Trevi Italy / Construction & Materials Company update Produced by: All ESN research is available on Bloomberg: “ESNR” <go> Distributed by the Members of ESN (see last page of this report) Investment Research 03 April 2008 Buy 13.25 17.80 Recommendation unchanged Target price: EUR Share price*: EUR Reuters/Bloomberg TFI.MI/TFI IM Accounting Standard/Since IFRS/2005 Market capitalisation (EURm) 848.0 No. of shares (m) 64.0 Free float 44.1% Daily avg. no. trad. sh. 12 mth 245,200 Daily avg. trad. vol. 12 mth (m) 3.03 Price high 12 mth (EUR) 14.66 Price low 12 mth (EUR) 8.99 Abs. perf. 1 mth 3.9% Abs. perf. 3 mth 10.4% Abs. perf. 12 mth 29.3% (EUR) 12/08e 12/09e 12/10e Sales (m) 1,037 1,187 1,290 EBITDA (m) 164 189 201 EBITDA margin 15.8% 15.9% 15.6% EBIT (m) 126 153 163 EBIT margin 12.2% 12.9% 12.6% Net Profit (adj.)(m) 70 87 93 ROCE 15.0% 16.1% 29.4% Net debt/(cash) (m) 174 145 100 Debt Equity 76.7% 47.3% 25.5% Debt/EBITDA 1.1 0.8 0.5 Int. cover(EBITDA/Fin.int) 9.3 10.4 10.7 EV/Sales 1.1 0.9 0.8 EV/EBITDA 6.8 5.7 5.1 EV/EBITDA (adj.) 6.8 5.7 5.1 EV/EBI T 8.8 7.1 6.3 P/E (adj.) 12.2 9.8 9.1 P/BV 3.9 2.8 2.2 FCF yiel d -2.3% 4.0% 6.5% Dividend yiel d 0.8% 1.1% 1.5% EPS (adj.) 1.09 1.36 1.46 BVPS 3.44 4.69 6.00 DPS 0.10 0.15 0.20 vvdsvdvsdy 7 8 9 10 11 12 13 14 15 M ar 07 Apr 07 M ay 07 Jun 07 Jul 07 Aug 07 Sep 07 Oct 07 Nov 07 Dec 07 Jan 08 Feb 08 M ar 08 Apr 08 TREVI M ibtel (Rebased) Source: Datastream Shareholders: Trevi Family 56%; *closing price as of 02/04/2008 The key to success: interaction between engineering and services FY 07 results: group revenues stood at EUR 837m, +30.3% Y/Y (slightly higher than the preliminary results of EUR 830m anticipated by the management in February). These positive results were reached, in particular, thanks to the further excellent increase in sales by the equipment divisions (Soilmec +50.0% Y/Y and Drillmec +49.5% Y/Y); a good performance was also recorded by Trevi, (the foundation service division) with +10.6% Y/Y. It is also important to highlight that, despite the still low weight on total sales (around 5%), Petreven, the oil service division (which realized the group’s highest margin), also achieved a strong revenue growth of +54% Y/Y. Operating leverage translated into much higher margins: EBITDA was up +51.2% Y/Y to EUR 129.5m (vs. last February’s guidance of EUR 123m, +44% Y/Y); the EBITDA margin was 15.5% on net sales, vs. 13.3% in 2006, and EBIT was EUR 99.4 m (+71.2% Y/Y). 2008 outlook: last February, thanks to the good visibility in both business areas, the management said it was confident it would reach improved results in 2008e; in particular, the management forecasts it will reach FY 08 group sales of around EUR 1bn. DCF Model and SOP Valuation: Our DCF Model shows a Fair Value of EUR 17.80 per share. Our SOP valuation, based on the group’s four divisions (peer multiple comparison), identifies a Fair Value of EUR 16.9 per share. The peer analysis shows a lower value than the DCF Model, given that the EV/EBITDA ‘08e multiple does not factor in the development in the drilling sector which, based on our estimates, will increase from 33% on group EBITDA in 2008e to 47% on group EBITDA in 2012e. Buy Rating confirmed: based on our DCF valuation, we confirm our Buy recommendation and we have set a Target Price of EUR 17.80 per share. Analyst: Paola Saglietti +39 02 4344 4287 [email protected]
Transcript
Trevi Italy / Construction & Materials Company update
Produced by: All ESN research is available on Bloomberg: “ESNR” <go>
Distributed by the Members of ESN (see last page of this report)
Investment Research 03 April 2008
Buy
13.2517.80
Recommendation unchanged
Target price: EURShare price*: EUR
Reuters/Bloom berg TFI.MI/TFI IM Accounting Standard/Since IFRS/2005 Market capitalisation (EURm) 848.0No. of shares (m) 64.0Free float 44.1%
M ar 07 Apr 07 M ay 07 Jun 07 Jul 07 Aug 07 Sep 07 Oct 07 Nov 07 Dec 07 Jan 08 Feb 08 M ar 08 Apr 08
TREVI M ibtel (Rebased)
Source: Datastream Shareholders: Trevi Family 56%;
*closing price as of 02/04/2008
The key to success: interaction between engineering and services
FY 07 results: group revenues stood at EUR 837m, +30.3% Y/Y
(slightly higher than the preliminary results of EUR 830m anticipated by the management in February). These positive results were reached, in particular, thanks to the further excellent increase in sales by the equipment divisions (Soilmec +50.0% Y/Y and Drillmec +49.5% Y/Y); a good performance was also recorded by Trevi, (the foundation service division) with +10.6% Y/Y. It is also important to highlight that, despite the still low weight on total sales (around 5%), Petreven, the oil service division (which realized the group’s highest margin), also achieved a strong revenue growth of +54% Y/Y. Operating leverage translated into much higher margins: EBITDA was up +51.2% Y/Y to EUR 129.5m (vs. last February’s guidance of EUR 123m, +44% Y/Y); the EBITDA margin was 15.5% on net sales, vs. 13.3% in 2006, and EBIT was EUR 99.4 m (+71.2% Y/Y).
