Polish construction companies 2015: Key players, growth factors and industry development prospects

Transcription

1 Polish construction companies 2015: Key players, growth factors and industry development prospects

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4 Table of contents Introduction 5 Chapter 1. Financial analysis of the biggest construction companies Ranking of the biggest construction companies by 2014 revenue Ranking of the largest construction companies by 2014 operating margin Ranking of the biggest construction companies by 2014 net profit Debt of 15 biggest construction companies in Capital expenditure to sales ratio of the largest companies in Revenue of the 15 largest construction companies by geography and by type in Market Capitalisation of the largest construction companies listed on Warsaw Stock Exchange at December 31, Chapter 2. Prospects for development of construction companies in Poland Introduction Key factors of the construction market development in Poland Bankruptcies in the construction sector Employment in the construction sector Development outlook for construction segments in Poland From the market perspective Summary 54 Chapter 3. Profiles of the biggest construction companies in Poland 57 Bibliography 102 Contact 104 4

5 Introduction Dear Sir/Madam, We have the pleasure to present the third edition of the Polish construction companies 2015: Key players, growth factors and industry development prospects report, analysing the condition of the 15 largest construction companies operating on the Polish market based on their revenue, and describing their prospects for business development. In 2014, a recovery was observed, accompanied with positive change in market outlook. Total revenue of the 15 largest companies increased by nearly PLN 2.5 billion, i.e. 9% vs The growth correlated with an improved operating performance and net profit of the top fifteen. Capitalisation of the largest construction companies listed on the Warsaw Stock Exchange and included in the ranking was only slightly higher at the end of 2014 than in the previous year. The reversal of the previously negative trend resulted mostly from the completion of unprofitable road construction contracts, which materially affected the performance of most companies in the past. The infrastructure segment continued to play a key role in construction and assembly related production, although railway, industrial and hydrotechnical construction was the main driver of the entire sector s growth. Once tenders regarding contracts co-funded by the EU budget under the new financial perspective are accepted, the increasing trend in the sector should be consitent. The first part of our report is a financial analysis of companies in the construction sector in Poland, based on 15 entities that have managed to build the strongest position in the market. We analyse their revenue, operating margins, net profits, debt, and revenue structure by geography and by type. The second part comprises a high-level analysis of the prospects for the industry s short-term and mediumterm development, including presentation of planned expenditure in each market segment, bankruptcy statistics and employment trends in the construction sector. This part of the report is concluded with a summary of the present condition and key growth factors for the sector from the viewpoint of the largest construction companies in Poland. In the final part of the report we briefly examine the characteristics of the business activity of the 15 most important market players in It includes crucial information concerning the scope of their activities, ownership structure and detailed financial data derived from their annual financial statements. When preparing the report, we referred to commonly available financial data or information provided to us directly by the entities presented herein. We hope that you will find the report Polish Construction Companies 2015: Key players, growth factors and industry development prospects useful and that it will give you better understanding of the current construction market position, indicating challenges and opportunities faced by construction companies in the years to come. As always, we are open to your ideas and suggestions regarding any of the presented topics. Polish construction companies 2015: Key players, growth factors and industry development prospects 5

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7 Chapter 1. Financial analysis of the largest construction companies Polish construction companies 2015: Key players, growth factors and industry development prospects 7

8 1.1. Ranking of the largest construction companies by 2014 revenue In 2014, the combined revenue of the 15 largest companies was PLN 28.5 billion which constitutes a growth of PLN 2.5 billion, i.e. 9.4% compared to In this year s ranking, the Skanska Group came first with revenue of PLN 5.1 billion and 16.5% growth. The Budimex Group, controlled by Ferrovial of Spain, came second with revenue of PLN 4.9 billion and 4.2% growth, compared to Austrian Strabag was also in the top three, which was the only company that saw a revenue drop in 2014 (revenue decreased 5% to PLN 3.1 billion). Revenue was, however, sufficient to maintain its position from the previous year. Apart from the Skanska Group, the largest revenue growth by value was seen by the Erbud Group and Torpol Group, whose revenue increased by PLN 468 million and PLN 360 million, respectively. The Torpol Group also saw the largest revenue growth expressed as a percentage, while revenue generated by the Mostostal Zabrze Group increased by 50%. Thanks to the good performance, both groups debuted in this year s ranking. The Polimex- Mostostal Group reported the biggest yearon-year drop in revenue (PLN 261 million), but it has managed to maintain the fourth place that it occupied in the previous year. Apart from Polimex Mostostal Group (an 11% drop in revenue), the largest revenue drop in excess of 5% was seen by the Mostostal Warszawa Group and Warbud S.A. (7.6% and 6.4% year-on-year, respectively). Please note that in 2014, the number of companies that generated revenue growth was much bigger than in the previous year. Only four companies experienced a decrease in revenue. At the same time, the revenue of 11 companies increased. Last year s ranking was the opposite case. The average increase in revenue of 9% generated by the largest entities in the construction industry confirms the development of the construction market and reflects the growth seen in the industry in Table 1.1: Ranking of construction companies in Poland by revenue in 2014 (PLN 000) No. Company name Revenue Revenue Change expressed in PLN Change expressed in % 1 Skanska Group % 2 Budimex Group % 3 Strabag Group** % 4 Polimex-Mostostal Group* % 5 Erbud Group % 6 Trakcja Group* % 7 PBG Group* % 8 Mostostal Warszawa Group % 9 Elektrobudowa Group % 10 Unibep Group % 11 Warbud S.A.* % 12 PORR (Polska) S.A % 13 Mirbud Group % 14 Mostostal Zabrze Group % 15 Torpol Group % Total % Average % Note: This analysis does not include the performance of foreign establishments of the construction companies operating in Poland, or that of SPV s established within consortia in order to perform specified tasks, since this performance is included in consolidated performance of consortium members. Source: Financial statements for the years

