6 -2,4 -3,6 -3,8
(+) D&A 6,7 7,0 7,4 7,8 8,3
(+) Provisions & Others 3,3 3,4 3,6 3,8 4,1
(-) Capex 4,5 4,3 -5,3 -6,2 -7,8
(-) Change in NWC -1,4 -1,6 -2,7 -1,6 -1,1
Free Cash Flow Most Probable -0,8 14,7 9,5 13,9 14,2
Probability 94% 87% 78% 73% 68%
FCF Bankruptcy 0,0 0,0 0,0 0,0 0,0
Probability 6% 13% 22% 27% 32%
Weighted FCF -0,8 12,8 7,5 10,2 9,7 178,2
Source: Martifer and NOVA SBE Equity Research Team
Solar
Martifer Solar specializes in offering all types of photovoltaic solutions adapted to
client’s needs. It is involved in the engineering service, the production of modules,
installation, maintenance and financial analysis.
Source: Renewables 2011 Global Status Report and NOVA SBE Equity Research Team
Solar energy represents a small part of the total energy produced in the world. In
terms of solar photovoltaic (Solar PV), Germany is still the country with the highest
existing capacity as of the end of 2010, followed by Spain, Japan, Italy and US.
The higher existing capacity is directly related with the existence of tax benefits
and ambitious clean energy targets in these countries. Annual growth rate for
Solar PV energy was around 49% for the period 2005-2010, with 2010 amounting
for a 72% increase. The major problem with solar energy is related to its cost.
Figure 34 shows levelized costs for the different types of sources of energy.
81%
3%
1%
1%
2% 3%
10%
16%
Figure 33 - Renewable Energy Share of Global Final Energy Consumption 2009
Fossil fuels
Nuclear
Wind/Solar/biomass/geothermal power generation Biofuels
Biomass/Solar/geothermal hot water/heating
Hydropower
Traditional Biomass
122 131
221256
287310
0,0%
2,0%
4,0%
6,0%
8,0%
10,0%
12,0%
0,0
50,0
100,0
150,0
200,0
250,0
300,0
350,0
2008 2009 2010 2011 (F) 2012 (F) 2013 (F)
Mill
ion
Figure 32 - Martifer Solar
Revenues EBITDA margin
CAGR= 20,4%
Source: Martifer and NOVA SBE Equity Research Team
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PAGE 23/39
Source: Energy Information Administration, Annual Energy Outlook 2011, December 2010.
Solar PV is still one of the most expensive sources of energy, despite of recent
developments. In order to reduce the Portuguese electricity tariff deficit of 3,2
billion Euros (October 2011), the recently elected government has already
declared its intention to reduce current tax benefits. The memorandum signed with
the troika, however, only anticipates a renegotiation of the first wind contracts (too
expensive given the evolution the technology suffered in the last years), and a
considerable reduction CSP technology. Therefore, we do not expect impacts for
photovoltaic solar energy.
Bottom line: Martifer Solar is expected to continue its growth, with turnover
incrementing by 30% in the first 9 months of the year. However, EBTIDA margin
decreased from 12,2% to 4,2%36
. We expect revenues to grow at a CAGR of 8,3%
until 2016. Concerning EBITDA margin, we expect them to increase to values
closer to historical ones, reaching 9% in 2016.
To what the FCF is concerned, capex is expected to decrease considerably due
to two factors: (1) the sale of solar farms worth €31 mn37
; (2) urgent need to
reduce debt levels. In our analysis we have considered that the company is able
to sell these assets for €27,9 mn until 2013 (with a 10% loss), as the company is
under pressure to reduce debt. NWC is expected to maintain its current levels.
36 This fact is attributed to: (1) higher competition; (2) internationalization costs; (3) raise of the distribution’s weight, characterized by lower operating margins. 37 In October the company signed a contract with BNP Paribas Clean Energy Partners for the construction of 22 MWp in Portugal
94,8 109,4 136,2
113,9 97
243,2 210,7
311,8
101,7 112,5 86,4
0
50
100
150
200
250
300
350
USD
/meg
awat
tho
ur
Figure 34 - Average levelized cost (2009 $/megawatt) for plants entering service in 2016
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Table 11 – FCF Martifer Solar
FREE CASH FLOW 2012(F) 2013(F) 2014(F) 2015(F) 2016(F) Terminal Value
(+) EBIT 12,3 16,4 18,9 23,0 27,4
(-) Income Tax -3,6 -4,4 -5,0 -6,1 -7,3
(+) D&A 2,0 2,2 2,3 2,4 2,5
(+) Provisions & Others 1,4 1,5 1,6 1,7 1,8
(-) Capex 5,3 1,6 -13,7 -14,2 -15,1
(-) Change in NWC -5,9 -2,9 -0,9 -0,4 -1,0
Free Cash Flow Most Probable 11,6 14,4 3,2 6,4 8,2
Probability 94,3% 86,8% 78,3% 73,4% 68,4%
FCF Bankruptcy 0,0 0,0 0,0 0,0 0,0
Probability 5,7% 13,2% 21,7% 26,6% 31,6%
Weighted FCF 10,9 12,5 2,5 4,7 5,6 114,1
Source: Martifer and NOVA SBE Equity Research Team
Conclusion
Martifer used to have a separate unit for the management of wind farms.