2008 outlook: last February, thanks to the good visibility in both business areas, the management said it was confident it would reach improved results in 2008e; in particular, the management forecasts it will reach FY 08 group sales of around EUR 1bn.
DCF Model and SOP Valuation: Our DCF Model shows a Fair Value of EUR 17.80 per share. Our SOP valuation, based on the group’s four divisions (peer multiple comparison), identifies a Fair Value of EUR 16.9 per share. The peer analysis shows a lower value than the DCF Model, given that the EV/EBITDA ‘08e multiple does not factor in the development in the drilling sector which, based on our estimates, will increase from 33% on group EBITDA in 2008e to 47% on group EBITDA in 2012e.
Buy Rating confirmed: based on our DCF valuation, we confirm our Buy recommendation and we have set a Target Price of EUR 17.80 per share.
From soil foundation operator to drilling service operator, and now…
Trevi Group was established in 1957; today it has 30 branches in as many countries and counts on 5,067employees all told.
The group operates in four divisions:
• Foundation rigs: plants and rigs used for foundation engineering that are designed and manufactured by SOILMEC.
• Foundation services: special foundations, soil consolidation for infrastructures such as bridges, railways, dams, industrial systems and tunnels, all realized by TREVI using the rigs manufactured by Soilmec.
• Drilling rigs (hydraulic and conventional rigs): drilling rigs that are used for hydrocarbons and that are designed and manufactured by DRILLMEC.
• Drilling services: well drilling for the extraction of hydrocarbons and for water research, realized by PETREVEN thanks to the use of drilling rigs manufactured by Drillmec.
...the 3rd sector: projects for off-shore wind farms
In the last few months Trevi Group has set up a new subsidiary, TREVI Energy S.p.A., 100% controlled by TREVI - Finanziaria Industriale S.p.A.
The new company will design, engineer and develop renewable energy projects on its own behalf and for third-parties.
In particular, TREVI Energy will initially focus its activity on the development of offshore wind farms. Trevi Group has decided to take part in several specific projects: in fact, it has already started to seek the necessary authorisations to develop off-shore wind farms, mainly in southern Italy where coping with the depth of the sea and variable wind conditions will be all-important in reaching success.
TREVI Group’s structure
T R E V I - F in a n z ia r ia In d u s tr ia le S .p .A .D rillin g a n d fo u n d a t io n s p e c ia lis t
S p e c ia l fo u n d a t io n r ig s O il d r i l l in g r ig s O il d r i l l in g s e rv ic e s
G r o u n d E n g in e e r in g 7 3 .6 % (* ) D r i ll in g 2 6 .4 % (* )
S p e c ia l fo u n d a t io n s e rv ic e s
F o u n d a t io n S e rv ic e s 4 2 .6 %F o u n d a t io n E q u ip m e n ts 3 1 ,0 %
D r i l l in g S e rv ic e s 5 .0 %D r i l l in g E q u ip m e n ts 2 1 .3 %
• D e e p F o u n d a t io n s
• G e o te c h n ic a l W o r k s
• M a r in e W o rk s
• T u n n e l C o n s o lid a tio n
• A u to m a te d C a r P a r k s
• H y d r a u lic R o ta r y R ig s
• C ra n e s
• J e t G r o u tin g
• T u n n e l C o n s o lid a t io n
• C a s in g O s c illa to r s
• E x tra c to r s
• D r ill in g T o o ls
• H y d r a u lic R ig s (H H S e r ie s )
• D e rr ic k s & O ffs h o r e
• M a s ts & S u b s t ru c tu r e s
• M o b ile D r ill in g R ig s
• H y d r a u lic T o p D r iv e s
• T r ip le x M u d P u m p s
• O n s h o r e D r ill in g
• L o n g te rm c o n tr a c ts
• L a t in A m e r ic a e m e r g in g
P la y e r
T R E V I - F in a n z ia r ia In d u s tr ia le S .p .A .D rillin g a n d fo u n d a t io n s p e c ia lis t
S p e c ia l fo u n d a t io n r ig s O il d r i l l in g r ig s O il d r i l l in g s e rv ic e s
G r o u n d E n g in e e r in g 7 3 .6 % (* ) D r i ll in g 2 6 .4 % (* )
S p e c ia l fo u n d a t io n s e rv ic e s
F o u n d a t io n S e rv ic e s 4 2 .6 %F o u n d a t io n E q u ip m e n ts 3 1 ,0 %
D r i l l in g S e rv ic e s 5 .0 %D r i l l in g E q u ip m e n ts 2 1 .3 %
• D e e p F o u n d a t io n s
• G e o te c h n ic a l W o r k s
• M a r in e W o rk s
• T u n n e l C o n s o lid a tio n
• A u to m a te d C a r P a r k s
• H y d r a u lic R o ta r y R ig s
• C ra n e s
• J e t G r o u tin g
• T u n n e l C o n s o lid a t io n
• C a s in g O s c illa to r s
• E x tra c to r s
• D r ill in g T o o ls
• H y d r a u lic R ig s (H H S e r ie s )
• D e rr ic k s & O ffs h o r e
• M a s ts & S u b s t ru c tu r e s
• M o b ile D r ill in g R ig s
• H y d r a u lic T o p D r iv e s
• T r ip le x M u d P u m p s
• O n s h o r e D r ill in g
• L o n g te rm c o n tr a c ts
• L a t in A m e r ic a e m e r g in g
P la y e r
Source: Company Data as of 31/12/2007
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FY 07 Results On 28th March the company’s Board of Director approved the FY 07 results. The data showed good annual performance with double digit growth for both revenues and margins, thus continuing the group’s ever improving result which began a few years ago.
