05 | May | 15 PORR AG Buy (unchanged) Target: Euro 65.00 (unchanged) Solid 2014 figures – After the spin-off and a net cash position of Euro 65m, PORR is well on track as a pure play construction firm – still Buy and € 65 TP On 23 April, Austrian real estate construction and technology group PORR AG released its 2014 annual report after the suc- cessful spin-off of its real estate activities. All in all, the num- bers were very good and gave us a clear indication that the com- pany successfully managed the turn-around and is now as a pure construction group right on track to increase profits and to further improve profit margins. Company realized an impressive hike in production output by 10% to Euro 3.5bn and an even stronger increase in revenues by almost 15% to Euro 3.0bn. PORR reached an order backlog of Euro 4.1bn, which is against the background of the sophisticated markets a favorable figure. Order intake dropped to Euro 3.1bn whereat the previous figure was mainly influence by some large- scale projects. Due to higher material costs and staff expense EBITDA rose by 7% to Euro 156m and pre-tax margin remained constant at a level of 1.9%. According to the good operating performance and the improvement in the balance sheet which translated into a hike in the equity ratio from 15% to 18%, the management decided to significantly lift the dividend payment by 50% from Euro 1.00 to Euro 1.50 for FY 2014. As a consequence of the successful UBM transaction the firm further optimized its balance sheet structure and should benefit from lower finance costs. In detail, cash and cash equivalents surged by almost Euro 466m and the net debt position was transformed from minus Euro 357m to plus Euro 65m and final- ly, asset and liability ratios were significantly improved. Due to its optimized balance sheet ratios, PORR wants to play an active role in the upcoming consolidation process in its home markets. Due to its high reputation in the Middle East, we expect further large scale orders until year end. Concerning the pre-tax loss in the CEE/SEE business unit, man- agement plans to implement a more consistent cost and project controlling to realize the turn-around in 2015. We expect for the upcoming quarters a further hike in production output as well as higher profits and improved profit margins. Due to the company´s capital market approach we expect a further positive news flow and according to the high pay-out ratio of 30% to 50% rising dividends for the future. Fur- thermore, we assume increasing profits for the upcoming quarters. However, we also see some risks that the manage- ment failed in its attempt to realize the turn-around in the CEE/SEE business unit and calculated a risk discount of 10%. Therefore, we derived from our updated DCF model with undemanding assumptions a fair value of Euro 65.00 per share and confirm our Buy rating. Price (Euro) 53.80 52 weeks range 54.17 / 35.60 Key Data Country Austria Industry Technology & Construction ISIN AT0000609607 WKN 850185 Reuters ABGV.VI Bloomberg POS AV Internet www.porr-group.com Reporting Standard IFRS Fiscal Year 31/12 Market Cap (EUR million) 742.6 Number of shares (million) 13.8 Free Float 46.3% Free Float MCap (million) 343.8 Multiples 2014 2015e 2016e 2017e MarketCap/ Revenues 0.25 0.23 0.21 0.20 PE-Ratio 16.7 10.2 8.6 7.5 Dividend Yield 2.8% 4.5% 5.4% 5.6% Price-to-Book ratio 192.8% 182.2% 170.6% 159.8% Key Data per Share (Euro) 2014 2015e 2016e 2017e Earnings per Share (EPS) 3.22 5.25 6.26 7.16 Dividends per Share (DPS) 1.50 2.40 2.90 3.00 Financial Data (Euro '000) 2014 2015e 2016e 2017e Revenues 3,009,118 3,191,000 3,486,000 3,708,000 EBITDA 156,424 185,257 203,438 208,988 Operating Profit (EBIT) 81,708 116,402 132,906 137,978 Pre-tax profit (EBT) 66,100 94,100 111,000 123,000 Net profit (after minorities) 48,626 76,784 90,552 99,721 Adjusted Shareholders' Equity 340,140 364,459 392,659 423,139 RoE after tax 14.3% 21.0% 23.0% 23.5% Financial Calendar 1Q 2015 report 31 May 2015 AGM 3 June 2015 2Q 2015 report 28 August 2015 SRC Forum Financials & Real Estate 10 September 2015 Main Shareholders Syndicate (Strauss-/Ortner-group) 53.7% Renaissance Construction AG 5.7% Vienna Insurance Group 4.5% PORR Management 4.3% Own shares 2.1% Analyst Thilo Gorlt, EMBA (HSG), CIIA Dipl.-Kfm. Stefan Scharff, CREA E-Mail gorlt@src‐research.de scharff@src‐research.de Internet www.src‐research.de www.aktienmarkt‐international.at
Transcript
05 | May | 15
PORR AG
Buy (unchanged) Target: Euro 65.00 (unchanged)
Solid 2014 figures – After the spin-off and a net cash position of Euro 65m, PORR is well on track as a pure play construction firm – still Buy and € 65 TP
On 23 April, Austrian real estate construction and technology
group PORR AG released its 2014 annual report after the suc-
cessful spin-off of its real estate activities. All in all, the num-
bers were very good and gave us a clear indication that the com-
pany successfully managed the turn-around and is now as a
pure construction group right on track to increase profits and to
further improve profit margins.