9 1.2. Ranking of the largest construction companies by 2014 operating margin The operating margin earned by the biggest construction companies, expressed as the operating revenue less costs of sales (excluding other operating revenue and expenses), indicates that the revenue increase in 2014 was accompanied by a growth in the profit of core operations. The average operating margin of the largest companies increased by nearly PLN 40 million, with a profit on core operations for the largest companies increased by nearly PLN 40 million in 2014 (compared to a PLN 117 million increase in 2013). As in the preceding year, the Budimex Group recorded the biggest operating margin and earned a profit on sales of PLN 433 million. The Trakcja Group came second with an operating margin of PLN 202 million, i.e. more than double the previous year. Warbud S.A. took third place, having generated an operating margin of PLN 136 million (more than PLN 66 million lower than the Trakcja Group). Only one entity in the ranking, the Polimex- Mostostal Group, incurred an operating loss (PLN 202 million) in Table 1.2: Operating margin of the 15 biggest companies in nominal terms (PLN 000) No. Company name Operating margin 2014 Operating margin 2013 Change expressed in PLN Change expressed in % 1 Budimex Group % 2 Trakcja Group* % 3 Warbud S.A.* % 4 Strabag Group** % 5 Mostostal Warszawa Group % 6 Erbud Group % 7 PBG Group* % 8 Mostostal Zabrze Group % 9 Elektrobudowa Group % 10 Mirbud Group % 11 Unibep Group % 12 Torpol Group % 13 Polimex-Mostostal Group* % 14 Skanska Group no data no data no data no data 15 PORR (Polska) S.A. no data no data no data no data Average Average operating margin (%) 5.86% 3.85% For the Strabag Group companies, preparing profit and loss account by nature of expense, the operating margin reflects selling expenses and general and administrative costs (unlike that of the remaining companies). Source: Financial statements for the years Polish construction companies 2015: Key players, growth factors and industry development prospects 9

10 Furthermore, 13 ranked companies have managed to improve their operating margin and in only one case it is worse than for the preceding 12 months. The Mostostal Warszawa Group saw the biggest growth (in excess of PLN 258 million), while the Polimex-Mostostal Group saw the biggest decrease (in excess of PLN 226 million). The ranking indicates that ten of thirteen entities that disclosed their data have generated a profit on sales both in 2013 and in The average operating margin was positive and amounted to 5.86% in 2014, indicating a growth in excess of 2 p.p. vs Warbud S.A. had the best result with an operating margin of 12.96%. The Trakcja Group was second with an operating margin of 12.62%, followed by the Budimex Group with the positive ratio of 8.74%. The Polimex-Mostostal Group occupied the opposite end of the scale with the operating margin of minus 9.59%. In summary: in 2014, along with a growth in revenue, profitability of operations of the largest companies further improved, although not as rapidly as in the previous year (an increase by 5.69 p.p.) when the number of unprofitable contracts performed by companies was significantly limited. Chart 1.2: Operating margin of the largest construction companies (in percent) 15.00% 12.96% 12.62% Trakcja Group* Budimex Group Mostostal Zabrze Group Mirbud Group Mostostal Warszawa Group Elektrobudowa Group Torpol Group Unibep Group PBG Group* Erbud Group Strabag Group** Polimex-Mostostal Group* Skanska Group Average 10.39% 10.00% 8.74% 8.55% 8.33% 7.95% 7.32% 6.92% 6.88% 5.85% 6.97% 7.43% 6.61% 6.24% 6.33% 6.18% 6.18% 5.84% 5.87% 5.86% 5.00% 3.64% 3.85% 0.00% 0.26% 1.04% b.d. b.d % -5.00% % -9.46% -9.59% % Source: Financial statements for the years