FY 07 group revenues stood at EUR 837m, +30.3% Y/Y (slightly higher than the preliminary results of EUR 830m released by the management in February).
These positive results were reached, in particular, thanks to a further excellent increase in sales by the equipment divisions (Soilmec +50.0% Y/Y and Drillmec +49.5% Y/Y); a good performance was also realized by Trevi, (the foundation service division) with +10.6% Y/Y. It is also important to highlight that, despite the still low weight on total sales (around 5%), Petreven, the oil service division (which realize the group’s highest margin) also achieved strong revenue growth of +54% Y/Y.
FY 07 Sales breakdown by division FY 07 Sales breakdown by geographical area
Drilling Services5.0% Drilling Machines
21.3%Foundation Machines
31.0%
Foundation Works42.6%
Far Eastand Other 6%
North America11%
South America12%
Middle East22%
Africa15%
Europe (less Italy)17%
Italy17%
Source: Company Data
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Operating leverage translated into much higher margins: EBITDA was up +51.2% Y/Y to EUR 129.5m (vs. last February’s guidance of EUR 123m, +44% Y/Y); the EBITDA margin was 15.5% on net sales, vs. 13.3% in 2006, and EBIT was EUR 99.4 m (+71.2% Y/Y).
Furthermore, in spite of the achieved growth, the group’s NFP at December 31, 2007 showed an improvement of around 19% compared to the NFP in 2006, and a consequent improvement in the main balance sheet ratios (D/E decreased from 1.38x in 2006 to 0.87x in 2007 and Net Debt/EBITDA decreased from 2.0x in2006 to 1.1x in 2007).
Lastly, the BoD deliberated to propose a dividend payment of EUR 0.10 per share (+100%).
Work Portfolio
The FY 07 order book reached a record level of EUR 709.3m and showed clear improvement compared to December 2006 (+11.4%).
TREVI GROUP: Orders’ Portfolio trend
196 241329 316
432100
130
188321
277
0
100
200
300
400
500
600
700
800
2003 2004 2005 2006 2007
Foundation Division Drilling Division
Source: Company Data
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Businesses interaction: the wellhead of innovation and reliability One of the main key factors to Trevi’s success over the years is its business model, which is based on the interaction between engineering and services. This double structure, which started with the first historical group business focusing on the soil foundation sector, is drawing on and is being utilized for each new business area that the group has developed, and will probably continue to develop, little by little. Since Soilmec (foundation equipment division) and Trevi (foundation service division) have always travelled together, so will Drillmec (drilling equipment division) and Petreven (drilling service division).
We cannot rule out that the same structure could be applied again for the fledgling renewable energy division.
TREVI: interaction between engineering and services
Source: Company data
The decision to use this business model, which has been so successful to date, stems from the management’s belief that: thanks to the remarkable investments in R&D, the equipment divisions have been able to develop a complete range of equipment characterised by the highest level of technological innovation and, in turn, these division are helped by all the information from the service divisions that utilize the group’s equipment and test the new prototypes in their yards.
TREVI: merging of different competences and capabilities
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Although Trevi is still apparently quite small compared to multinational groups, given the complexity of the sectors, it has taken many years to reach the current size: in fact, it has invested heavily in R&D, product innovation and personnel training in order to reach its current acknowledgment as a reliable leader and partner in both its sectors. All of this has been repaid over the years in term of excellent, sustainable profitability, despite operating in a cyclical industrial sector.
However, given the current uncertain global scenario and the poor visibility in the global economy, the increasing competition and the still small size of the group in the drilling sector, we argue that Trevi must continue its strong investment policy.
SWOT Analysis Strengths Weaknesses High technological level thanks to constant high investments in order
to develop technologies and innovative products High entry barriers: in the foundation division, represented by a solid
track record, and in the drilling division, represented by its innovative hydraulic rigs
Vertical integration among the various business divisions stand as the competitive advantage
High geographical diversification Strong interaction between equipment and service divisions
Currency risk: particularly in the drilling division, a strong and sudden euro/dollar exchange rate could negatively weigh upon the operating profitability
Country risk: particularly in the drilling and foundation service divisions, the group mainly works in countries that are characterized by growing economies but also by strong instability
High capital intensive business: because of the high level of production resources, two equipment divisions (Drillmec and Soilmec) are decidedly capital intensive
Potential problems related to the group’s growing size (management, technicians, etc)
Opportunities Threats Strong demand still expected for the coming years both in the
foundation sector and in the drilling sector Entry correlated niche sectors (such as off-shore wind farms
Cyclical businesses: the group business areas are closely linked to the trend in the construction and building sector and to the oil sector trend
A sudden slowdown in the emerging economies and a longer-than-expected US stagnation could entail a strong drop in the group’s order book
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Unbelievable, but oil and foundation are still booming sectors During the last few years, the group’s growth has been guaranteed by some important agreements both in the foundation and in the drilling divisions. Nevertheless, the company shows considerable growth potential also for the coming years, as demonstrated by the foregoing large order backlog. This strong order level will allow the company to cover more than nine months of operating revenues.
Therefore, in the light of the strong growth expected in both sectors, we believe that the significant growth targets announced by the management will be met (we remind investors that last February, it would reach further improved result in 2008e; in particular, the management forecasts it will reach FY 08 group sales of around EUR 1bn).
In the following paragraphs we analyze the features, the drivers and estimates for each business area in which the group operates.
Trevi (Foundation services)
Founded in 1957, the company is the 4th largest company in the world (behind Soletanche Bachy, Bauer and Keller) in the field of soil engineering; it is present on the five continents with its activities, representative offices and agencies. The group’s leading position is due to its solid track record.