However, the company decided to “get back to basics” and chose to abandon this
business. In 2010 the company sold a wind farm in Germany for €26,4 mn with an
impairment loss of €13,6 mn. In October 2011 it announced the selling of 3 wind
farms in Poland to IKEA for the total amount of €87,3 mn. Assets valued at €182
mn38
are still available for sale and will be used to amortize debt. We do not
expect the company to register more impairment losses as they have already
registered €47,5 mn and €45,7 mn in impairment losses in 2009 and 2010,
respectively. In the table 13 we summarize our forecasts for each business area.
Table 12 – Martifer revenue’s growth rates and EBITDA margin estimates
Revenues 2010 2011(F) 2012(F) 2013(F) 2014(F) 2015(F) 2016(F)
Metallic Construction 364,2 236,7 241,5 251,1 266,2 282,2 299,1
Growth rate -22,5% -35,0% 2,0% 4,0% 6,0% 6,0% 6,0% EBITDA Margin 4,6% -8,5% -4,0% 5,0% 7,5% 9,0% 9,0%
Solar 220,8 256,1 286,8 309,8 325,2 338,2 351,8 Growth rate 69,2% 16,0% 12,0% 8,0% 5,0% 4,0% 4,0% EBITDA Margin 10,0% 4,1% 5,5% 6,5% 7,0% 8,0% 9,0%
Others* 23,9 14,3 10,0 7,0
Growth rate 9,8% -40,0% -30,0% -30,0% EBITDA Margin 74,7% 20,0% 20,0% 20,0%
Source: Mota-Engil and NOVA SBE Equity Research Team
*others include Martifer Renewables
Our valuation attributes a fair value of 1,30€ per share to Martifer. This gives a
potential appreciation of 19,5%. Figure 36 shows a detailed summary of our
valuation.
38 50 million in solar parks allocated to RE Developer plus wind farms in Portugal, Spain, Romania and Brazil.
Renewables; 154
Solar; 38
Construction; 28
Figure 29 - Assets Available for sale
Martifer Renewables with
announced end in 2013…
Source: Martifer and NOVA SBE Equity Research Team
11,8
21,823,9
14,3
10,0
7,0
0,0%
10,0%
20,0%
30,0%
40,0%
50,0%
60,0%
70,0%
80,0%
0,0
5,0
10,0
15,0
20,0
25,0
30,0
2008 2009 2010 2011 (F) 2012 (F) 2013 (F)
Mu
llio
n
Figure 35 - Martifer Renewable
Revenues EBITDA margin
CAGR=-9,8%
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Figure 36 – Martifer Sum-of-the-parts valuation (million)
Source: Martifer and NOVA Equity Research Team
Total Backlog Martifer’s backlog is stable at €542 mn, of which €292 mn are attributable to the
Metallic Construction unit and €250 mn to Solar. Based on our projections for
2011 sales, this corresponds to slightly more than 1 year of sales.
Ascendi
Ascendi results from a partnership between Mota-Engil Group and Banco Espiríto
Santo Group at the end of 2006. Ascendi is the main shareholder of 11
concessions in Portugal totaling 1.609km. However, their activity goes well
beyond the national market, with concessions in Brazil, Mexico, Mozambique, and
Spain, comprising a total portfolio of 3.047km. A summary of all the concessions
can be found in table 13.
Table 13 – Ascendi’s concessions
Concession Holding Km Ending Investment (M€) Type
Portugal Lusoponte 38,0% 20 2030 897 Real Concessão Norte 74,9% 175 2029 1.273 Availability Scutvias 22,2% 178 2029 812 Availability Costa de Prata 80,2% 110 2030 499 Availability Beiras Litoral e Alta 80,2% 173 2031 1.130 Availability Grande Porto 80,2% 56 2032 842 Availability Beira Interior 4,8% 44 2025 390 Availability Grande Lisboa 80,2% 91 2036 290 Availability Douro Interior 80,8% 242 2038 931 Availability Pinhal Interior 80,0% 520 2040 1.429 Availability Total Portugal 1609 8.493 Spain Holding Km Ending Investment (€) Auvisa – Autovía Viñedos 50,0% 75 2033 210 Availability Madrid 407 50,0% 12 2035 64 Availability Autovia de los Llanos 40,0% 74 2038 141 Availability Autopista Madrid – Toledo 15,0% 81 2040 600 Availability
Latin America Holding Km Ending Investment (€) Copexa 50,0% 60 2038 389 Real Marechal Rondon Leste, SP 40,0% 415 2039 470 Real Africa Holding Km Ending Investment (€) Estradas do Zambeze 40.00% 701 2040 151 Real Railway Concessions Holding Km Ending Investment (€) MTS – Metro. Transportes do Sul 24,9% 20 2032 338 Availability TOTAL 3047 10.856
Source: Mota-Engil and NOVA SBE Equity Research
101,5
8,8
Solar PrioMetallic
Construction
Renewables
185,2
Others
21,4
Minorities Martifer
Equity Value
48,8
EV
484,3
Net Debt
355,7
79,7167,3
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All the concessions are under review by the Portuguese government given the
new austerity measures. Due to its uncertainty, we have not considered Douro
Interior and Pinhal Interior in our valuation. Costa de Prata, Norte, Grande Porto,
Grande Lisboa and Beira Litoral e Alta are being explored according to the
availability of network system, with, theoretically, no risks associated, besides the
“political” one.