Company realized an impressive hike in production output by
10% to Euro 3.5bn and an even stronger increase in revenues by
almost 15% to Euro 3.0bn. PORR reached an order backlog of
Euro 4.1bn, which is against the background of the sophisticated
markets a favorable figure. Order intake dropped to Euro 3.1bn
whereat the previous figure was mainly influence by some large-
scale projects. Due to higher material costs and staff expense
EBITDA rose by 7% to Euro 156m and pre-tax margin remained
constant at a level of 1.9%. According to the good operating
performance and the improvement in the balance sheet which
translated into a hike in the equity ratio from 15% to 18%, the
management decided to significantly lift the dividend payment
by 50% from Euro 1.00 to Euro 1.50 for FY 2014.
As a consequence of the successful UBM transaction the firm
further optimized its balance sheet structure and should benefit
from lower finance costs. In detail, cash and cash equivalents
surged by almost Euro 466m and the net debt position was
transformed from minus Euro 357m to plus Euro 65m and final-
ly, asset and liability ratios were significantly improved. Due to
its optimized balance sheet ratios, PORR wants to play an active
role in the upcoming consolidation process in its home markets.
Due to its high reputation in the Middle East, we expect further
large scale orders until year end.
Concerning the pre-tax loss in the CEE/SEE business unit, man-
agement plans to implement a more consistent cost and project
controlling to realize the turn-around in 2015. We expect for the
upcoming quarters a further hike in production output as well as
higher profits and improved profit margins.
Due to the company´s capital market approach we expect a
further positive news flow and according to the high pay-out
ratio of 30% to 50% rising dividends for the future. Fur-
thermore, we assume increasing profits for the upcoming
quarters. However, we also see some risks that the manage-
ment failed in its attempt to realize the turn-around in the
CEE/SEE business unit and calculated a risk discount of
10%. Therefore, we derived from our updated DCF model
with undemanding assumptions a fair value of Euro 65.00
per share and confirm our Buy rating.
Price (Euro) 53.8052 weeks range 54.17 / 35.60
Key Data
Country AustriaIndustry Technology & ConstructionISIN AT0000609607WKN 850185Reuters ABGV.VIBloomberg POS AVInternet www.porr-group.comReporting Standard IFRSFiscal Year 31/12Market Cap (EUR million) 742.6Number of shares (million) 13.8Free Float 46.3%Free Float MCap (million) 343.8
PORR is a strong brand in the European construction business. With a long track-record in finishing demanding products in-time and in-budget. This is a most decisive advantage to pitch for lucrative new construction projects and to grab a higher market share by beating competitors.
Austria is the home market of PORR, where the firm is the No. 1 player today. With regards to the home market region with Germany, Switzerland, Poland and CZ, the firm has a strong footprint, in particular in metropolises like Berlin, Frankfurt, Warsaw and Prague, with several well-known land-mark projects.
The order backlog is at record levels in company’s history. After a new record of Euro 4.7bn in 2013 with the Doha Metro Line project, the company was able to keep it at above Euro 4.1bn as of year-end 2014. On an adjust-ed basis without Doha Metro the order backlog steeply hiked in 2014 by 18%. This means that PORR has an attractive project pipeline for about 14 months without gaining any new orders. This allows the firm to cherry-pick the most lucrative future projects and to abstain from any “price wars.”