TREVI – business feature Cyclical business closely linked to the trend in the construction and infrastructure sector, which have different trends
based on the geographical area in the world; Limited country risk: high geographical diversification (high quantity of big infrastructure projects realized in the
various countries; High entry barriers: special foundation work requires high technical competence, which is not easily developed in
the short/medium term for new emerging players, besides, it needs several years to train up highly specialized personnel;
Currency risk: job order revenues are realized in local currency in the various world countries and covered by costs in the same currencies; however, any weaknesses on the local currencies could weigh upon the group results;
Risk of delay in job order execution: job order execution requires high structural and labour costs and the net working capital level required is also very high; if significant delays or mistakes happen in job order execution there is a strong imbalance risk.
Our estimates – The foundation sector is showing very interesting growth rates also for the next years (in particular, it forecasts further heavy investments in some emerging countries and in the Middle East, which continue to benefit from large cash flows deriving from oil and non-oil commodity prices). We believe that Trevi will continue to focus on projects characterised by high technological complexity, in which the company operates as the General Specialty Contractor, to increase its market share thanks to the strengthening of its leadership in the historical markets and to enter new geographical areas characterised by significant growth rates. In particular, we expect Trevi to focus on big infrastructure projects in which the group has significant technological leadership, such as waterproofing works and maritime works, and which assure a high profitability.
Just to confirm the foregoing considerations, we remind investors of the last contract signed in Abu Dhabi in January. Trevi, through its subsidiary Swissboring Overseas Corp., signed a contract for the foundation works, expected to be completed by mid-2008, to comprise a diaphragm 2.2 kms long for the circuit and foundation piles for the theme park of the
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prestigious project ‘Ferrari Experience in Abu Dhabi: the contract is worth USD 27m (EUR 18.3m). Although this prestigious order has a limited impact on the group total revenues, we believe it is positive from a strategic point of view as it, along with the contract signed in Dubai for the foundation work of the “Pentominium” tower in December, confirms that Trevi Group is indisputably the leading player in the Middle East area, which will be the growth driver for the foundation service division also in 2008.
Therefore, according to the management and based on the large order backlog (the foundation works were 49% of the total order book at the end of 2007), we estimate further good sales growth in 2008 and a more conservative growth for the future, for which, today, the visibility is still low. As regards profitability, since we believe that Trevi will be able to choose projects with higher added value, we estimate that the company will be able to maintain a consistent EBITDA margin in the coming future.
The following table is a summary of our new forecasts.
Potential critical issues – the group has to implement its structure flexibility continuously in order to fully face the unavoidable slowdown in the positive cycle in the infrastructure segment that has been going on for some years now but which could make a U-turn if the emerging economies should reduce the current growth trend.
Soilmec (Foundation rigs)
Founded in 1969, the company is the second largest player in the world and the world leader in the middle-high segment for equipment building for subsoil engineering; it has over 400 employees and satellite industries of over 60 companies.
SOILMEC – business feature Cyclical business closely linked to the trend in the construction and building sector; Highly capital intensive because of the high level of production resources, this business division is decidedly capital
intensive. In the last few years the group has been able to improve production efficiency and structure flexibility thanks to the outsourcing of the production phases to smaller value added firms;
High entry barriers Soilmec is today recognised as having high reliability thanks to the foregoing high level of R&D and to the continuous investments in technology; this constitutes a remarkable entry barrier to new competitors;
Currency risk: USD exposure (about 10% of total sales).
Our estimates – Based on Comamoter (the soil moving machinery manufacturing association ), the Italian players operating in the foundation equipment sector exported 90% of their production in 2007 and the order books in the first few months of this year are still large.
So, in our opinion, Trevi should be able to increase its current global growth in infrastructural equipment expenditure even further, though not at the same high growth rate seen over the last two years. Thanks to the updating of several products, the launch of innovative products to widen the current product range and to entry into new market niches, the management thinks that the foundation equipment division will maintain good sales
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growth in the near future. We estimate further double digit sales growth in the next two years and more conservative growth for future years, for which, today, the visibility is still low. In terms of operating profitability we believe that, thanks to the significant production efficiency obtained in the last few years and the current process to increase production capacity in Italy, the company was able to reach an EBITDA margin above 15% and we consider this margin will continue to be high also in the next few years. The following table is a summary of our new forecasts.
OIL SECTOR: Scenario and trend – Based on the last ESN Sector Report on the Oil & gas sector published on 31st March 2008, analysts believe that “the continued stresses in the energy sector and financial markets that have led to $100 per bbl of oil are becoming systemic rather than temporary. There is a growing, but as yet unpublicised, recognition amongst key players in the industry that the underlying direction on oil prices is upwards not downwards”. One of the main arguments that the ESN analysts highlighted in support of their thesis is the decline rate from mature fields: “the underlying decline rate on mature assets is generally acknowledged by the oil majors to be 4-5%. This level is also consistent with a detailed analysis published in January by Cambridge Energy Research Association (CERA), which looked at 811 separate oilfields accounting for two-thirds of current global production. Even with an optimistic assumption that global maturity decline is just half of this figure, on a production base of 85 million barrels per day, the world needs to replace the equivalent of Saudi Arabian production every four to five years”.
Profile and market share - Drillmec is a spin-off of Soilmec. Previously the Oil & Gas Division of Soilmec, the company started its operations on January 1, 2004. Drillmec manufactures mechanical and innovative systems, hydraulic rigs for oil, geothermal and water drilling, as well as their relevant accessories; it also supplies specialised services, characterised by high added value, in the maintenance of the rigs. Thanks to the strong know-how developed by the group in the field, the company has further improved its technology through the acquisitions of Geoastra (a manufacturer of water well rigs), Massarenti & Ballerini (another well-know drilling rig manufacturer) and “Officine Meccaniche” in Cortemaggiore (Piacenza). In the last few years Drillmec has developed an innovative technology, the HH model: this machine is the most innovative hydraulic rig in the world; it can drill to a maximum depth of 4,000-4,500metres and, compared with others sold on the market, it is highly automated:: 1) automatic drill shaft interchangeability, still manual in traditional systems; 2) low environmental impact and smaller plants (75% reduction of occupied areas); 3) 30% average increase in drilling performances; 4) average 30% reduction in drilling costs; 5) average 40% reduction in plant relocation and transport costs; 6) great reduction in accidents and damage.