Valuation
In order to evaluate Ascendi, we used different methods depending on the
concessions considered and the information provided to the market. For the
concessions composing the availability of network system we resorted to the
adjusted present value (APV) method, while for Lusoponte, Copexa and
Marechal Rondon Leste we focused on book values, given the lack of data.
According to company’s information, the rent received in the availability regime
will amount to €189 mn for the first 5 semesters, corresponding to an initial
annual value of €378 mn, expected to grow at half the inflation rate. Operating
costs are expected to stand at 6% of revenues, of which 2% are the unavailability
rate of the total network. Total debt allocated to the five concessions is €2,5 bn.
Given last reports we have estimated invested capital to total €2,99 bn, and since
it will be fully depreciated by the end of each concession, we estimated an annual
depreciation value of €126,8 mn. Capex is expected to stay around €25-30 mn,
according to information provided by the company. However, we have
considered €35 mn (according to past values we thought it would be a more
conservative value) for the first and second years, then increasing in line with
revenues. Since all the concessions are being reevaluated by the government,
we have considered an 80% probability of amendments to this contract by 2013,
as it embraces a substantial financial burden to Estradas de Portugal. We have
considered a 5% decrease in revenues, which, given a 18,7% probability of
default39
, still allows Ascendi to payback its debt by 2032 and achieve a
reasonable value – €79 mn40
.
To find Lusoponte’s value we resorted to the book value of €128,7 mn41
. Since
Marechal Rondon Leste and Copexa concessions offer promising prospects, we
decided to include them in our valuation at the total amount invested – €40 mn
39 We expect Ascendi to go bankrupt only when EP goes. EP is closely linked to the sovereign debt and, thus, we have considered the probability
associated with Portuguese Republic. 40 The cost of equity inputs were considered as in table 5.
41 This value is fairly close to the one obtained through transaction multiples when Ascendi bought 24,2% of Macquarie’s position in 200841 - 138€
million.
Concessions under audit of
public authorities…
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and €43 mn respectively. Due to their uncertainty, we assumed a zero value for
all the other concessions. Our valuation implies a P/BV of 1,3xx.
Debt position
Mota-Engil had nearly €1,1 bn of debt in its balance sheet by the end of 2010.
Almost half of this debt was due in one year. Commercial paper seems a typical
source of funds for the company, directly followed by bank loans (see figures 37
and 38).
Figure 38 – Mota-Engil debt position 2010 (million)
Source: Mota-Engil financial report 2010
Mota-Engil showed some concern with its debt levels when it started
consolidating Ascendi through the equity method, instead of the proportional
consolidation method. Despite of having considerable amounts of non-recourse
debt, it seems dubious that both companies cannot be seen separately. If
Ascendi went bankrupt, even though Mota-Engil would not be legally responsible,
banks would certainly start restraining the credit conceded to the Mota-Engil
group.
Given the credit crunch that companies are facing in general, particularly
construction companies, Mota-Engil is expected to pay considerably more on its
debt (see figure 39).
Figure 39 – Interest Rate evolution
Source: Mota-Engil and NOVA SBE Equity Research Team
1 year 2 years Total Debt
169,6
1.099,0
3-5 years
333,9
> 5 years
515,0
80,6
5,7% 6,4% 4,8% 5,0%
6,7%
8,8% 8,9% 8,3% 8,0% 7,9%
2007 2008 2009 2010 2011 (F) 2012 (F) 2013 (F) 2014 (F) 2015 (F) 2016 (F)
Non-converti
ble bond loans
7%
Credit instituti
ons 58%
Other loans 35%
Figure 37 - Loans distribution
Source: Mota-Engil and NOVA SBE Equity Research Team
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Mota-Engil announced its intention to sell €200 mn of non-core assets. Making
the doubtful assumption that these assets are non-productive and will not affect
sales or the EBITDA margin, we should include them directly in our valuation.
Since the impact on the final price is significant we have decided to conduct a
sensitivity analysis on the price target, given different amounts for the sale.
Table 14 – Sensitivity analysis to assets sales
Sales(€) 0 25M 50M 70M 100M 150M 200M
Price Target 1,09 1,25 1,41 1,54 1,73 2,05 2,37
Potencial 16,0% 29,0% 41,0% 52% 67,0% 92,0% 118,0%
Source: NOVA SBE Equity Research Team
Bottom line: In our analysis we have considered that the company is able to sell
35% of the assets, with a 10% impairment loss. Assuming this as our central
value, net debt to EBITDA can be reduced to 3,8x in 2012 (excluding Ascendi’s
debt).
Figure 40 – Net Debt to EBITDA (million)(1)
Source: Mota-Engil and NOVA SBE Equity Research Team
(1) We have not included Ascendi’s debt
Additional asset’s sale: Martifer and Ascendi
We have decided to consider a scenario under which Mota-Engil decides to sell its
position in Ascendi and/or Martifer. We have considered the possibility of selling
both companies in each of the 5 years analysed. To better assess the effects of
such sale, we have considered a central scenario in which the sale would occur in
2013.