The firm is not only strong in building construction but also in public infrastructure construction projects like tunnel, bridge and highway con-struction as well as the prominent Green Line Metro in Doha. The business unit infrastructure is the second biggest revenues driver for the group.
PORR worked to improve the balance sheet by reducing working capital and net debt position. At year-end 2014 the firm is net debt free and has even reached net cash position of about Euro 65m.
PORR increased the dividend for 2014 from Euro 1.00 to Euro 1.50.
In the past, the firm suffered from severe losses and bad debts with projects mainly in CEE/SEE countries like Hungary and Romania.
PORR missed to build up a strong and efficient cost management system as well as a project controlling system in the CEE/SEE business unit.
Due to the spin-off of real estate activities and Development Business to the
“new” UBM Development AG, PORR is now a Pure Play Construction group with a strong footprint in its European home markets.
Significant upside for the share to come from higher profits (efficiency gains, better operating margins, lower financial expenses) and a higher free float.
Stable economic situation in PORR’s home markets and slightly growing construction business activities in almost all decisive countries.
Good margins at the Metro Doha “Green Line” and further infrastructure projects follow-up orders will foster group’s numbers the next 4 - 5 years.
A higher awareness at capital markets as PORR changed in Dec. 2014 from Standard Market Continuous at Vienna stock exchange to the Prime Market.
Company has a clear capital market focus and plans a payout ratio of 30% to 50% for the upcoming years.
An overall economic downturn in Europe would also affect PORR’s business. Although we believe that PORR could reach the turn-around in the CEE/SEE
business unit we also see some risk that the management could fail.
Weaknesses
Opportunities
Threats
Strengths
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After the spin-off and solid figures for 2014, PORR has a clear focus on its core business and is now well on track for an improved profitability
In 2014, PORR realized the successful spin-off of its development business to UMB Realitätenentwicklungs AG. All in all, the whole transaction was made in a two-step process. In the first step, in which PIAG was used as a spin-off vehicle to separate PORR`s non-core real estate development activities (former pooled in PORR`s subsidiary Strauss & Partner) from PORR`s construction business in order to create two pure play and seperately listed companies. In addition, PIAG also holds PORR`s majority stake in UBM. In the second step, PIAG was merged with the current UBM (UBM Realitätenentwicklungs AG) to UBM Development AG. Therefore, the syndicat (Strauss- / Ortner-group) holds now a stake of 48.3% in UBM Realitäten AG. As a consequence of the new strategy to act as a pure play, PORR is now able to focus even more closely on it core competency – the construction business. For 2014, PORR reported solid figures which were mainly driven by the above mentiond spin-off. Due to its excellent market position in its home market Austria in which PORR is the number one construction company, the firm was able to increase its production output by almost 10% to Euro 3.5bn, whereas 92.5% of that volume was generated in secure home markets. Due to its focus on profitable foreign markets like Qatar in the Middle East for example the firm hiked its foreign share from Euro 1.1bn to almost Euro 1.4bn which represents an increase of the foreign share from 36% to 39%. The share of its home market Austria remained relatively stable at Euro 2.1bn and rose only slightly by 4% towards the 2013 figure. Besides the five core markets, PORR focus on four business segments in which the firm was able to increase its production output.