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DRILLMEC – business feature Cyclical business closely linked to the oil sector trend; therefore, both the business trend and the stock price are
strongly affected by the oil price; Currency risk: USD exposure (about 20% of total sales); High capital intensive because of the high level of production resources, this business division is decidedly capital
intensive. However, the company is realizing the same efficiency improvement obtained in the last two years by Soilmec;
Vertical integration just like Soilmec, Drillmec can benefit from the integration with Petreven (the drilling service company), which tests all the technological innovations in its own sites.
Our estimates and further important drivers for future upside – We believe that Drillmec can be fully considered a reliable supplier in the oil drilling sector thanks to the strong success of the HH technology in the last few years (we remind investors that, thanks to the contracts obtained from primary sector buyers, there are currently 67 HH rigs operating in 15 countries).
Based on this track-record, and thanks to the foregoing mentioned increasing need for new rigs, we think that Drillmec will obtain new important agreements in the near future.
In confirmation of the foregoing considerations, we remind investors of the last contract signed in Saudi Arabia at the end of December. Drillmec realized a joint-venture agreement with the Saudi Arabian company Dhahran Global Company for Oil & Gas (Shoula Group). The value of the plant and equipment to be supplied is USD 200m.
Furthermore, in our opinion, additional potential growth drivers for the drilling equipment division could be the widening of its product range as well as strategic agreements or joint ventures with important partners or customers.
Therefore, based on the positive news-flow and on the large order backlog (drilling equipment accounted for 23% of the total order book at the end of 2007), we estimates further strong sales growth in the coming years (Sales Cagr 2004-07 was +63.6%). In terms of operating profitability, we believe that thanks to the improvement in production efficiency (through an increase in outsourced production, which allows the group to improve its structure flexibility) the company is realizing, Drillmec will be able to reach approximately the same current EBITDA margin as Soilmec’s in the next three years, which will then stay stable in the future years. The following table is a summary of our new forecasts.
Potential critical issues – in our opinion, in this phase of strong business growth and given the still small size of the group in the drilling sector, Trevi must continue its strong investment policy to face up to the potential new strategies launched by the market leaders such as the US National Oilwell (market share greatly above 65%), which could restrain new players like Trevi from growing.
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Petreven (Oil drilling services)
Profile and market share - The company operates in the oil drilling sector using drilling rigs manufactured by Drillmec.
PETREVEN – business feature Cyclical business closely linked to the oil sector trend; therefore, both the business trend and the stock price are
strongly affected by the oil price; Currency risk: job order revenues are realized in USD. A strong and sudden euro/dollar swing could negatively
weigh upon the operating profitability; Country risk: Petreven mainly works in South America (Venezuela, Peru and Argentina) and other emerging
countries characterized by growing economies but also by strong instability; Risk of delay in job order execution: job order execution requires high structural and labour costs and the net working
capital required is also very high; if significant delays happen in job order execution there is a strong imbalance risk.
Our estimates – Thanks to the growing success of the HH model, we believe that, in the near future, the group could sign some new contracts also in the drilling services division. The joint-venture agreement signed by Drillmec with the Saudi Arabian company proves the point. In fact, the contract is for the supply, over three years, of HH model hydraulic drilling rigs to be used in a joint venture between the Saudi Arabian group and Petreven C.A. for oil drilling services. So, in addition to the potential amount of USD 200m which could be obtained by Drillmec for the equipment supply, the revenues from the drilling services must be added, which should be agreed at a later date.
Based on the projects being executed, we estimate double digit sales growth in the next three years. At the profitability level, we believe that, based on the structure of the last contracts currently in progress (Petreven received revenues from drilling services, but it is the customer that owns the utilized HH rigs), the drilling service division could maintain an EBITDA margin of around 24-25%, in line with the 2007 results, also in the coming few years; nevertheless, we estimate that, in view of a decrease in the D&A item, Petreven could reach an EBIT margin above 20% in the next three years. The following table is a summary of our new forecasts.
Our estimates do not include the potential contract deriving from the joint venture in Saudi Arabia. Nevertheless, assuming that the will be awarded the contract, we estimate a prudential further upside for the stock of above 15% compared with our current Fair Value.
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2008-2011e cash flow generation The strong increase in operative margins realized by the company in the past few years (EBIT margin rose from 0.7% in 2001 to 11.9% in 2007) has translated into good cash flow generation. In fact, as shown by the graph below, despite the EUR 50m set aside for investments, the free cash generation in 2007 was positive for EUR 62m.
Changes in NFP (EUR m)
126
2815
50176
14
143
15
NFP as of 31/12/06 EBIT + D&A TAXES D NWC CAPEX INTERESTS OTHERS NFP as of 31/12/07
FREE CASH FLOW~ + EUR 62m
Source: Company data
D/E was 0.87x at the end of 2007. If we consider the possibility to exercise the share settlement option on the indirect exchangeable bond issued on 30 November 2006, the gearing decreases to 0.4x (we remind investors that the stock price exceed the strike price by EUR 11.30).
Even if the drilling divisions (Drillmec and Petreven) grow strongly in the coming years, we believe that the management will be able to maintain a well balanced level of financial structure.
The investment level to support business development remains very strong also in the coming years (we estimate around EUR 190m between 2008 and 2010). However, cash flow generation should remain significant over the period due to the continuous improvement in profitability.
Valuation Our valuation of Trevi Group is based on a DCF Model and takes into account the SoP (Sum-of-the-parts) valuation based on the group’s four divisions (peer multiple comparison).