11 1.3. Ranking of the largest construction companies by 2014 net profit The net profit is a material indicator reflecting the overall condition of construction companies. The median net profit of the key 13 companies that disclosed their data for 2014 was positive and totalled PLN 26 million, i.e. a growth in excess of PLN 14 million compared with PLN 12 million in The Budimex Capital Group earned the highest net profit of PLN 194 million which represents a 36% yearon-year decrease. However, the profit for 2013 included a gain from selling shares in the subsidiary Budimex Danwood. Following elimination of the transaction balance, the net profit of the Budimex Group for 2014 improved by approx. 34%. The Strabag Capital Group came second with a net profit of PLN 148 million, and the Trakcja Capital Group was third with a net profit of PLN 50 million. Performance of Warbud S.A. was similar with a net profit of PLN 48 million. The Polimex- Mostostal Group generated a loss of PLN 153 million and closed the ranking. As many as ten ranked companies that disclosed their data earned a net profit, whereas three incurred a loss. In the previous year, ten entities had generated a net profit, but the average net profit of all ranked companies had been lower. Additionally, please note that ten companies earned a net profit both in 2013 and Table 1.3: Net profit of the 15 biggest companies in nominal terms (PLN 000) No. Company name Net profit 2014 Net profit 2013 Change expressed in PLN Change expressed in % 1 Budimex Group % 2 Strabag Group** % 3 Trakcja Group* % 4 Warbud S.A.* % 5 Erbud Group % 6 Elektrobudowa Group % 7 Torpol Group % 8 Unibep Group % 9 Mostostal Zabrze Group % 10 Mirbud Group % 11 Mostostal Warszawa Group % 12 PBG Group* % 13 Polimex-Mostostal Group* % 14 Skanska Group no data no data no data no data 15 PORR (Polska) S.A. no data no data no data no data Average Average net margin (%) 1.50% 0.73% Source: Financial statements for the years Polish construction companies 2015: Key players, growth factors and industry development prospects 11

12 The average net profit expressed as a percentage in 2014 was slightly higher than in the previous year and amounted to 1.5%. The Strabag Group and Warbud S.A. were nearly equal and came first with net profitability of 4.7% and 4.6%, respectively. The Budimex Group came third with a net profitability of 3.9%. The aforementioned data shows that, similarly to the sales result, net profitability of most ranked companies has improved. Thus, events not directly related with their core business and performance on financial operations have positively affected the overall performance (net profitability doubled year-on-year, while the gross margin growth rate was slightly lower). Chart 1.3: Net margin of the largest construction companies (in percent) 20.00% Strabag Group** Budimex Group Torpol Group Trakcja Group* Elektrobudowa Group Mostostal Zabrze Group Unibep Group Mirbud Group Erbud Group Mostostal Warszawa Group PBG Group* Polimex-Mostostal Group* Skanska Group Average 16.90% 15.00% 10.00% 6.34% 5.00% 0.00% 3.15% 2.44% 2.22% 1.94% 1.81% 2.90% 2.25% 4.73% 4.61% 3.92% 3.23% 1.15% 2.35% 1.94% 1.33% 1.76% 1.77% 1.65% 1.48% b.d. b.d. 1.50% 0.73% -0.58% -5.00% -5.28% % -7.29% % % % Source: Financial statements for the years % 12

13 1.4. Debt of 15 biggest construction companies in 2014 Analysis of the debt ratios shows that the biggest construction companies debt was relatively high in 2014 (similar to 2013). In 2014, the average debt (weighted by revenue) remained flat and amounted to 78%. In the aforementioned period, six companies increased and six reduced the percentage of debt in their financing structure. Similarly to 2013, six entities used debt capital to the extent corresponding to at least 75% of their assets. In 2014, as in 2013, the PBG Group has the highest percentage debt with the total debt constituting 131% of its total assets (i.e. it exceeded the value of the company s assets by 31%) and has increased by 9% compared to Following the loss of liquidity in 2012, the company had been put into liquidation with an arrangement option, which was voted for by its creditors in Among the remaining companies, Erbud had the largest debt increase, from 66% at the end of 2013 to 73% at the end of The growth in the debt of the other companies did not exceed 5 p.p. in Chart 1.4: Debt/equity ratio in PBG Group* Budimex Group Mostostal Warszawa Group Polimex-Mostostal Group* Warbud S.A.* Torpol Group Erbud Group Strabag Group** Unibep Group Elektrobudowa Group Mirbud Group Trakcja Group* Mostostal Zabrze Group Skanska Group b.d. PORR (Polska) S.A. Average b.d % 78.43% Source: Financial statements for the years Polish construction companies 2015: Key players, growth factors and industry development prospects 13

14 Among the ranked companies, the Mostostal Zabrze Group and Trakcja Group had the lowest debt/equity ratio of 51% and 53%, respectively. At the end of 2014, the average debt/equity ratio of the biggest construction companies remained unchanged compared to the previous year. The real picture is distorted by the PBG Group, which has both the highest debt/equity ratio and saw the biggest growth among all analysed companies Capital expenditure to sales ratio of the largest companies in 2014 The capital expenditure (expenditure on property, plant and equipment and intangible assets) to sales ratio of companies in the construction industry is usually relatively low due to high sales volume and relatively low capital expenditure necessary to provide construction services. In 2014, the total capital expenditure of the biggest companies was PLN 252 million, i.e. nearly 33% lower year-on-year. It is also worth noting that only six construction companies reduced their capital expenditure compared with the previous year. Table 1.5: Capital expenditure of the largest companies in nominal terms (PLN 000) No. Company name Capital expenditure 2014 Capital expenditure 2013 Change expressed in PLN Change expressed in % 1 Budimex Group % 2 Polimex-Mostostal Group* % 3 Trakcja Group* % 4 Strabag Group** % 5 Warbud S.A.* % 6 Mostostal Zabrze Group % 7 Mirbud Group % 8 PBG Group* % 9 Erbud Group % 10 Torpol Group % 11 Elektrobudowa Group % 12 Mostostal Warszawa Group % 13 Unibep Group % 14 Skanska Group no data no data no data no data 15 PORR (Polska) S.A. no data no data no data no data Source: Financial statements for the years Total % Average % 14