Source: Company Data, SRC Research
Solid 2014 figures with strong increase in produc-tion output and revenues
The successful spin-off of its development business was the precondition for prospective improved prof-itability
Segments PORR AG
31/12 IFRS (Mio. Euro) 2011 2012 2013 2014
Production outputBusiness Unit 1 -DACH 1,635 1,719 1,930 2,013Business Unit 2 -CEE/ SEE 426 364 403 425Business Unit 4 - Infrastructure 514 462 684 889Business Unit 5 - Environmental engineering 70 78 99 105Holding 259 268 46 43
Total production output 2,906 2,891 3,162 3,475
Production output shareBusiness Unit 1 -DACH 56.3% 59.5% 61.0% 57.9%Business Unit 2 -CEE/ SEE 14.7% 12.6% 12.7% 12.2%Business Unit 4 - Infrastructure 17.7% 16.0% 21.6% 25.6%Business Unit 5 - Environmental engineering 2.4% 2.7% 3.1% 3.0%Other 8.9% 9.3% 1.5% 1.2%
Total production output share 100.0% 100.0% 100.0% 100.0%
Production output in Mio. EuroHome market 1,822 1,946 2,027 2,114Foreign countries 1,084 945 1,135 1,361
Despite the strong hike in production output to Euro 3.5bn, the firm reached the highest growth of almost 30% in infrastructre business segment, followed by environmental engineering with 6% and the CEE/SEE with over 5%. Due to the strong growth in the infrastructure business segment with a portion of nearly 26% of total production output, the share of the important DACH segment declined from 61% to only 58%. All in all, we can say that the reported total production output was above our expectations and offers the company a very comfortable initial situation for the future and is a clear demonstation of the strong market position of the company. Although PORR showed a slight decline of almost 8% in order backlog from Euro 4.4bn to Euro 4.1bn, we have to keep in mind that 2013 figures were mainly influenced by the large-volume projects of Metro Doha “Green Line” and KAT 3 Koralm tunnel. The following chart shows the top 15 projects with its order backlog volume and the duration.
Source: Company Data, SRC Research
All in all, we have to point out that an order backlog of Euro 4.1bn that corresponds to an order backlog range of 14 months according to the 2014 production output is in our point of view a very favourable figure that act as a ”cushion” that offers the firm protection against cut-throat competition and declining prices. The significant reduction of order intakes to the low level of Euro 3.1bn in 2014 was mainly driven by the firm`s strategy to accept only projects which will generate an EBT-margin above 3%. On the other hand, order intake 2013 was highly influenced by the above mentioned bulk order from Qatar.
Source: Company Data, SRC Research
Strong increase in produc-tion output…
… and the high order back-log reflects the firm`s strong market position
Despite sophisticated markets, PORR has still strong order backlog
Major projects order backlog (as of Dec 2014)
Project Country Volume Entry Duration Completion
(Euro million, PORR share)
Metro Doha "Green Line" (JV Green Line WLL) Qatar (Doha) 944 Aug 2013 Juen 2018 16.7%
KAT 3 Koralm tunnel (Porr Bau GmbH) AUT 297 June 2013 June 2020 15.0%
"Stuttgart 21" Filder tunnel GER 266 July 2011 2019 13.1%
Tunnel Albaufstieg GER 235 Aug 2013 Feb 2019 20.8%
Slab track Erfurt‐Halle GER 190 Oct 2012 Dec 2014 95.3%
Emscher BA 40 GER 144 Dec 2013 June 2018 14.7%
S10 Tunnel Götschka AT 129 Oct 2011 July 2015 90.7%
Slab track Coburg Ilmenau GER 103 Nov 2012 Dec 2015 70.0%
Stuttgart 21 Lot 2a/3 GER 99 July 2012 Mar 2018 16.4%
Hospital Vienna Nord AT 98 May 2012 Dec 2016 81.8%
Motorway Sebes‐Turda RO 96 April 2014 Mar 2016 15.1%
Bypass Biel Ostast CH 92 April 2007 July 2015 96.9%
Main Station Vienna AT 86 Oct 2009 2019 88.9%
S10 Bypass Freistadt AT 84 Oct 2011 Sep 2014 100.0%
Smart Campus AT 79 June 2014 June 2016 19.5%
Total: 2,941.7
2,764
3,373
4,3984,058
3,2213,500
4,377
3,135
0
1,000
2,000
3,000
4,000
5,000
2011 2012 2013 2014
Order backlog vs. order income
Order backlog Order income
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Besides the strong and pleasing development of the production output, PORR even surged total revenues by 14% to Euro 3.0bn (2013: Euro 2.6bn). Due to the higher production volume, costs for materials and other production services also rose by about 16% to Euro 2.0bn. As a consequence of the increased workforce of 12.834 (2013: 11.920) staff expenses climbed by 12% from Euro 670m to Euro 753m. Source: Company Data, SRC Research
