Trevi Finanziaria. Good backlog but also huge capex. 02 December 2008 Capital Goods Update. Price: 7.94 Target price: 11.

Transcription

1 02 December 2008 Capital Goods Update Price: 7.94 Target price: Outperform /12/ E 2009E 2010E EPS Adj. ( ) DPS ( ) BVPS ( ) D J F M A M J J A S O N TREVI FIN INDUSTRIALE MILAN MIBTEL - PRICE INDEX Source: DATASTREAM EV/Ebitda (x) P/E adj (x) Div.Yield (%) FCF Yield (%) <0 7.1 < Source: Mediobanca Securities Good backlog but also huge capex Market Data Market Cap ( m) 561 Shares Out. (m) 70 Main Shareholder Trevisani Fam (55.9%) Free Float (%) 44.1% 52 week range ( ) Rel Perf vs Mibtel (%) -1m -0.1% -3m -12.2% -12m 17.1% 21dd Avg. Vol. ('000) 146 Reuters/Bloomberg TFI.MI / TFI IM Key Financial Data ( m) Turnover 874 EBITDA 129 EBIT 99 Net Profit 56 Shareholders' Funds 156 Net Debt (-) Cash (+) -143 Gearing % 87.3% Increase in 2008 estimates Positive impact of USD on 2009E figures We are increasing our 2008E EPS by 18.8% in light of very positive Q3 results (sales up by 35.6% Y/Y, EBIT by 67.2% Y/Y and net profit by 109%). On the back of 9M results, our 2008 net profit forecast of 82.7m implies conservative assumptions on Q4 (sales +17%, EBIT +10% and net profit +13%), which is reasonable since it discounts the volatility in profitability typical of this business. We are increasing our 2009 forecasts to take into account the good backlog level ( 1.22bn vs. 0.97m as of June 08, implying some 0.5bn intake in Q3), providing 100% visibility on 2009, coupled with the positive effect of the USD appreciation (revenues in USD account for around 40% of the total). Our 2009 net profit estimate stands at 101.3m (vs. 89.5m, +15.1% est. ch.). Material investments 60m in free operating cash burned in 2008E 9M results also showed a strong increase in investments, both capex ( 42m in Q3 and 80m in 9M) and inventories. Specifically, the increase in inventories relates to the equipment produced by Soilmec and to be used by the ground engineering service division (Trevi), in light of the new orders expected from the US and the Middle East. In this context, the sharp increase in net debt (from 183m as of June 08 to 256m in 9M, falling to 210m by year-end) represents the main risk. If intake dried up, debt ratios (1.2x debt/ebitda and 0.9x debt/equity currently expected by year-end) would deteriorate and the balance sheet would become stressed. Outperform and TP of What the market discounts now In line with our approach in the capital goods sector, we assume 4x EBITDA (from 5x EBITDA) as a fair multiple for the ground engineering business and 5.0x for the drilling stub (around 30% of the group s business) on 2009E figures. Starting from 144m net debt in 2009E, we see that the current share price (market cap of 560m) discounts EBITDA of 140m in 2009, or -19% and -31% versus the 173m and 204m expected in 2008 and 2009 respectively. We see such a discount as unlikely, in light of the visibility guaranteed by the current backlog. We are fine-tuning our TP to 11.4 (from 15.70) to include the higher net debt position expected in 2009 and the lower multiple applied. Andrea Scauri Sales desk Equity Analyst mailto:andrea.scauri@mediobanca.it

2 Contents Valuation what the market is currently discounting 3 Increase in estimates 7 Material investments 60 free operating cash burned in 2008E 9 02 December

3 Valuation what the market is currently discounting On the back of our new 2009 forecasts, the Trevi Group is currently trading at 3.5x EV/EBITDA, 4.1x EV/EBIT and 5.5x earnings, or a 0.18x PEG ratio. In line with our approach in the capital goods sector, we assume 4x EBITDA (from 5x EBITDA) as a fair multiple for the ground engineering business and 5.0x (from 7.5x) for the drilling stub (around 30% of the group s business) on 2009E figures. Starting from 144m net debt in 2009E, we see that the current share price (market cap of 560m) discounts EBITDA of 140m in 2009, or -19% and -31% versus the 173m and 204m expected in 2008 and 2009 respectively (see the table below). 2009E EBITDA implied in the current market cap Current market cap ( m) E net debt ( m) Implied EV ( m) Fair multiple for the ground engineering stub (70% of the business) 4.0x Fair multiple for the drilling stub (30% of the business) 5.0x Average multiple 4.3x Implied EBITDA in 2009E ( m) Implied decrease on 2008E EBITDA -19% Implied decrease on 2009E EBITDA -31% Source: Mediobanca Securities This assumption is probably driven by an expected decrease in the order backlog due to the intake drying up in We tried to quantify the decrease in the backlog that the market is currently assuming, taking into account the execution period of the four business divisions, i.e. 3/4 months for Soilmec (ground engineering equipment), 9/10 months for Trevi (ground engineering works), 7/8 months for Drillmec (rigs for the oil and water industries) and 25 months for Petreven (drilling industry services). As highlighted by the chart on the next page, the market is currently discounting decreases in intake and backlog of almost 20% and 10% respectively. 02 December