15 As regards nominal capital expenditure, the Budimex Group was the leader in 2014 with the total of PLN 48 million (i.e. a 173% increase compared to 2013). The Polimex-Mostostal Group with a total expenditure of PLN 27 million (a 9% drop year-on-year) and the Trakcja Group with the total expenditure of PLN 26 million (a 41% increase year-on-year) came second and third, respectively. The general drop in year-on-year capital expenditure resulted mostly from a significant reduction in capital expenditure of the PBG Group, which used to be the ranking leader in this respect. Having eliminated the PBG Group from the ranking, the general level of capital expenditure among the largest construction companies increased by 20% compared to In 2014, the capital expenditure to revenue ratio was 1.13% and was almost 0.7 p.p. lower than in The drop resulted from a significant reduction in capital expenditure in the PBG Group vs on the one hand, and the general increase in revenue generated by construction companies on the other. The Mostostal Zabrze Group saw the highest capital expenditure to sales ratio. In 2014, the Unibep Group had the lowest capital expenditure to sales ratio (0.3% in 2014 vs. 1.27% in 2013) with the Mostostal Warszawa Group coming second last (0.55% vs. 0.78% in 2013). Chart 1.5: Capital expenditure to sales ratio (data for 2014 and 2013) Mostostal Zabrze Group Torpol Group Warbud S.A.* Mirbud Group Trakcja Group* Polimex-Mostostal Group* PBG Group* Elektrobudowa Group Budimex Group Erbud Group Strabag Group** Mostostal Warszawa Group Unibep Group 2.20% 1.84% 1.94% 1.69% 1.83% 0.99% 1.77% 0.34% 1.60% 1.43% 1.28% 1.25% 1.12% 1.04% 1.92% 0.98% 0.37% 0.95% 0.98% 0.78% 1.35% 0.55% 0.78% 0.30% 1.27% % Skanska Group b.d. PORR (Polska) S.A. b.d. Average 1.13% 1.82% 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% Source: Financial statements for the years Polish construction companies 2015: Key players, growth factors and industry development prospects 15

16 1.6. Revenue of the largest construction companies by geography and by type in Revenue by geography The largest construction companies operating in Poland operate also on foreign markets, but their export sales volume is relatively small. The median revenue generated by the biggest companies abroad amounted to PLN 184 million and was PLN 62 million lower than in 2013, marking a 25% year-on-year drop. The Trakcja Group generated the highest foreign revenue amounting to PLN 566 million, i.e. 22% higher than in The Group operates on the Lithuanian market. Polimex-Mostostal Group with a total revenue of PLN 384 million (a 35% drop year-on-year) was second and the Trakcja Group with a total revenue of PLN 319 million (a 25% increase year-on-year) came third. Export operations of the Polish construction companies have focused on the neighbouring markets, mostly Eastern Europe, Scandinavia and Germany. Table 1.6.1: Export sales revenue of the largest construction companies in nominal terms (PLN 000) No. Company name Export sales revenue 2014 Export sales revenue 2013 Nominal change Percentage change 1 Trakcja Group* % 2 Polimex-Mostostal Group* % 3 Unibep Group % 4 Mostostal Zabrze Group % 5 PBG Group* % 6 Budimex Group % 7 Erbud Group % 8 Mostostal Warszawa Group % 9 Elektrobudowa Group % 10 Torpol Group % 11 Strabag Group** % 12 Warbud S.A.* % 13 Mirbud Group % 14 Skanska Group No data No data No data No data 15 PORR (Polska) S.A. No data No data No data No data Financial statements for the years Total % Average % 16

17 On average, export sales revenue amounted to 11% of total operating revenue (4 p.p. lower than in 2013). Export sales of three entities was in excess of 30% of total sales revenue (the Trakcja Group with 35%, the Unibep Group and the Mostostal Zabrze Group with 30% each). Sales analysis by geography indicates that the number of entities in the construction sector that find their clients abroad has been increasing, as they search for new markets to diversify their operational risk. In light of the expected reduction in new investments once the EU funds for the perspective are consumed, the trend may further increase. Chart 1.6.1: Percentage share of export sales in total sales of the largest companies in % 45% 40% 35% 36% 35% 41% 30% 25% 30% 30% 28% 25% 25% 25% 20% 15% 10% 5% 0% Trakcja Group* Unibep Group Mostostal Zabrze Group 18% Polimex-Mostostal Group* Source: Financial statements for the years % PBG Group* 19% 12% Erbud Group 17% 10% Mostostal Warszawa Group 6% Elektrobudowa Group 4% Budimex Group 12% 4% 3% Torpol Group Strabag Group** 0% 0% 0% 0% 0% 0% b.d. b.d. Mirbud Group Skanska Group 11% Average 15% Polish construction companies 2015: Key players, growth factors and industry development prospects 17