Although the company realized a 7% higher EBITDA of Euro 156m (2013: Euro 147m), operating profit (EBIT) rose by only 1% to Euro 82m as depreciation and impairment expenses surged by 14% to almost Euro 75m. As financial assets doubled to Euro 25m - which was mainly driven by higher income and lower expenses from shareholdings and affiliated companies - and finance costs rose by 20% to Euro 40m, earnings before tax (EBT) climbed by 11% to Euro 66m. For 2014, PORR had a higher tax ratio of 27% (2013: 12%) which was a consequence of higher income from interests in companies accounted for under the equity method towards expenses in 2013 and therefore, net profit declined by 8% to Euro 49m. Concerning the above mentioned situation, profit margins slightly decreased as expense ratios increased. Source: Company Data, SRC Research
The strong growth in pro-duction output generated higher cost…
… with a negative influ-ence on profit growth and margins
P&L PORR AG
31/12 IFRS (Euro '000) 2011 2012 2013 2014
Growth2013 - 2014
Production output 2,826,047 2,905,634 3,162,079 3,474,885 9.9%Revenues 2,212,490 2,314,828 2,630,025 3,009,118 14.4%Own work capitalized in non-current assets 4,152 4,210 4,453 890 -80.0%Share of profit/loss of associates 17,916 20,201 34,604 66,156 91.2%Other operating income 67,158 70,312 112,700 119,475 6.0%Cost of materials and other related production services -1,470,861 -1,455,484 -1,748,711 -2,026,001 15.9%Staff expense -580,804 -625,309 -669,814 -752,960 12.4%Other operating expenses -239,225 -224,921 -216,643 -260,254 20.1%
Operating result (EBITDA) 10,826 103,837 146,614 156,424 6.7%
Depreciation, amortisation and impairment expense -51,291 -50,028 -65,736 -74,716
Operating result (EBIT) -40,465 53,809 80,878 81,708 1.0%Income from financial investments and other current financial assets 1,738 5,976 12,354 24,762 100.4%
Personnel costs to sales 26.3% 27.0% 25.5% 25.0%Cost of material to sales 66.5% 62.9% 66.5% 67.3%Depreciation to sales 2.3% 2.2% 2.5% 2.5%Payout ratio 0.0% 28.7% 25.8% 46.6%Tax rate -15.5% -18.2% -11.8% -26.5%
Profitability in %
Gross profit margin 33.5% 37.1% 33.5% 32.7%
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As mentioned above, PORR is now a pure play in the construction business with a new strategy and a clear focus on its european core markets. As a consequence of that, we saw significant changes in the balance sheet structure. One of the major changes triggered by the spin-off was a considerable reduction of total non-current assets by approx. 32% to Euro 728m, as investment properties declined by more Euro 187m. In contrast, total current assets surged by almost 16%. This development was caused by the rise of trade receivables that hiked by 11% to Euro 725m, mainly driven by receivables from construction contracts (+9% or Euro 22m) and receivables from consortiums (+61% or Euro 41m).
Source: Company Data, SRC Research
Furthermore, cash and cash equivalents surged by 40% to Euro 466m, which offers the company a comfortable cushion to play a furthermore active role in the upcoming consolidation process in important core markets. All in all, the UBM transaction changed the proportion of the asset side significantly. While the share of non-current assets dropped from 47% (2013) to only 34% (2014), the portion of current assets surged from 53% to 66% which represents the business modell of a pure play construction company. On the other hand, the liability side offers also significant changes triggered by the UBM transaction. Accordingly to the above mentiond spin-off of the real estate activities, non-current financial liabilities plunged by 65% or Euro 177m to Euro 97m. As PORR was also able to reduce its bond exposure by 31% to Euro 155m, total non-current liabilities declined by 39% and the long-term liability ratio dropped from 31% to only 19%. On the other hand, short-term liabilities increased only marginally by 6%. Besides higher total equity of Euro 385m (+11%) and an improved equity ratio of 18%, PORR was able to improve its balance sheet ratios significantly. All in all, the increased cash volume, a higher equity ratio and more attractive liability ratios offers the company in our view a better precondition for upcoming acquisitions and improved profitability.
The new strategy to act as a pure play construction group turns the asset side of the balance sheet structure upside down.