DCF valuation
In light of our estimates for each division in the previous paragraphs, and based on our DCF model, we have set a target price of EUR 17.80 per share, reflecting an upside of above 33% on the current share price.
We have run our DCF analysis based on the following assumption:
• Sales and profitability forecast: a) for the period 2008/2010e we assume the estimates given in the previous paragraphs; b) for the period 2011/2012e, we estimate a sales CAGR of 5.0%, as the growth average for each sector division is characterized by various growth rates; c) in terms of long-term forecasts, we assume a stable EBIT margin at 11.5%.
• A WACC calculated by assuming: a) a risk-free rate of 4.5% and a market risk premium of 4.0%; b) a target capital structure with debt covering 25% of net capital employed; c) a beta at 1.2.
• A terminal growth rate of 2.0% looks appropriate to reflect Trevi’s potential growth rates in the future.
Our assumptions are shown in the following tables.
Perpetual Growth Rate 2.00% WACC 8.05% Terminal Value 1,723.3 Discounting Rate of Terminal Value 0.63 Discounted Terminal Value 1,083.2 Cumulated DFOCF 213.9 Financial Assets as of 31/12/07 22.9 Enterprise Value (EUR m) 1,320.0 Net Financial Debt as of 31/12/07 (EUR m) (142.8) Minorities market value (EUR m) (38.4) Equity Value (EUR m) 1,138.8 Value per share (EUR) 17.8 Source: BANCA AKROS estimates
SOP based on a peer multiples comparison for each group division
Our SOP valuation, based on a peer multiple comparison for each group division, shows an Enterprise Value of EUR 1,260.8m (a Fair Value of EUR 16.9 per share), calculated on 2008e EV/EBITDA.
The peer analysis shows a lower value than the DCF Model, given that the EV/EBITDA ‘08e multiple does not factor in the development in the drilling sector which, based on our estimates, will increase from 33% on group EBITDA in 2008e to 47% on group EBITDA in 2012e.
In particular, each division (Foundation Services, Foundation Rigs, Drilling Rigs, Drilling Services) is valuated through a specific group of peer multiples.
• Foundation Services (Trevi) - We applied the 2008e EV/EBITDA consensus multiple of Keller and Bauer, two of Trevi’s listed players. We did not apply any discount because the company is one of the four world leaders in the field of soil engineering and also the main player in the Italian market.
TREVI GROUP: Foundation services peer multiples (as of 02 April 2008)
08e EV/EBITDA BAUER 6.0x KELLER 4.4x AVERAGE 5.2x
Source: Bloomberg data and BANCA AKROS estimates
• Foundation Rigs (Soilmec) - We applied the 2008e EV/EBITDA consensus multiple on the two main machinery producers in the world (Caterpillar and Atlas Copco). We did not apply a discount because the company is the second largest player in the world and the world leader in the middle-high segment in equipment building for subsoil engineering.
TREVI GROUP: Foundation equipment peer multiples (as of 02 April 2008)
08e EV/EBITDA CATERPILLAR 12.1x ATLAS COPCO 9.5x AVERAGE 10.8x
Source: Bloomberg data and BANCA AKROS estimates
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• Drilling Rigs (Drillmec) - We applied the 2008e EV/EBITDA consensus multiple for the main US and European drilling equipment producers. We did not apply a discount because, in spite of its still small size, Drillmec can today be fully considered a reliable supplier in the oil drilling sector thanks to the strong success of the HH technology in the last few years.
TREVI GROUP: Drilling rigs peer multiples (as of 02 April 2008)
08e EV/EBITDA TRANSOCEAN 8.5x ROWAN 5.2x NATIONAL OILWELL 7.5x COOPER CAMERON CORPORATION 9.4x TENARIS 9.0x SOCOTHERM 5.5x AVERAGE 7.5x
Source: Bloomberg data and BANCA AKROS estimates
• Drilling services (Petreven) - We applied the 2008e EV/EBITDA consensus multiple of the main US and European drilling services operators. We did not apply a discount because, in spite of its still small size, Petreven, thanks to the high value added of its services and its high performance level, can be fully considered a reliable drilling service operator in the oil sector.
TREVI GROUP: Drilling services peer multiples (as of 02 April 2008)
08e EV/EBITDA SAIPEM 9.6x PRECISION DRILLING 8.0x PRIDE INTERNATIONAL 5.7x AVERAGE 7.8x
Source: Bloomberg data and BANCA AKROS estimates
TREVI GROUP: SOP on 2008 EV/EBITDA multiples (EUR m)
Brand EV 08 EV/ EBITDA 08e EBITDA
Division % on Group
EBITDA 08e EBITDA