To what Ascendi is concerned, considering the validity of our analysis, a sale at
fair value would have to register a gain of €36,4 mn.
2015 (F)
1.081,31.158,3
2014 (F)2012 (F)
1.022,9
2016 (F)
1.253,2
2013 (F)
1.082,6
Net Debt /
EBITDA3,8x 3,8x 3,6x 3,6x 3,7x
Selling Ascendi and/or Martifer as an opportunity to further reduce debt levels…
Asset sales is a big question mark for Mota-
Engil’s valuation…
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We have also looked at multiples offered by infrastructure funds. According to our
computations42
, values for infrastructure deals are around 9,4x EBITDA.
According to these multiples and given the absence of information on the other
concessions, we would value the concessions composing the availability network
system at €263,9 mn, well above the value we found.
When considering Martifer, Mota-Engil would have to assume a loss of €68,0 mn,
given that the book value is €116,8 mn43
.
Figure 41 shows the evolution of debt with the sales of Ascendi and Martifer.
Figure 41 – Net Debt and Asset Sales (million) (1)
Source: NOVA SBE Equity Research Team
(1) We have not included Ascendi’s debt
Conclusion: Given the projected asset sales (already included in our analysis),
and the consequent decrease in net debt to EBITDA ratio, we do not think it
should be necessary to sell any of these participations. However, under more
demanding than expected economic conditions, Mota-Engil can always further
realize a considerable amount of cash that would allow them to achieve significant
reductions in debt levels (to 3,1x against 3,9x in 2013).
Is Mota-Engil really creating value? The purpose of this section is to evaluate if Mota-Engil is actually creating value,
compared with the market and its peers. By looking at the stock’s performance for
the last year against PIS20, we see that Mota-Engil’s decline was considerably
higher. However, when observing comparable companies we can see that Mota-
Engil has the best performance so far.
42 Bloomberg data 43 Value registered in Mota-Engil’s Report and accounts of 2010.
New Net
Debt 2016
1.030
174
Martifer
49
Ascendi
Sale
872
CF from
Investment
s 2012-16
1.253
Net Debt
2016
CF from
Financing
2012-16
851
CF from
Operations
2012-16
1.493
Net Debt
2011e
1.024
Sale of non-core assets would represent a Net Debt decrease
of EUR 223 M
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Figure 44 – Financing by company dimension
Source: Yahoo Finance and NOVA SBE Equity Research Teams
Stock prices can fluctuate considerably and for a long period around its fair value,
meaning that market returns can always be noisy. Bearing this in mind, and in
order to analyse if the company is actually creating value, we have computed the
return on invested capital and compared it to the cost of capital obtained44
,
assuming value creation whenever the first is higher. To compute the cost of
capital for the holding company we computed a weighted average WACC based
on free cash flow generation (figure 43).
Bottom line: Although construction companies seem to be performing poorly, we
conclude that the company is presenting excess returns, and thus creating value
for its shareholders.
M&A scenario
Given the current economic situation, we see the possibility of a merger between
construction companies as beneficial to numerous stakeholders: (1) Banks
granted large credits to construction companies and, unless a merger occurs,
some of their money may not be recovered; (2) Construction companies can
realize synergies, acquire know-how and/or expand to other geographies and
businesses; gain competitive advantage, mostly through size since no Portuguese
construction company is large enough to compete with other European
companies. Additionally, larger companies have better access to credit and at
lower financing costs (figures 44 and 45); (3) Government would theoretically
guarantee more jobs and taxes collected.
44 Return on Invested Capital =
0
20
40
60
80
100
120
Ind
ex
Figure 42 - Construction companies Vs PSI20
Mota-Engil PSI20 Soares da Costa Teixeira Duarte
ROIC analysis as the better way to evaluate value creation…
0,0
2,0
4,0
6,0
8,0
10,0
12,0
0 1.000 2.000 3.000
Net debt / EBITDA
Turnover (million)
Soares da Costa
Lena
Teixeira Duarte
Mota-Engil
Somague
DST
Monte Adriano
Edifer
MSF
7,2% 6,0%
9,5% 9,8% 9,3% 9,5% 10,2%
13,4% 13,6%
0,0%
5,0%
10,0%
15,0%
Figure 43 - Value Creation
ROIC Group WACC
Source: Mota-Engil and NOVA SBE Equity Research Team
Source: Companies’ reports and NOVA SBE Equity Research Team
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Figure 45 – Financing by company dimension When looking to other European countries, consolidation seems to be on average,
higher than in Portugal (see figure 46).
Figure 46 – Market Share of the 3 major construction companies
Source: Euroconstruct, companies’ financial reports and NOVA SBE Equity Research Team
The Spanish market, in particular, is constituted by 6 big players. This was the
consequence of a huge M&A activity in the country. The most emblematic was
ACS, itself a merger between several companies, acquiring Dragados in 2003, the
second largest construction company in Spain.45
But this was not an isolated
event. Grupo Ferrovial was constituted through the merger between Ferrovial and
Agroman, back in 1996; Acciona is the result of the merger between Entrecanales
and Cubiertas in 1998; SyV is the result of Sacyr, Vallehermoso and Somague;
OHL is the outcome of a merger between several companies. These players are,
nowadays, among the largest in Europe.