Significant changes in the balance sheet structure due to the spin-off of the real estate activities
Significant change con-cerning the portion of short- and long-term liabil-ities and higher equity ra-tio
Total non-current assets 1,178,059 1,101,407 1,068,659 728,013 -31.9%
Current assetsInventories 55,125 81,133 96,105 72,647Trade receivables 602,639 610,146 650,987 725,101 11.4%Other financial assets 113,022 121,152 133,097 129,943Other receivables and current assets 17,594 12,111 11,187 18,593Cash and cash equivalents 153,813 110,411 332,907 465,617 39.9%Assets held for sale 16,800 24,381 3,528 6,116
Total current assets 958,993 959,334 1,227,811 1,418,017 15.5%
Total assets 2,137,052 2,060,741 2,296,470 2,146,030 -6.6%
portion of non-current assets 55.1% 53.4% 46.5% 33.9%portion of current assets 44.9% 46.6% 53.5% 66.1%
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Source: Company Data, SRC Research
As an additional consequence of PORR`s strategy and the realized spin-off of the real estate activities, the firm was able to transform the former net debt position of Euro -357m into a net cash position of even Euro +65m at year-end 2014. In addition, PORR also managed a turn-around of the working capital from Euro -52m to almost Euro +66m.
PORR`s strategy represents the corner stone for increasing profitability in the future.
In the last three years, PORR constantly focused on its five european home markets like Austria, Germany, Switzerland, Polend and the Czech Republic which contributes for 92.5% of its total production output. In the past, the company refused to develop new foreign markets like Brazil or North America. Due to a very profitable project in Qatar (Metro Doha “Green Line”), PORR was able to build up step by step its reputation and has now a “footprint” in the Middle East region which - in our point of view - should offer the chance for further high profitable orders. After the concentration on the pure construction business, PORR `s target is to realize growth by operational excellence through streamlining operational processes and unlock cost cutting potential in order to drive profitability. PORR follows a strategy of “intelligent growth”, which means that the firm wants to grow both organically and via acquisition of some niche players and
PORR focus on five home markets and wants to grow organically and via acquisition
Successful turn-around from net debt to a net cash position
Equity and liabilities 2011 2012 2013 2014 y-o-y
Shareholders' equityShare capital 19,896 19,896 24,203 29,095Capital reserves 121,353 121,353 139,632 249,014 78.3%Hybrid capital 0 0 0 17,150Other reserves 83,571 85,303 134,898 44,881 -66.7%Equity from profit-participation rights 75,530 92,119 46,120 44,160Non-controlling interests 2,893 3,882 2,809 871
Total equity 303,243 322,553 347,662 385,171 10.8%
Total current liabilities 1,022,103 1,142,597 1,280,116 1,352,029 5.6%
Total liabilities 1,833,809 1,738,188 1,948,808 1,760,859
Total equity and liabilities 2,137,052 2,060,741 2,296,470 2,146,030
portion of total equity 14.2% 15.7% 15.1% 17.9%portion of non-current liabilities 38.0% 28.9% 29.1% 19.1%Portion of current liabilities 47.8% 55.4% 55.7% 63.0%
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wants to act as a full-service pure play contruction company with a leading role in Europe. In addition, PORR follows a strategy with qualitative, profitable and secure growth which enables the firm to act with speed and flexibility in adapting to changing market conditions. Therefore, as one of the biggest construction companies in Europe, the firm wants to play an active role in the upcoming consolidation process of its home marktes. Therefore, we expect some small or mid-size acquisitions for the upcoming quarters. For the acquisition of new projects, PORR has an internal hurdle rate of 3% EBT-margin at least to ensure its long-term target of a pre-tax proft margin of 3% or above for the group. For the future, a steady increase of the firm`s net cash position is also a fix component of its long-term strategy. Based on the strong financial results, the Executive Board will propose a dividend increase of 50% to Euro 1.50 (2013: Euro 1.00) for 2014 which represents a pay-out ratio of about 47%. To limit the losses that were generated in the CEE/SEE business line, PORR launched a performance management programm to improve operational efficiency and to manage the turn around. Furthermore, the firm`s target is to realize the turn-around in that business line as well as to implement a better cost project controlling.