margin Foundation works 313.1 5.2x 60.3 37% 15.5% Drilling services 144.2 7.8x 18.6 11% 24.8% Drilling Equipement 268.8 7.5x 35.7 22% 14.8% Foundation equipment 534.8 10.8x 49.6 30% 15.9% Total 1,260.8 164.1 100% Net debt (143) Minorities (38) Equity Value (SOP) 1,079.7 Sh. Outs. 64,000 FAIR VALUE 16.87 Source: Bloomberg data and BANCA AKROS estimates
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Trevi: Summary tables P R OF IT & LOSS (EUR m) 2005 2006 2007 2008e 2009e 2010e C A GR 10/ 05Sales 506.8 642.4 837.1 1,036.5 1,187.2 1,290.0 20.5%Cost of Sales & Operating Costs (excl. Pers. Expenses) -357.4 -452.2 -586.0 -742.4 -860.0 -942.4Personnel Expenses -94.0 -104.7 -121.6 -130.1 -137.9 -146.2Non Recurrent Expenses/Income 0.0 0.0 0.0 0.0 0.0 0.0EB IT D A 55.3 85.6 129.5 164.1 189.3 201.4 29.5%EB IT D A (adj.) * 55.3 85.6 129.5 164.1 189.3 201.4Depreciation, Amortisation & Write Downs -26.6 -27.6 -30.1 -38.1 -36.7 -38.5EB IT 28.7 58.0 99.4 126.0 152.6 162.9 41.5%EBIT (adj.)* 28.7 58.0 99.4 126.0 152.6 162.9Net Financial Interest -9.0 -12.6 -17.0 -17.6 -18.2 -18.8Other Financials 5.6 -5.1 0.1 0.1 0.1 0.1Associates 0.0 0.0 0.0 0.0 0.0 0.0Other N o n R ecurrent Items 0.0 0.0 0.0 0.0 0.0 0.0Earnings Before Tax (EBT) 25.3 40.4 82.5 108.5 134.5 144.2 41.7%Tax -11.6 -14.7 -28.1 -37.4 -46.4 -49.8Tax rate 45.8% 34.4% 32.7% 34.5% 34.5% 34.5%Discontinued Operations 0.0 0.0 0.0 0.0 0.0 0.0M ino rit ies -0.9 -1.2 -2.0 -1.3 -1.3 -1.3N et P ro f it ( repo rted) 12.8 24.5 52.4 69.8 86.8 93.2Net Profit (adj.) 12.8 26.8 55.8 69.8 86.8 93.2C A SH F LOW (EUR m)Cash Flow from Operations before change in NWC 34.8 58.3 84.4 109.1 124.7 132.9 30.8%Change in Net Working Capital -5.3 -45.3 16.8 -63.7 -26.0 -17.7C ash F lo w fro m Operat io ns 29.4 13.0 101.2 45.4 98.7 115.1Capex -28.0 -55.0 -44.0 -65.0 -65.0 -60.0F ree C ash F lo w 1.4 -42.0 57.2 -19.6 33.7 55.1 nmNet Financial Investments 0.0 0.0 0.0 0.0 0.0 0.0Dividends 1.0 1.6 1.6 6.4 6.4 9.6Other (incl. Capital Increase & share buy backs) 2.3 -0.8 -39.4 0.4 0.0 0.0C hange in N et D ebt 4.7 -41.2 19.4 -12.9 40.1 64.7NOPLAT 15.6 31.4 53.9 68.3 82.7 162.9B A LA N C E SH EET & OT H ER IT EM S (EUR m)Net Tangible Assets 168.7 192.4 207.4 247.0 278.9 304.0Net Intangible Assets (incl.Goodwill) 3.5 4.9 5.4 5.4 5.4 5.4Net Financial Assets & Other 14.3 20.8 22.9 22.9 22.9 22.9T o tal F ixed A ssets 186.5 218.2 235.6 275.2 307.2 332.3 12.2%Net Working Capital 86.6 131.9 115.1 178.9 204.9 222.6Total capital invested/employed 258.8 329.2 327.9 431.2 489.2 532.0Shareho lders Equity 97.2 122.0 156.5 220.0 300.4 384.0 31.6%M inorities Equity 4.8 5.4 7.0 7.1 7.3 7.4N et D ebt 126.0 175.8 142.8 174.3 145.4 99.9 -4 .5%Provisions 30.9 30.8 29.7 36.8 42.1 45.8Other Liabilities 14.2 16.1 14.8 15.9 16.8 17.8T o tal M arket C ap 167.1 424.7 779.8 848.0 848.0 848.0Enterprise Value (EV adj.) 351.4 689.7 1,012.9 1,109.3 1,078.9 1,032.9M A R GIN S A N D R A T IOSSales growth 36.1% 26.8% 30.3% 23.8% 14.5% 8.7%EBITDA growth 32.8% 54.7% 51.3% 26.8% 15.3% 6.4%EBIT growth 55.8% 102.1% 71.3% 26.8% 21.1% 6.8%EB IT D A margin 10.9% 13.3% 15.5% 15.8% 15.9% 15.6%EBIT margin 5.7% 9.0% 11.9% 12.2% 12.9% 12.6%D ebt/ Equity (gearing) 123.5% 138.0% 87.3% 76.7% 47.3% 25.5%Debt/EBITDA 2.3 2.1 1.1 1.1 0.8 0.5Interest cover (EBITDA/Fin.interest) 6.2 6.8 7.6 9.3 10.4 10.7ROCE (adj.) 5.7% 9.0% 15.4% 15.0% 16.1% 29.4%WACC 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%R OC E (adj.) / WA C C 0.7 1.1 1.9 1.9 2.0 3.6EV/CE 1.29 1.97 2.89 2.44 2.11 1.86OpFCF/EV 0.4% -6.1% 5.6% -1.8% 3.1% 5.3%EV/Sales 0.69 1.07 1.21 1.07 0.91 0.80EV/ EB IT D A 6.4 8.1 7.8 6.8 5.7 5.1EV/EBITDA (adj.)* 6.4 8.1 7.8 6.8 5.7 5.1EV/EBIT 12.2 11.9 10.2 8.8 7.1 6.3EV/EBIT (adj.)* 12.2 11.9 10.2 8.8 7.1 6.3P/E (adj.) 13.0 15.9 14.0 12.2 9.8 9.1P/BV 1.7 3.5 5.0 3.9 2.8 2.2F C F yield 0.8% -9.9% 7.3% -2.3% 4.0% 6.5%Payout ratio 12.5% 6.0% 11.5% 9.2% 11.1% 13.7%D ividend yield (gro ss) 1.0% 0.4% 0.8% 0.8% 1.1% 1.5%P ER SH A R E D A T A (EUR )EP S (repo rted) 0.20 0.42 0.87 1.09 1.36 1.46 48.7%EP S (adj.) 0 .20 0.42 0.87 1.09 1.36 1.46 48.7%BVPS 1.52 1.91 2.44 3.44 4.69 6.00 31.6%DPS 0.03 0.03 0.10 0.10 0.15 0.20 51.6%Source: Company, Banca Akros est imates. * Where EBITDA (adj.) or EBIT (adj.)= EBITDA (or EBIT) +/- Non Recurrent Expenses/ Income2005 restated as IFRS proforma
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Recommendation system
The ESN Recommendation System is Absolute. It means that each stock is rated on the basis of a total return, measured by the upside potential (including dividends and capital reimbursement) over a 6 month time horizon.