18 Chart 1.6.2: Sales of the largest companies by geography in 2014 MARKETS Domestic Western Europe Eastern Europe Scandinavian Asian Other TOTAL (2014, PLN 000) Skanska Group Budimex Group Strabag Group** Polimex-Mostostal Group Erbud Group Trakcja Group PBG Group Mostostal Warszawa Group Elektrobudowa Group Unibep Group Warbud S.A. PORR (Polska) S.A. Mirbud Group Mostostal Zabrze Group Torpol Group No information on the place of origin of the export revenue Export revenue value No information on the place of origin of the export revenue Export revenue value no data No information on the place of origin of the export revenue Export revenue value no data No information on the place of origin of the export revenue Export revenue value TOTAL: Source: Financial statements for the years

19 Chart 1.6.3: Sales of the largest companies by geography in 2013 MARKETS Domestic Western Europe Eastern Europe Scandinavian Asian Other TOTAL (2013, PLN 000) Budimex Group Skanska Group Strabag Group** Polimex-Mostostal Group* Mostostal Warszawa Group Trakcja Group* PBG Group* Erbud Group Warbud S.A.* PORR (Polska) S.A. Mirbud Group Unibep Group Elektrobudowa Group Mostostal Zabrze Group Torpol Group no data No information on the place of origin of the export revenue Export revenue value No information on the place of origin of the export revenue Export revenue value No information on the place of origin of the export revenue Export revenue value no data No information on the place of origin of the export revenue Export revenue value TOTAL: Source: Financial statements for the years Polish construction companies 2015: Key players, growth factors and industry development prospects 19

20 The sales revenue structure by type shows that the largest construction companies have focused on road and railway construction projects. Construction projects for the power engineering sector have had an increasing share in revenue, too. Chart : Sales of the largest construction companies by type in 2014 MARKETS General construction Residental construction Road and railway construction Construction engineering Power construction Other activities TOTAL (2014, PLN 000) Skanska Group Budimex Group Strabag Group** Polimex-Mostostal Group Erbud Group Trakcja Group PBG Group Mostostal Warszawa Group Elektrobudowa Group Unibep Group Warbud S.A. PORR (Polska) S.A. Mirbud Group Mostostal Zabrze Group Torpol Group no data no data no data *** TOTAL: *** General construction and construction engineering Source: Financial statements for the years

21 Chart : Sales of the largest construction companies by type in 2013 MARKETS General construction Residental construction Road and railway construction Construction engineering Power construction Other activities TOTAL (2013, PLN 000) Budimex Group Skanska Group no data Strabag Group** no data Polimex-Mostostal Group Mostostal Warszawa Group Trakcja Group* PBG Group* Erbud Group Warbud S.A.* PORR (Polska) S.A. no data Mirbud Group Unibep Group Elektrobudowa Group Mostostal Zabrze Group *** Torpol Group TOTAL: *** General construction and construction engineering Source: Financial statements for the years Polish construction companies 2015: Key players, growth factors and industry development prospects 21

22 In nominal terms, the Mostostal Zabrze Group and Polimex-Mostostal Group had the largest share in other non-construction revenue in 2014 with PLN 681 million and PLN 427 million, respectively. As compared to 2013, the average weighted share of other operating revenue expressed as a percentage dropped from 17.5% to 13.3%. In 2014, in most cases, the share of construction and assembly services as a percentage of total revenue was in the range of %. The Mostostal Zabrze Group remains the entity with the most diversified operations (79%) including, along with construction, assembly and production. In 2014, of the twelve companies analysed above that generated revenue on other operations, just three managed to increase the percentage share of revenue from non-construction operations as a percentage of total revenue, compared to The main reason was a growth in revenue generated by the largest construction companies on construction and assembly in Chart : Capital expenditure to sales revenue ratio (data for 2014 and 2013) Mostostal Zabrze Group PBG Group* Polimex-Mostostal Group* Unibep Group Elektrobudowa Group Mirbud Group Trakcja Group* Budimex Group Erbud Group Torpol Group Warbud S.A.* Mostostal Warszawa Group Skanska Group Strabag Group** PORR (Polska) S.A. Average 22.36% 36.93% 20.33% 25.70% 19.57% 21.69% 18.38% 31.13% 10.54% 8.05% 7.97% 10.21% 7.74% 15.66% 2.69% 4.06% 2.61% 5.22% 1.06% 1.25% 0.21% 0.06% b.d. b.d. b.d % 17.45% 78.91% 78.09% Source: Financial statements 0.0% for the years % 50.0% 75.0% 100.0% 22