Our estimates for the four business segments of PORR
Based on the above mentioned and expressed strategy of the company, we explain our assumptions and show as well in greater detail our operational expectations for all business lines. As an Austria based construction group, PORR`s biggest and most important business unit is combined in DACH, which represents the three home markets Germany, Austria and Switzerland and comprises large-scale building construction projects with a special focus on general contractors. This business unit is already market leader in Austia, but PORR was also able to increase its production output in the two other countries by about 13%. For the upcoming quartes we assume a relatively stable development in Austria and only a slight increase in production output in Switzerland. What the german market is concerned, we believe that PORR should be able to benefit from the strong growth potential and its excellent reputation. Therefore, we assume for the following two years a strong contribution from the german market and after 2016 slight growth rates in Austria and Switzerland. As the management will focus on cost controlling and is willing to pay more attention to avoiding flops we are confident that PORR will generate an EBT margin of 3% in 2015 and above in the following years.
Source: Company Data, SRC Research
Business unit DACH should benefit from the strong growth potential in Germany
The firm`s strategy is “in-telligent growth” with high flexibility to adapt chang-ing market conditions
The CEE/SEE unit covers PORR`s permanent business in the home markets Poland and Czech Republic, where the firm offers a complete range of construction services in gerneral building construction. Due to the strong growth in Poland (7.1%) and the Czech Republic (+2.5%), the company was able to increase production output in 2014 in a very sophisticated market environment by almolst +6% to Euro 425m. Against the background of strong competition with ongoing pricing pressure in that markets, PORR was not able in 2014 to reduce losses. In order to generate the turn-around, management already tightend its cost management and is willing to implement a stronger project controlling to avoid losses. Although the UBM transaction kept the management very busy in 2014, we are confident that PORR will reach the turn-around in that business unit in 2015. However, in our point of view positive EBT margins should probably remain on a very low level for the upcoming years. All in all, we assume a very slow recovery and should keep in mind that the whole region is dominated by payment difficulties and longer payment terms from public authorities. Therefore, some risks still remain.
Source: Company Data, SRC Research
The business unit infrastructure that covers activities in tunneling, rail construction, and foundation engineering, as well as large scale projects in road and bridge construction benefits from the leading market position of PORR in its five home markets. Although this business unit is traditionally subject of high fluctuations in production output and EBT, PORR managend since 2012 due to its high reputation a relatively steady increase in production output and positive EBT marings. However, the strong increase in production output in 2013 and 2014 was mainly driven by the large scale projects “Metro Doha” and “KAT 3”. Due to the strong footprint in the Middle East and the strong reputation of PORR for lagre scale infrastructure projects we are confident that the company will acquire further large scale projects in that region. Therefore, we assume continuous growth in production output and a strong increase in pre-tax profit.
Source: Company Data, SRC Research
The business segment environmental engineering comprises the Group´s expertise in environmental clean-up, wast management and sorting facilities in Austria, Germany and Serbia. In that business unit the firm generated in 2014 more than 83% of its production output in Austria and only 16% in foreign countries. Despite decreasing oder backlog, the firm was able in a sophisticated market environment to increase the production output. Furthermore, due to the increase of order intake in 2014 we are still confident that PORR will benefit from its reputation and a relatively stable market environment in Austria and
In the CEE unit a turn-around is possible but risks still remain
The infrastructure unit should benefit from PORR`S reputation and further large scale pro-jects in Middle East.
Environmental engineering should benefit from stable market environment in PORR`s home markets
Germany. Therefore, we expect a slight increase in production output as well as a steady rise of pre-tax margins from a very low level.
Source: Company Data, SRC Research
Our estimates for the upcoming quarters of PORR show attractive growth potential
In the past two years, PORR`s management made an excellend job to improve the company´s market position in its home markets and made a lot of strategic decisions to manage the successful turn-around. According to the spin-off of the real estate activities the firm made the final step to be one of the leading pure play construction groups in Europe with outstanding market position. Therefore, the 2014 figures with an optimized balance sheet structure, a higher equity ratio and a net cash position show in an impressive way that the company is now on the crusp of a better future with higher profitability. We expect for the opcoming quarters that the PORR will increase not only its production output but also its profit margins. The firm will release its 1Q 2015 figurs at 31 May 2015. In the following chart we present our estimates for the upcoming quarters.