Mergers and acquisitions in the Portuguese sector were much more limited, small,
and even late. Mota and Engil were the first to merge, creating the largest group in
Portugal. More deals followed after it: Soares da Costa and Contacto merged in
2008; Lena merged with Abrantina in 2007; and Opway resulted from the merger
between Sopol and OPCA in 2008. Monte Adriano, another large player in the
Portuguese market, is the outcome of Monte & Monte and Adriano. After a short
merger period, Portugal still has a lot of players in the market with reasonable
size.
Methodology
Bearing all this factors in mind, we conducted a superficial analysis of potential
Mota-Engil’s targets, resorting to the following criteria: business fit (diversification),
economic fit (solvency), and geographical fit (internationalization). It is relevant to
highlight that, mergers will not occur without banks participation and
encouragement, meaning that financially fragile companies may still be seen as
interesting targets.
45 Nuno Correia Torrado, D., March 2008. An analysis of the ACS / Dragados merger. M.S. Thesis, ISCTE Business School.
2007
5,5%
2008
7,5%
2009
8,6%
2010
9,2%
18,9%17,3%
28,4%
9,2%
31,8%
3,9%0,8%
Space for Portuguese
companies to concentrate…
0,0%
5,0%
10,0%
15,0%
20,0%
25,0%
30,0%
0 1.000 2.000 3.000
Interest rate/ Net debt
Turnover (million)
Somague
Mota-EngilTeixeira DuarteSoares da Costa
DST Lena
MSF
Monte Adriano
Edifer
Source: Companies’ reports and NOVA SBE
Equity Research Team
Spain with a huge history of mergers and acquisitions in the sector…
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Major construction companies in Portugal are typically controlled by families (Mota
with Mota-Engil, Fino with Soares da Costa and the obvious Teixeira Duarte).
Bearing this in mind we think it would be very unlikely to witness a merger
between any of the three biggest companies (defining the new board of directors
would be an unattainable activity). Despite the potential synergies involved no
agreement would be obtained on easy terms.
However, we were able to identify two suitable targets using our previously
mentioned methodology: Opway and Edifer. Both companies present a
reasonable international presence and a diversified portfolio. Moreover, banks are
currently at risk is these deals. To better understand the merger’s potential, we
conducted a DFC analysis of each of the companies46
.
Opway
Opway emerged from the merger between OPCA and Sopol in 2008. It has more
than 75 years of experience, in areas such as construction, real estate, industry
and concessions. Through Banco Espírito Santo (its only shareholder) is also an
important shareholder of Ascendi (24% stake).
By acquiring Opway, Mota-Engil could gain access to some relevant markets:
Congo, Morocco and Algeria (Algeria is expected to grow 2,9% in 2011, Morocco
4,6%, and Congo 6,5%, according to IMF estimates). Furthermore, Opway is
already in Brazil through Pavi Brazil, with €19,9 mn in turnover. Despite of its
limited presence in Spain, Mota-Engil could gain from Construcciones Sarrión
position in the market, with resilient cash flow generation.
In terms of financial situation, Opway is in a very delicated one. In 2010 net debt
to EBITDA amounted to 36x, with an interest coverage ratio of only 0,12.
Operationally, the EBITDA margin was indubitably low, amounting to only 2,4%,
while revenues decreased by 9% in 2010.
Edifer
Edifer has been involved in some of the major Portuguese construction projects.
Nowadays it is the 8th biggest construction company in Portugal with a turnover of
€420 mn. Edifer is a reasonably diversified company, including businesses in:
construction, real estate, water and waste management, logistics, road and health
concessions.
Edifer generates more than 40% of their revenues outside Portugal, namely in
Angola, Mozambique, Libya, Cape Verde, Algeria and Spain. Algeria and Libya
46 The methodology was the same used for the other DCF calculations. We ended up with a WACC of 6,8% for Opway and 8,4% for Edifer.
Source: Edifer and NOVA SBE Equity Research Team
Opway under significant
distress…
Source: Companies’ reports and NOVA SBE Equity Research Team
-15,0%
-5,0%
5,0%
15,0%
25,0%
Figure 48 - Financials Summary (Edifer)
Revenues Growth
EBITDA margin
ROIC
-15,0%
-5,0%
5,0%
15,0%
25,0%
Figure 47 - Financial Summary (Opway)
Revenues Growth
EBITDA margin
ROIC
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would be good additions to Mota-Engil’s international presence, while in all the
other cases synergies could be generated. Moreover, Mota-Engil could extend its
activity into hospital concessions, diversifying into activities where the current
know-how could be of use.
Edifer is a much more financially solid company than Opway, with a net debt to
EBITDA of 3,6 times and an interest coverage ratio of 1,88. Operationally,
EBITDA margin increased in 2010 to 9,8%, while revenues decreased by 14,2%.
Altogether, Edifer seems a much less risky company than Opway.
Synergies
We expect synergies to take place at the acquired company. We have looked at
best practices of both companies when defining possible synergies from the
merger. A summary of the scenarios taken into account and the values found in
each case can be seen in figure 49.