23 1.7. Market capitalisation of the largest construction companies listed on the Warsaw Stock Exchange as at 31 December 2014 The improving investor sentiment regarding companies indexed with WIG-Budownictwo (WIG BUD) has slightly slowed down in In 2014, the WIG Budownictwo index decreased by 5% compared to 2013, while the main WIG index was close to the previous year s level at the end of Out of the 15 biggest construction companies, as many as 11 were listed on the Warsaw Stock Exchange in 2014, and we used them as our basis for the capitalisation ranking. At the end of 2014, the combined market value of the eleven construction companies listed on the Warsaw Stock Exchange was PLN 6.1 billion, i.e. PLN 0.2 billion higher than the combined market value of these companies at the end of Expressed as a percentage, the total capitalisation increased by 4%. Chart 1.7: Changes in WIG and WIG-Budownictwo indexes in WIG WIG BUDOW Source: Deloitte analysis based on data available on the WSE website. Polish construction companies 2015: Key players, growth factors and industry development prospects 23

24 Five of the eleven companies analysed experienced a drop in market value. Elektrobudowa S.A. saw the biggest drop: in 2014, its market value decreased by 33%. Budimex S.A. has remained the market value leader since 2011, with a capitalisation of PLN 3,613 million (a 7% increase compared to 2013). Trakcja PRKiI S.A. was second, and Elektrobudowa S.A. third with capitalisation of PLN 391 million and PLN 350 million, respectively. At the end of 2014, capitalisation of Budimex S.A. constituted over 59% of the total capitalisation of the eleven largest companies in our ranking listed on Warsaw Stock Exchange (a 2 p.p. drop vs. 2013). In summary, please note that market capitalisation of the largest construction companies increased by 4% at the end of 2014 year-on-year. The trend agrees with a growth in the construction manufacturing ratio by 0.4% in 2014 and a 9% increase in revenue of the companies included in our ranking compared to Table 1.7: Capitalisation of the largest construction companies listed on Warsaw Stock Exchange as at 31 December 2014 No. Company name Market capitalisation Market capitalisation Change expressed in PLN Change expressed in % 1 Budimex S.A % 2 Trakcja PRKiI S.A % 3 Elektrobudowa S.A % 4 Mostostal Zabrze S.A % 5 Erbud S.A % 6 Polimex-Mostostal S.A % 7 Unibep S.A % 8 Torpol S.A IPO on 8 July Mostostal Warszawa S.A % 10 Mirbud S.A % 11 PBG S.A % Source: Deloitte analysis based on data available on the WSE website. Total % Chart 1.7.1: Share of the largest companies listed on the Warsaw Stock Exchange in total capitalisation as at 31 December % 5.44% 4.98% 5.76% 1.84% 1.97% 3.76% 0.39% 4.74% 6.42% 59.37% Source: Deloitte analysis based on data available on the WSE website. Budimex S.A. Trakcja PRKiI S.A. Elektrobudowa S.A. Mostostal Zabrze S.A. Erbud S.A. Polimex-Mostostal S.A. Unibep S.A. Torpol S.A. Mostostal Warszawa S.A. Mirbud S.A. PBG S.A. * The financial data for 2013 was reconciled to the financial statements for 2014 following adjustments of the opening balance. ** Due to absence of consolidated financial statements, the financial data of the Strabag Group include (for simplification purposes) the total revenue of Strabag Sp. z o.o. and StrabagInfrastrukturaPołudnie Sp. zo.o. The financial data of Strabag for 2013 was reconciled to the financial statements for 2014 following adjustments of the opening balance. 24

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27 Chapter 2. Prospects for development of construction companies in Poland Polish construction companies 2015: Key players, growth factors and industry development prospects 27

28 Economic climate indicator I.08 IV.08 VII.08 X.08 I.09 IV.09 VII.09 X.09 I.10 IV.10 VII.10 X.10 I.11 IV.11 VII.11 X.11 I.12 IV.12 VII.12 X.12 I.13 IV.13 VII.13 X.13 I.14 IV.14 VII.14 X.14 I.15 IV.15 VII.15 Construction Total economy Source: Main Statistical Office 2.1 Introduction The second part of the report begins with an analysis of the key factors shaping the construction sector and a presentation of the changes taking place in the sector as seen through statistics on bankruptcies and employment in construction companies. Further herein we will discuss the characteristics and current conditions of each segment in the construction sector and analyse planned expenditures in the short- and medium-term perspective. This part of the report is concluded with a summary of the present condition and key growth factors for the sector from the viewpoint of representatives of the largest construction companies in Poland. Following a period of slowdown in resulting from the completion of large capital projects included in the previous EU perspective and organisation of the EURO 2012 tournament, the construction industry in Poland has been recovering. Despite its growth in 2014 being very small (0.4%), the prospects are positive and the growth should accelerate in the coming years. In the years to come, the construction engineering market shall grow the fastest, mostly thanks to an inflow of funds from the EU. The growth in this segment should peak in the years The market of building construction shall increase too, in the coming years, although the growth will be slower. We assume the increase shall include the office, housing and warehousing segments. Krzysztof Andrulewicz, CEO of Skanska S.A. A number of signals from the market indicate an improvement in the standing of the construction sector. Since 2014, a significant decrease in the number of bankruptcies announced by construction companies has been observed. Additionally, in the initial months of 2015, a slow increase in employment has been observed, accompanied with further projections of employment growth. 1 In the years to come, following the expected commencement of infrastructural investments, an increased labour demand is predicted, in particular in relation to road construction, which may even result in a labour shortage. The economic climate indicator as examined by the Main Statistical Office has confirmed the reversal of the negative trend in the construction sector. Since the beginning of 2013, the indicator for the sector has been growing, having outgrown the indicator for the entire economy in mid More information provided in the section Employment in the construction sector 28