Production output 3,474,885 833,714 1,689,562 2,840,530 3,689,000Revenues 3,009,118 721,166 1,461,478 2,457,070 3,191,000Own work capitalized in non-current assets 890 225 456 766 995Share of profit/loss of associates 66,156 15,560 31,533 53,015 68,850Other operating income 119,475 28,368 57,488 96,650 125,520Cost of materials and other related production services -2,026,001 -485,984 -984,869 -1,655,785 -2,150,370Staff expense -752,960 -177,710 -360,138 -605,473 -786,328Other operating expenses -260,254 -59,757 -121,100 -203,596 -264,410
Operating result (EBITDA) 156,424 41,868 84,848 142,648 185,257
Depreciation, amortisation and impairment expense -74,716 -15,561 -31,536 -53,018 -68,855
Operating result (EBIT) 81,708 26,307 53,312 89,630 116,402Income from financial investments and other current financial assets 24,762 5,165 10,466 17,596 22,852
Re-assessed DCF model shows a significant undervaluation
In our Discounted Cash Flow (DCF) valuation of the PORR share, we estimated the long-term operating cash flow strength of the company by adjusting our forecasted EBIT-figures by taxes, non-cash effects like depreciation, investments and changes in provisions and net working capital. We came up with a sustainable cash flow potential between Euro 50m and Euro 91m for the upcoming years. Discounted and adjusted by cash and outstanding liabilities, we computed a fair equity value of Euro 1.010m, implying a fair value of Euro 73.18. Our model assumptions were rather conservative: with a risk free interest rate of 1.0% and average cost of liabilities of 5.5% we calculated a weighted average cost of capital (WACC) of 6.2%. However, due to the modified business model towards a pure play construction group we think a Beta of 1.20 is more appropriate and reflects the slightly lower risks of that business model for the future. As PORR has a shareholder structure with a free float of about 46.3%, we expect sufficient liquidity in the stock. Our DCF model with undemanding assumptions results in a conservative target price of Euro 73.18. However, due to the fact that it is not sure that the management is able to realize the turn-around in the CEE/SEE business unit in 2015, we think a 10% discount (margin of safety) should represent that risk in an appropriate manner. Therefore, our target price is 65.00 Euro. This target would still imply a large upside of about 22% at current price of approx. Euro 54 per PORR share. Taking into account that book value per share for 2015e is at approx. Euro 30, this target price does not seem to be too ambitious. Moreover, the current market valuation of PORR does not reflect its upcoming earnings power in our view. At an EPS (2014) of Euro 3.22, the share is trading at 16.7 times its net profit. Based on our EPS (2015e) assumption of Euro 5.25, the share is trading at 10.2 times of its net profit. In addition, a current dividend yield of 2.8% (2014) at a payout ratio of about 47% provides an attractive mix of capital appreciation and cash income for investors. Therefore, we stick to our Buy recommendation for PORR and also confirm our Euro 65.00 target price.
Free cash flow potential of Euro 50m to 91m for the coming years Conservative assumptions leave room for further up-side in stock valuation Fair value of Euro 65.00 per share in our DCF after margin of safety
High cash income (2.8% dividend yield) for 2014 with high upside potential and despite relatively moderate payout ratio
Profit/loss for the period -70,189 17,993 52,532 48,558 76,692 90,465 99,630 114,939 127,418 27.1%
of which attributable to non-controlling interest 2,749 742 -225 -68 -92 -87 -91 -93 -99Profit/loss for the period attributable to shareholders of the parent and holders of profit-participation rights -72,938 17,251 52,757 48,626 76,784 90,552 99,721 115,032 127,517 27.0%
of which attributable to holders of profit-participation rights 5,600 5,600 6,433 4,200 4,300 4,100 4,000 3,900 4,100Profit/loss for the period attributable to shareholders of the parent -78,538 11,651 46,324 44,426 72,484 86,452 95,721 111,132 123,417 29.2%
Rating Chronicle Date Rating Former Price Former Target
Porr AG 15 April 2015 Buy 49.15 € 65.00 €Porr AG 18 February 2015 Buy 44.80 € 65.00 €Porr AG 27 November 2014 Buy 46.05 € 65.00 €Porr AG 01 September 2014 Buy 49.70 € 63.00 €Porr AG 15 July 2014 Buy 51.00 € 60.00 €Porr AG 12 May 2014 Buy 49.72 € 60.00 €
Porr AG 16 April 2014 Buy 48.55 € 60.00 €Porr AG 25 March 2014 Buy 44.36 € 60.00 €