4 2009E and 2010E Group s backlog, intake and revenues trend implied in the current market cap 1,400 1,200 1, E 2009E 2010E Group's backlog Group's intake Group's turnover 2009E and 2010E backlog, intake and revenues trend implied in the current market cap (Trevi - Soilmec) E 2009E 2010E Trevi backlog Trevi intake Trevi turnover E 2009E 2010E Soilmec backlog Soilmec intake Soilmec turnover 2009E and 2010E backlog, intake and revenues trend implied in the current market cap (Drillmec Petreven) E 2009E 2010E Drillmec backlog Drillmec intake Drillmec turnover E 2009E 2010E Petreven backlog Petreven intake Petreven turnover 02 December

5 This is in contrast with the positive backlog figure posted in 9M 2008 ( 1.22bn, up 26% on the 0.97bn as of June 08), implying an intake of 0.5bn in Q3, a quarter already affected by the market turmoil and credit crunch. We believe that the reason behind this performance lies in Trevi s leading position in niche markets characterised by local government efforts to support local economies. We refer to: the Saudi government's investment in oil and other sectors totalling USD 400bn: Saudi Arabia s King Abdullah announced he expects a government investment program in oil and other sectors to spend more than USD400bn over the next five years (Monday, 17 November). The king said the spending is intended to help shore up the region's economy in the face of the global financial crisis; the expected increase in infrastructure spending in the US following the election of the democrat Barack Obama (new investments for dams and bridges should be approved by the US Corp of Engineers). The group has had a leading role in consortia together with German group Bauer and French company Soletanche Bachy in other projects in the past. As such, we feel confident in the group s capability to get new intake also in 2009, thus maintaining the total backlog at around 1.0bn. In detail, we expect: an increase in intake from the US in ground engineering services (intake of 550m in 2009E, down by almost 10% compared to the 2008 intake); an almost stable intake for Drillmec driven by the Middle East ( 300m, +3.7% Y/Y) coupled with a strong increase for Petreven ( 60m thanks to contracts recently signed); a decline in Soilmec s intake, affected by lower turnover to third parties ( 300m intake, -13% Y/Y). The tables below summarise our intake and backlog assumptions over 2009 and Trevi Group historical and expected intake by business divisions ( m) FY 2006 FY 2007 % ch. FY 2008 % ch. FY 2009 % ch. FY 2010 % ch. Total intake % % % % Soilmec % % % % Petreven n.m n.m % % Drillmec % % % % Trevi % % % % Trevi Group historical and expected order backlog by business divisions ( m) FY 2006 FY 2007 % ch. FY 2008 % ch. FY 2009 % ch. FY 2010 % ch. Total backlog % % % % Soilmec % % % % Petreven % % % % Drillmec % % % % Trevi % % % % 02 December

6 As already mentioned, we assumed 4x EBITDA as a fair multiple for the ground engineering business and 5.0x for the drilling stub (around 30% of the group s business) on 2009E figures. On the back of our new 2009 new forecasts (see the next section for further details), our SOP points to an equity value of 802m, or per share. Note that our target price is fully diluted, and already includes the conversion of the 70m convertible bond issue. Trevi group SOP on 2009E figures EV EV/ Sales EV/ EBITDA 2009E Sales 2009E EBITDA EBITDA margin Ground engineering divisions (Trevi and Soilmec) x 4.0x % Drilling service (Petreven) x 5.0x % Drilling equipment (Drillmec) x 5.0x % Total x 4.3x % 2009E NFP (144.1) 2009E NFP adjusted by the convertible bond ( 70m) (74.1) Equity Value Shares outstanding (m) 64.0 Shares outstanding (fully diluted - m) Target price 11.4 Source: Mediobanca Securities 02 December