The ESN spectrum of recommendations (or ratings) for each stock comprises 5 categories: Buy, Accumulate (or Add), Hold, Reduce, Sell, (in short: B, A, H, R, S). In specific cases and for a limited period of time, the analysts do have to rate the stocks as Rating Suspended (RS) or Not Rated (NR), as explained below.
Meaning of each rating or recommendation:
• Buy: the stock is expected to generate a total return of over 15% during the
next 6 months time horizon.
• Accumulate: the stock is expected to generate a total return of 5% to 15%
during the next 6 months time horizon.
• Hold: the stock is expected to generate a total return of 0% to 5% during the
next 6 months time horizon
• Reduce: the stock is expected to generate a total return of 0 to -15% during the
next 6 months time horizon
• Sell: the stock is expected to generate a total return below -15% during the
next 6 months time horizon
• Rating Suspended: the rating is suspended due to a capital operation (take-
over bid, SPO, …) where the issuer or a related party of the issuer is or could
be involved or to a change of analyst covering the stock
• Not Rated: there is no rating for a company being floated (IPO) by the issuer or
a related party of the issuer
Banca Akros Ratings Breakdown
Accumulate53%
Buy17%
Hold29%
Reduce1%
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Il presente documento è stato redatto da Paola Saglietti (socio AIAF) che svolge funzioni di analista presso Banca Akros SpA ("Banca Akros"), soggetto responsabile della produzione del documento stesso. Banca Akros è una banca autorizzata anche alla prestazione di servizi di investimento appartenente al Gruppo Bipiemme Banca Popolare di Milano (il “Gruppo”), ed è soggetta all’attività di direzione e coordinamento di Banca Popolare di Milano (la “Capogruppo”). La banca è iscritta all’albo delle Banche al n. 5328 ed è soggetta alla regolamentazione e alla vigilanza di Banca d’Italia e Consob. La banca ha prodotto il presente documento solo per i propri clienti professionali. Esso è distribuito dal giorno 3 aprile 2008. Banca Akros, ai sensi degli artt. 69 quater e quinquies del Regolamento Consob in materia di Emittenti, dichiara di non avere propri rilevanti interessi finanziari negli strumenti finanziari oggetto del presente documento ovvero rilevanti conflitti di interesse derivanti da rapporti con l’emittente detti strumenti finanziari (l’”Emittente”) ovvero, più in generale, derivanti da operazioni descritte nel presente documento. Banca Akros dichiara di non essere a conoscenza della sussistenza di rilevanti interessi finanziari e/o di rilevanti conflitti di interesse della Capogruppo nei confronti dell’Emittente. L’analista Paola Saglietti (socio AIAF), che ha redatto il presente documento, ha maturato una significativa esperienza presso Banca Akros e altri intermediari. L’analista e i suoi familiari non detengono Strumenti Finanziari emessi dall’Emittente, né svolgono ruoli di amministrazione, direzione o consulenza per l’Emittente, né l’analista riceve bonus, stipendi o altre forme di retribuzione correlate, direttamente o indirettamente, al successo di operazioni di investment banking. Banca Akros, nell’ultimo anno, ha pubblicato sulla società oggetto di analisi tre studi in data 6 febbraio, 26 e 31 marzo 2008. La Banca rende disponibili ulteriori informazioni, ai sensi delle disposizioni Consob di attuazione dell’art. 114, comma 8 del D.Lgs 58/98 (TUF) ed in particolare ai sensi dell’art. 69 quinquies, comma 2, del Regolamento Emittenti, presso il proprio sito internet (si veda http://bancaakros.webank.it/akros/sito.nsf/homepage). Le informazioni e le opinioni contenute in questo documento si basano su fonti ritenute attendibili. La provenienza di dette informazioni e il fatto che si tratti di informazioni già rese note al pubblico è stata oggetto di ogni ragionevole verifica da parte di Banca Akros. Banca Akros tuttavia, nonostante le suddette verifiche, non può garantire in alcun modo né potrà in nessun caso essere ritenuta responsabile qualora le informazioni alla stessa fornite, riprodotte nel presente documento, ovvero sulla base delle quali è stato redatto il presente documento, si rivelino non accurate, complete, veritiere ovvero corrette. Il documento è fornito a solo scopo informativo; esso non costituisce proposta contrattuale, offerta o sollecitazione all’acquisto e/o alla vendita di strumenti finanziari o, in genere, all’investimento, né costituisce consulenza in materia di investimenti. Banca Akros non fornisce alcuna garanzia di raggiungimento di qualunque previsione e/o stima contenuto nel documento stesso. Inoltre Banca Akros non assume alcuna responsabilità in merito a qualsivoglia conseguenza e/o danno derivante dall’utilizzo del presente documento e/o delle informazioni in esso contenute. Le informazioni o le opinioni ivi contenute possono variare senza alcun conseguente obbligo di comunicazione in capo a Banca Akros, fermi restando eventuali obblighi di legge o regolamentari. E’ vietata la riproduzione e/o la ridistribuzione, in tutto o in parte, direttamente o indirettamente, del presente documento, non espressamente autorizzata.
Percentuale delle raccomandazioni al 31 dicembre 2007 Tutte le raccomandazioni Raccomandazioni su titoli in conflitto di interessi (*)
Accumulate53%
Buy17%
Hold29%
Reduce1%
Accumulate66%
Buy7%
Hold27%
(*) Si informa che la percentuale degli emittenti in potenziale conflitto di interessi con Banca Akros è pari al 19% del totale degli emittenti oggetto di copertura
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