Figure 49 – Opway and Edifer Valuations (million)
Source: Mota-Engil, Opway, Edifer and NOVA SBE Equity Research Team
By considering synergies we saw the value incrementing considerably. This is due
mainly to two effects: (1) operational improvement; (2) decrease in the perception
of risk, converging to the probability of default to Mota-Engil’s probability. In our
analysis we have also considered several alternatives to improve both companies’
value creation perspectives: debt haircuts; sale of non-strategic assets (namely
Ascendi in Opway’s case); exemptions from interest payments; and debt
consolidation. Edifer seems to be in a better position, yielding a positive equity
value once synergies are taken into consideration
Conclusion: As previously mentioned, no deal is expected to occur without the
involvement of financial institutions. Despite the fact that significant synergies are
expected, without a debt haircut Opway and Edifer would only yield equity values
Opway
Equity
Value
30,2
Ascendi
20,9
Operational
Synergies
161,4
Net Debt
427,1
EV
275,1
Edifer
Equity Value
26,6
Operational
Synergies
77,2
Net Debt
162,4
EV
111,9OPWAY EDIFER
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of €30,2 mn and €26,6 mn, respectively. Both amount to only 10% of our stand
alone valuation of Mota-Engil, thus not compensating its shareholders for the
significant risks normally involving such operations.
Therefore, we believe banks’ involvement with debt haircuts and interest rate
exemptions is critical to increase the M&A appetite of Mota’s family. Thus we have
considered a debt haircut of 8% in the case of Opway and 20% for Edifer (yielding
around €35 mn in the two cases), both of which could be swapped by equity of the
new company. One important remark regarding this last argument is that no debt
swap could be higher than €84 mn as it corresponds to a dilution of 14% for
Mota’s family, the amount the family could give away without losing its majority
stake.
Figure 50 – Summary of a possible M&A deal (Opway; million)47
Source: Opway and Equity Research Team
Figure 51 – Summary of a possible M&A deal (Edifer; million)
Source: Edifer and Equity Research Team
47
Considering Ascendi sale
303,9
Opway
Stand Alone
Equity Value
-131,2
Operational
Synergies
161,4
Debt Haircut
35,8
NewCo
Equity Value
369,9
48,8
Assets for Sale
70,0
EGL Stand
Alone Equity
Value
EV Net Debt Minorities
1.069,1
1.035,2
Ascendi
Equity Value
23,1
174,4
Martifer
Equity Value
A MERGER WITH OPWAY WOULD INCREASE THE EQUITY VALUE OF MOTA-ENGIL BY EUR 66,0M
NewCo
Equity Value
364,7
Debt Haircut
34,1
Operational
Synergies
77,2
Edifer Stand
Alone Equity
Value
-50,5
EGL Stand
Alone Equity
Value
303,9
Assets for Sale
70,0
Martifer
Equity Value
48,8
Ascendi
Equity Value
174,4
Minorities
23,1
Net Debt
1.035,2
EV
1.069,1
A MERGER WITH EDIFER WOULD INCREASE THE EQUITY VALUE OF MOTA-ENGIL BY EUR 60,8M
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Appendix
1) FCF calculation – the end of the Eurozone The Eurozone is facing its gravest crisis, and no agreement has been reached yet.
Actually, Europe is repeatedly speaking at two voices. If on one hand, Sarkozy
and France put emphasis on “solidarity” among European States, i.e, joint
Eurobonds, no defaults or restructurings after Greece, Merkel and Germany give
priority to budgetary discipline and rules. Moreover, while Sarkozy urges the
Central Bank to act, Merkel is hesitant in doing so.
All of the sudden, Merkozy seem to have agreed upon the necessity of ratifying
European treaties. Sarkozy seems to be abandoning its previous positions to put
France right beside Germany. However, once again, nothing has been disclosed
about the content of the new treaties. Moreover, changes or a new treaty would
take months of negotiations and eventually years to ratify. Europe simply does not
have the time for that! The most important decision to be taken now is related to
allowing the Central Bank to use all the means necessary to sustain the collapse,
meaning, buying sovereign debt of its members massively and even printing
money to do so. Mario Draghi stated in the beginning of December that he may be
willing to do so, but only if a new “fiscal agreement” is reached. However, once
more, even Draghi seems to have succumbed to Merkel’s wishes48
. By now
Portugal, Greece and Ireland have been rescued by IMF and European Union.
However, the European Financial Stability Facility is not sufficient to rescue
countries like Spain, Italy, or even France, even if the amount available is actually
increased to €1.000 bn.
It is our belief that Europe will continue to be hesitant to intervene, but along the
first quarter of the year, with Italian and Spanish yields approaching prohibitive
levels, BCE will most likely interfere (97% probability). The consequences of not
doing so would be so devastating that no one wants to wait and see. It is also our
opinion that too much time was lost in the process (FED was much more
aggressive). With a BCE intervention we see a small probability of a Portuguese
default for the next couple of years (3% and 2%, respectively), as we still are in
the bailout program period. With no intervention, however, Portuguese probability
of default increases considerably (we have considered 30% for each year), as it
may be precipitated by other bailouts.
48 The Economist, 2011. Is this really the end?. [online] Available at: < http://www.economist.com/node/21540255> [Accessed November 2011].