7 Increase in estimates We are increasing our 2008E EPS by 18.8% in light of very Q3 positive results (sales up by 35.6% Y/Y, EBIT by 67.2% Y/Y and net profit by 109% - see table below). Trevi group Q3 and 9M results vs. Mediobanca forecasts ( m) Q3 07 Q3 08E Q3 08A % ch. A/E 9M 07 9M 08E 9M 08A % ch. A/E Order backlog , , % , , % Total sales % % +3.3% Turnover % +20.0% % +6.5% EBITDA % +26.0% % +9.0% EBITDA margin 15.1% 15.5% 16.3% 14.1% 14.5% 14.9% EBIT % +27.8% % +9.8% EBIT margin 12.0% 12.6% 13.5% 10.8% 11.6% 12.0% Pre-tax profit % % Net Profit % +65.4% % +20.3% Net Debt On the back of 9M results, our 2008E net profit of 82.7m implies conservative assumptions on Q4 (sales +17%, EBIT +10% and net profit +13%), which is reasonable since it discounts the volatility in profitability typical of this business. We are increasing our 2009 forecasts to take into account the excellent backlog level ( 1.22bn vs. 0.97m as of June 08, implying intake of 0.5bn in Q3), providing 100% visibility on 2009, coupled with the positive effect of the USD appreciation (revenues in USD account for around 40%). Our 2009E net profit points to 101.3m (vs. 89.5m, +15.1% est. ch.). Trevi group 2008E and 2009E old and new forecasts 2008E 2008E 2009E 2009E ( m) 2007 New est. Old est. Est. ch. New est. Old Est. Est. ch. Order backlog , % % Total sales , % 1, % 1, % 1, % Turnover , % 1, , % 1,149.7 EBITDA % % % % EBITDA margin 15.5% 16.2% 14.6% 16.2% 15.9% EBIT % % % % EBIT margin 11.9% 13.1% 11.8% 13.6% 13.1% Forex Net fin.inc.(charges) (13.7) (16.4) 20.2% (17.0) (13.0) -20.8% (13.0) Pre-tax profit % % % % Taxes (28.1) (43.1) 53.7% (37.7) (52.9) 22.5% (46.7) Tax rate 32.7% 33.4% 34.0% 33.5% 34.0% Minorities (2.0) (3.2) 60.3% (3.5) (2.0) -38.0% (1.2) Net profit % % % % 02 December

8 Looking at the breakdown of revenues and profitability by business division, we highlight the positive contribution of the USD appreciation to the performance expected in the ground engineering service division (Trevi). Trevi group 2008E and 2009E top line and profitability forecasts by business division ( m) E % ch. 2009E % ch. Foundation works (Trevi) % % EBITDA % % EBITDA margin 16.3% 16.8% 16.6% Drilling services (Petreven) % % EBITDA % % EBITDA margin 22.0% 22.9% 30.0% Foundation equipment (Soilmec) % % EBITDA % % EBITDA margin 13.5% 14.9% 14.0% Drilling equipment (Drillmec) % % EBITDA % % EBITDA margin 13.6% 15.3% 14.5% Total sales % % Inventories and others n.m n.m. Turnover % Group's EBITDA % % EBITDA margin 15.4% 16.2% 16.2% 02 December

9 Material investments 60 free operating cash burned in 2008E 9M results also showed a strong increase in investments, both capex ( 42m in Q3 and 80m in 9M) and inventories. Specifically, the increase in inventories relates to the equipments produced by Soilmec and to be used by the ground engineering service division (Trevi),. in light of the new orders expected from the US and the Middle East. In this context, the sharp increase in net debt (from 183m as of June 08 to 256m in 9M, falling to 210m by year-end) represents the main risk. If intake dried up, debt ratios (1.2x debt/ebitda and 0.9x debt/equity currently expected by year-end) would deteriorate and the balance sheet would become stressed. Trevi group NWC, operating free cash flow and net financial debt by quarter Q08 2Q08 3Q08 4Q08E 2008E 2009E NWC on Sales 10.8% 15.9% 15.4% 21.0% 16.0% 16.0% 13.6% Capex Delta working capital Total cash absorption Total cash generation Operating free cash flow Net financial debt Net debt/ebitda 1.1x 1.2x 0.7x Net debt/equity 0.9x 0.9x 0.4x We expect the company to burn operating free cash flow of 61m by year-end and to generate 58m in 2009, when capex is expected to slow. Finally, note that a large portion of the gross debt is long term, so the group will not be affected by re-financing problems. 02 December