29 The inflow of new EU funds shall be the strongest incentive improving the condition of the infrastructural construction segment in the coming years. Under the new financial perspective, Poland shall receive a record amount of funds EUR billion. The amount mostly includes funds under the Cohesion Policy (EUR 82.5 billion), Common Agricultural Policy (EUR 32.1 billion) and European Maritime and Fisheries Fund (EUR 0.5 billion). The construction sector shall mostly use funds under the Cohesion Policy. Significant portion of EU funding will be spend on infrastructural construction projects. Representatives of the biggest construction companies see new opportunities offered under the new EU financial perspective. In order to avoid the accumulation of projects already experienced with investments carried out for EURO 2012, the General Directorate for National Roads and Motorways has already accepted tenders for PLN 30 billion out of the total of PLN 107 billion planned for investments to be carried out in the years (as at 11 September 2015). The attitude of PKP PLK, which, by the end of August, failed to call for any tenders under the new perspective, gives rise to concerns. In order to counteract the anxiety, PKP PLK has announced the Great Railway Investment Campaign, which includes initiatives aimed at improving cooperation with contractors and accelerating the tender procedures. The introduction of a two-stage procedure, additional tender evaluation criteria (along with the price) and advance payments for contracts, payments for materials stored at the construction site or partial payments for the performed work will be the measures adopted to achieve the improvement. A strong growth in demand observed since 2014 has been the factor of crucial importance for positive prospects of the construction sector. The current macro-economic standing accompanied with access to government subsidies provides grounds for stabilisation in the housing segment in the nearest future. In the coming years, some construction companies are planning to further diversify their business through expanding their construction services onto new construction market sectors or developing new nonconstruction business. Additionally, certain companies see their potential in geographical diversification, and are planning investments in countries such as the Czech Republic, Slovakia, Romania or Hungary, as well as in Western Europe and Scandinavia. All of the aforementioned factors are very promising for the Polish construction industry which is entering a new period marked by great opportunities for development. In the next section, we will try to summarise the current opportunities and describe planned directions for market development. Drawing the right conclusions from the previous EU financial perspective is of key importance. We must avoid another accumulation of projects that would generate cyclical speculation on the labour market, to include costs of labour and materials, and finally the costs of projects. Paulo Silva, Management Board Member, Mota-Engil Central Europe S.A. This has been supported by the record area of office space constructed (622,000 sq. m.). Based on the analysed number of continued and planned investments in the portfolios of construction companies, the coming quarters should support the current positive trend. Polish construction companies 2015: Key players, growth factors and industry development prospects 29

30 GDP growth in Poland 6% 5.0% 5% 4% 3.7% 4.8% 3.4% 2.2. Key factors in the development of the construction market in Poland In the coming years, the condition of the construction sector shall be determined by both the economic growth in Poland and infrastructural investments cofinanced with EU funds under the new financial perspective, as well as with domestic funds. 3.5% 3.3% 3.0% 2.9% 3% 2% 1% 0% 1.6% Source: EUI Country Forecast Poland - August 2015 update Public debt as a GDP percentage 60% 58% 56% 54% 52% 50% 48% 46% 44% 42% 40% % % % 1.9% 1.7% 2012 Source: Ministry of Finance Strategia zarządzania długiem sektora finansów publicznych w latach , September P 47.7% 48.0% 46.9% 2016P 46.0% 2017P 2018P 44.5% P 2016P 2017P 2018P Economic growth In 2014, following an increase in domestic demand, the Polish economy saw a growth of approx. 3.5% after a GDP growth slowdown seen in the years According to the Economist Intelligence Unit, in the average annual GDP growth will reach 3.15%. The future increase in GDP shall be supported by large investments related to the new EU perspective, a growth in net exports, private consumption, the improved standing of the labour market and low interest rates. In a longer run, the level of economic growth in Poland shall get closer to that observed in Western European countries, which will determine further GDP increase. The process is expected to be slow, though, in light of the current condition of the global economy and absence of rapid reforms that could materially increase employee productivity. Public debt Ability to co-fund infrastructural projects from the national and local budgets depends significantly on the public debt level. At the end of 2014, the public debt to GDP ratio was 47.7%. According to the public debt management strategy for proposed by the Minister of Finance in 2015, the public debt to GDP ratio shall remain at 48% and further decrease to 44.5% in EU funds The inflow of EU funds under the financial perspective is a major factor underlying the development of the Polish construction market. The funds allocated to Poland under the cohesion policy amount to EUR 82.5 billion and include EUR 45.6 billion to be used for subsidies under National Operational Programmes. 30