EFSF with insufficient funds to save bigger economies…
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By hypothesising the end of the Euro and a possible return of Portugal to Escudo,
one can fully understand the spectrum of its consequences. By leaving the
Eurozone, Portugal would have to depreciate its new currency considerably, in
order to increase its productivity. By doing so, however, all the items in other
currencies would become more expensive in the same amount, namely debts
(both public and private). This would be critical for the country and most likely
precipitate its bankruptcy. Banks, with euro denominated debt, would also face a
huge increase in their debt burden, which accelerated by a bank run, would
certainly provoke their bankruptcy and consequently nationalization, worsening
even more the country’s situation. Portuguese total debt amounted to nearly 280%
at the end of 2010, which poses a true risk of contamination for other European
countries. Given this scenario and the risks to other economies, we do not think
Portugal exiting the euro is a viable scenario (we have considered an accumulated
probability of 9,1% over next five years for the end of the Euro and 5,8% for
peripheral countries exiting the Eurozone).
Exhibit 1 – Possible Euro Scenarios(1)
Source: NOVA SBE Equity Research Team (1) After each of the scenarios there are two chances: either Mota-Engil defaults or it survives
BCE intervention
No default Euro survives
Peripheral default/exiting
Euro ends
Euro Survives
Euro Survives without peripheral
countries
Italian or Spanish default
No intervention
No default Euro survives
Peripheral default/exiting
Euro ends
Euro survives
Euro survives without peripheral
countries
Italian or Spanish default
Euro ends
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MASTERS IN FINANCE
EQUITY RESEARCH
The probabilities associated with each scenario can be seen in exhibit 2.
Exhibit 2 – Probabilities in each scenario BCE
Intervention
No intervention
No default
Peripheral Default
Default total
Euro survives
Euro survives without
Peripheral Euro ends
Mota Defaults
Mota survives
2012 97,0% 3,0% 94,3% 4,1% 1,6% 95,5% 1,5% 3,0% 3,9% 96,1% 2013 90,0% 10,0% 94,8% 4,3% 1,0% 95,9% 1,5% 2,6% 4,3% 95,7% 2014 30,0% 70,0% 93,4% 6,6% 0,0% 95,2% 2,2% 2,6% 5,0% 95,0% 2015 10,0% 90,0% 99,0% 1,0% 0,0% 99,3% 0,3% 0,4% 2,3% 97,7% 2016 3,0% 97,0% 99,5% 0,5% 0,0% 99,6% 0,2% 0,2% 1,8% 98,2%
Source: NOVA SBE Equity Research Team
2) Probabilities of Default according to rating In our analysis we have considered probabilities of default according to historical
data compiled by Moody’s. Exhibit 3 shows the accumulated probabilities of
default over a 5 year period.
Exhibit 3 – Accumulated probability of default
Moody’s Rating
Year 1 Year 2 Year 3 Year 4 Year 5
Aaa 0,0% 0,0% 0,0% 0,0% 0,1%
Aa1 0,0% 0,0% 0,0% 0,1% 0,1%
Aa2 0,0% 0,0% 0,0% 0,1% 0,2%
Aa3 0,0% 0,1% 0,2% 0,2% 0,3%
A1 0,0% 0,2% 0,4% 0,5% 0,7%
A2 0,0% 0,1% 0,2% 0,4% 0,6%
A3 0,0% 0,2% 0,3% 0,5% 0,7%
Baa1 0,1% 0,4% 0,6% 0,9% 1,1%
Baa2 0,1% 0,4% 0,8% 1,4% 1,9%
Baa3 0,3% 0,8% 1,5% 2,1% 2,9%
Ba1 0,7% 1,9% 3,4% 4,9% 6,3%
Ba2 0,7% 2,1% 3,8% 5,6% 7,2%
Ba3 1,8% 5,0% 8,9% 12,9% 16,2%
B1 2,5% 6,8% 11,4% 15,4% 19,5%
B2 3,8% 9,1% 14,4% 19,2% 23,2%
B3 7,7% 15,1% 22,3% 28,7% 34,3%
Caa1 9,2% 18,8% 28,0% 35,6% 42,4%
Caa2 16,4% 25,8% 33,0% 38,8% 42,0%
Caa3 24,8% 36,6% 43,4% 49,3% 56,0%
Ca-C 32,9% 44,3% 53,3% 58,4% 63,9%
Source: Moody’s Global Credit Policy
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Financial Statements
Income Statement (million)
2010 2011E 2012F 2013F 2014F 2015F 2016F
Sales 2.004,6 2.088,2 2.120,3 2.201,2 2.300,4 2.427,6 2.581,7
E&C 1.599,0 1.608,1 1.604,7 1.658,8 1.739,8 1.851,9 1.990,4
E&S 409,9 484,7 518,8 545,7 564,1 579,4 595,2
Intragroup -4,4 -4,6 -3,2 -3,3 -3,5 -3,6 -3,9
EBITDA 237,3 267,8 269,2 282,3 299,6 317,5 340,9
E&C 162,5 173,1 165,5 172,6 183,9 199,0 217,3
E&S 80,8 98,8 106,4 112,5 118,7 123,3 127,0
Intragroup -6,0 -4,1 -2,7 -2,9 -3,0 -4,8 -3,4
EBIT 131,7 165,7 157,0 161,4 181,5 256,2 282,0
Net Financial loss -50,9 -77,3 -110,5 -119,6 -114,3 -116,7 -124,7
Equity Method 7,5 5,6 9,9 24,0 39,3 47,3 70,1
Income tax -19,0 -27,8 -15,9 -18,6 -30,1 -52,8 -64,0
Minority interests 32,4 34,7 21,2 24,7 40,0 70,2 85,6
Net profit 37,0 31,5 19,3 22,5 36,3 63,8 77,7
Balance Sheet (million)
2010 2011E 2012F 2013F 2014F 2015F 2016F