31 For the second consecutive time Poland has been among largest beneficiaries of EU funds. Funds allocated to Poland under the cohesion policy for the years are EUR 15.2 billion higher than those allocated in the previous perspective. National Operational Programmes Under the new financial perspective, certain funds have been allocated to six National Operational Programmes. The most funds (EUR 27.4 billion) have been allocated to the Infrastructure and Environment Operational Programme, whose priorities include the promotion of sustainable transport and the elimination of infrastructure gaps. Under the Programme, a total of EUR 19.8 billion shall be used to build roads, develop railways, urban and aviation infrastructure. Certain expenses can be funded from the Eastern Poland Operational Programme as well. Regional programmes Funds for infrastructural projects can be obtained also from Regional Operational Programmes for 16 provinces, with a total value of EUR 31.2 billion. This includes EUR 4.8 billion to be used for the development of transport infrastructure. Allocation of EU funds under National Operational Programmes under financial perspective 2% 4% 5% 10% 19% Technical assistance (EUR 0.7 bn) Eastern Poland (EUR 2 bn) Digital Poland (EUR 2.2 bn) Knowledge Education Development (EUR 4.7bn) Intelligent Development (EUR 8.6 bn) Infrastructure and Environment (EUR 27.4 bn) Source: Ministry of Infrastructure and Development 28% 8% 18% 11% 35% Development of TEN-T road network and multimodal transport Road infrastructure for cities Development of railway transport in Poland Development of low-emission public transport Other priorities The Connecting Europe Facility is an additional source of infrastructural funds, supporting pan-european investments (transport, power engineering and telecommunications). Under this initiative, Poland can obtain EUR 4.1 billion to co-fund transport investments until So far, EUR 2 billion has been used from the pool assigned to Polish projects. It is estimated that the budget for transport infrastructure allocated from EU funds (including CEF) of approx. EUR 15 billion will be earmarked for roads and EUR 10.2 billion for railways (in accordance with the 60% : 40% proportion of funds allocated in compliance with the Partnership Agreement). Allocation of EU funds under financial perspective Rural Areas Development Programme Regional Operational Programmes National Operational Programmes Source: Ministry of Infrastructure and Development Polish construction companies 2015: Key players, growth factors and industry development prospects 31

32 Number of bankruptcies among contractors in the construction sector in the period from 2011 to Q Share of construction firm bankruptcies in the number of all announcements % % 27% 22% 23% 17% % H2014 1H2015 Source: Euler Hermes Bankruptcies in the construction sector Statistics regarding bankruptcies are a good reflection of the current market condition. 2 In the first half of 2015, the balance of bankruptcies decreased by one-third year-on-year and the share of the sector in the total number of bankruptcies dropped by 6 p.p. to 17%. According to data derived from Euler Hermes reports, in the years , the number of bankruptcies announced for construction contractors decreased every year. During this period, the accumulated annual drop ratio reached 17.9%. The overall condition has improved, but the number of bankruptcies of construction companies compared to other industries was still high in 2014 and accounted for 22.4% of all bankruptcies announced. Low margins in the construction and assembly sector are still a problem for construction firms. The reasons include pricing competition during tenders, where price is often the key selection criterion. According to the Main Statistical Office, in the years the combined price decrease index in the sector amounted to 3.0%. Despite the index dropping again in 2014, the number of bankruptcies did not increase, which may be explained by the fact that due to a high number of bankruptcies in the previous year 3 only the strongest market players, less sensitive to changes in raw material costs, are still in business. Market suffers from the shortage of talents, in particular with regard to railways, electrics, telecoms, utilities or hydro engineering specialists. Qualified production staff is also in high demand. Firms in need of new hires must remember that the Polish labour market has been turning into employee s market and adjust their HR policies accordingly, bearing in mind not only the need to hire, but also to retain these talents. Krzysztof Andrulewicz, CEO of Skanska S.A. 2 Please note that they do not present the full scale of enterprises facing difficulties. Bankruptcy data does not include liquidated and suspended businesses, which in certain cases results in actual windup. 3 Since 2012, a wave of bankruptcies has gone through the sector. The organisation of the EURO 2012 tournament in Poland resulted in the significant development of infrastructure at the expense of the performance of many construction companies who participated in these investments due to very strong competition and the subsequent pricing war that caused a significant reduction of prices in the related tenders. Additionally, the commenced infrastructural projects made the prices of key materials increase, which affected the performance of construction companies. Consequently, in 2012 the number of bankruptcies in the construction industry increased the most in the last decade (according to a report by Arcata Partners). Large companies, such as PBG, Hydrobudowa Polska or DSS, were declared bankrupt, and so were hundreds of their subcontractors. Since then, a reduction in the sales of construction companies declaring bankruptcy has been observed, which confirms that the deterioration in the overall standing has been a problem mostly for subcontractors, not for general contractors, as in