Invested Capital 1861,6 1919,4 1923,6 1991,2 2018,8 2154,3 2324,0 Fixed Assets 1058,0 1095,6 1106,3 1114,0 1143,0 1262,5 1403,2 Financial Assets 425,9 425,8 442,8 456,1 465,2 474,5 484,0 Working Capital 249,3 266,9 240,8 284,7 271,4 275,3 292,1 Other Assets 128,6 131,1 133,7 136,4 139,1 141,9 144,8
Capital Employed 1861,6 1919,4 1923,6 1991,2 2018,8 2154,3 2324,0 Equity 411,7 421,9 419,9 421,1 436,1 478,6 533,0 Net Debt 1014,7 1023,9 1022,9 1081,3 1082,6 1158,3 1253,3 Other Liabilities 366,2 380,8 388,4 396,2 404,1 412,2 420,5 Minorities 69,0 92,8 92,4 92,6 95,9 105,3 117,3
Cash Flow Statement (million)
2010 2011E 2012F 2013F 2014F 2015F 2016F
Initial Net Debt Position 984,4 1.014,7 1.023,9 1.022,9 1.081,3 1.082,6 1.158,3 Cash Flow – Operation 240,8 228,0 289,2 243,8 322,0 308,0 330,1
EBIT 131,7 165,7 157,0 161,4 181,5 256,2 282,0 D&A 86,4 93,9 93,5 96,0 99,9 42,7 43,8 Provisions 19,2 8,3 18,7 24,9 18,1 18,5 15,0 Income taxes -19,0 -27,8 -15,9 -18,6 -30,1 -52,8 -64,0 ∆NWC 15,0 -17,7 26,1 -43,9 13,2 -3,9 -16,8 Equity Method 7,5 5,6 9,9 24,0 39,3 47,3 70,1
Cash Flow -
Investing -272,4 -142,3 -142,5 -144,6 -158,9 -192,9 -211,8 Capex -183,2 -139,8 -122,8 -128,6 -147,0 -180,8 -199,5 Net fin. Inv. and others -89,3 -2,5 -19,7 -16,0 -11,9 -12,1 -12,3
Cash Flow - Financing 1,3 -94,8 -145,8 -157,6 -164,4 -190,8 -213,3
Net Interest expenses -50,9 -77,3 -110,5 -119,6 -114,3 -116,7 -124,7 Equity Changes 18,6 -32,2 -43,0 -45,8 -58,0 -82,1 -96,8 Others 33,6 14,6 7,6 7,8 7,9 8,1 8,2 Increase in cash -30,4 -9,1 0,9 -58,4 -1,3 -75,7 -95,0 Ending Net Debt 1.014,7 1.023,9 1.022,9 1.081,3 1.082,6 1.158,3 1.253,3
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Disclosures and Disclaimer
Research Recommendations
Buy Expected total return (including dividends) of more than 15% over a 12-month period.
Hold Expected total return (including dividends) between 0% and 15% over a 12-month period.
Sell Expected negative total return (including dividends) over a 12-month period.
This report was prepared by a Masters of Finance student, following the Equity Research – Field Lab Work Project, exclusively for academic purposes. Thus, the author, which is a Masters in Finance student, is the sole responsible for the information and estimates contained herein and for the opinions expressed, which reflect exclusively his/her own personal judgement. All opinions and estimates are subject to change without notice. NOVA SBE or its faculty accepts no responsibility whatsoever for the content of this report nor for any consequences of its use. The information contained herein has been compiled by students from public sources believed to be reliable, but NOVA SBE or the students make no representation that it is accurate or complete, and accept no liability whatsoever for any direct or indirect loss resulting from the use of this report or its content. The author hereby certifies that the views expressed in this report accurately reflect his/her personal opinion about the subject company and its securities. He/she has not received or been promised any direct or indirect compensation for expressing the opinions or recommendation included in this report. The author of this report may have a position, or otherwise be interested, in transactions in securities which are directly or indirectly the subject of this report. NOVA SBE may have received compensation from the subject company during the last 12 months related to its fund raising program. Nevertheless, no compensation eventually received by NOVA SBE is in any way related to or dependent on the opinions expressed in this report. The NOVA School of Business and Economics does not deal for or otherwise offers any investment or intermediation services to market counterparties, private or intermediate customers. This report is not an investment recommendation as defined by Article 12.º-A of the Código do Mercado de Valores Mobiliários. The students of NOVA School of Business and Economics are not registered with Comissão do Mercado de Valores Mobiliários as financial analysts, financial intermediaries or entities or persons offering any services of financial intermediation, to which Regulamento 3.º/2010 of CMVM would be applicable. This report may not be reproduced, distributed or published without the explicit previous consent of its author, unless when used by NOVA SBE for academic purposes only. At any time, NOVA SBE may decide to suspend this report reproduction or distribution without further notice.