10 THIS RESEARCH REPORT IS ISSUED BY MEDIOBANCA - BANCA DI CREDITO FINANZIARIO S.P.A. (MEDIOBANCA S.P.A.) AUTHORIZED BY BANK OF ITALY TO PROVIDE FINANCIAL SERVICES. THIS RESEARCH REPORT IS PROVIDED FOR INFORMATION PURPOSES ONLY AND DOES NOT CONSTITUTE OR SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL, OR A SOLICITATION OF AN OFFER TO BUY OR SELL, ANY SECURITIES. IT IS NOT INTENDED TO REPRESENT THE CONCLUSIVE TERMS AND CONDITIONS OF ANY SECURITY OR TRANSACTION, NOR TO NOTIFY YOU OF ANY POSSIBLE RISKS, DIRECT OR INDIRECT, IN UNDERTAKING SUCH A TRANSACTION. THE INFORMATION CONTAINED HEREIN, INCLUDING ANY EXPRESSION OF OPINION, HAS BEEN OBTAINED FROM OR IS BASED UPON SOURCES BELIEVED TO BE RELIABLE BUT IS NOT GUARANTEED AS TO ACCURACY OR COMPLETENESS ALTHOUGH MEDIOBANCA S.P.A. CONSIDERS IT TO BE FAIR AND NOT MISLEADING. SAVE AS OTHERWISE PROVIDED IN THE RESEARCH REPORT, MEDIOBANCA S.P.A. HAS NO OBLIGATION TO UPDATE, MODIFY OR AMEND THIS REPORT AND INFORM THE READER ACCORDINGLY. ALL PRICES ARE MARKET CLOSE PRICES UNLESS DIFFERENTLY SPECIFIED. MEDIOBANCA S.P.A. AND ITS NON U.S. AFFILIATED COMPANIES MAY FROM TIME TO TIME DEAL IN, HOLD OR ACT AS MARKET-MAKERS OR ACT AS ADVISERS, BROKERS OR BANKERS IN RELATION TO THE SECURITIES, OR DERIVATIVES THEREOF, OF PERSONS, FIRMS OR ENTITIES MENTIONED IN THIS DOCUMENT, OR BE REPRESENTED ON THE BOARDS OF SUCH PERSONS, FIRMS OR ENTITIES, EMPLOYEES OF MEDIOBANCA S.P.A. AND ITS AFFILIATED COMPANIES, OR INDIVIDUALS CONNECTED TO THEM MAY FROM TIME TO TIME HAVE A POSITION IN OR BE HOLDING ANY OF THE INVESTMENTS OR RELATED INVESTMENTS MENTIONED IN THIS REPORT. TREVI FINANZIARIA INITIAL COVERAGE AS OF 06/03/2006.MEDIOBANCA S.P.A. AND ITS AFFILIATED COMPANIES, OR INDIVIDUALS CONNECTED TO THEM ARE UNDER NO OBLIGATION TO DISCLOSE OR TAKE ACCOUNT OF THIS DOCUMENT WHEN ADVISING OR DEALING WITH OR FOR THEIR CUSTOMERS. FOR FURTHER INFORMATION REGARDING QUARTERLY RATING STATISTICS AND DESCRIPTIONS, CHINESE WALL MECHANISMS PUT IN PLACE BY MEDIOBANCA S.P.A. AND ANY OTHER DISCLAIMERS, PLEASE REFER TO THE MB SECURITIES SECTION OF THE MEDIOBANCA S.P.A. WEBSITE AT TO ACCESS PREVIOUS RESEARCH NOTES AND ESTABLISH TRENDS IN RATINGS ISSUED, PLEASE SEE THE RESTRICTED ACCESS PART OF THE MB SECURITIES SECTION OF THE MEDIOBANCA S.P.A. WEBSITE AT ADDITIONAL NOTES TO U.S. INVESTORS: THIS RESEARCH REPORT IS PREPARED BY MEDIOBANCA - BANCA DI CREDITO FINANZIARIO S.P.A. AND DISTRIBUTED IN THE UNITED STATES BY MEDIOBANCA SECURITIES USA LLC, A FINRA MEMBER FIRM. THIS INFORMATION PROVIDED IN THIS COMMUNICATION IS FOR DISCUSSION AND IS NOT BINDING ON MEDIOBANCA SECURITIES USA LLC OR ANY OF ITS AFFILIATES. MEDIOBANCA SECURITIES USA LLC IS AN AFFILIATE OF MEDIOBANCA - BANCA DI CREDITO FINANZIARIO S.P.A.. MEDIOBANCA - BANCA DI CREDITO FINANZIARIO S.P.A. HAS NO OBLIGATION TO UPDATE, MODIFY OR AMEND THIS REPORT AND INFORM THE READER ACCORDINGLY, EXCEPT WHEN TERMINATING COVERAGE OF THE ISSUER OF THE SECURITIES DISCUSSED IN THIS REPORT. THIS DOCUMENT IS NOT INTENDED TO REPRESENT THE CONCLUSIVE TERMS AND CONDITIONS OF ANY SECURITY OR TRANSACTION, NOR TO NOTIFY YOU OF ANY POSSIBLE RISKS, DIRECT OR INDIRECT, IN UNDERTAKING SUCH A TRANSACTION. THE ATTACHED TERMS ARE INDICATIVE AND CONSTITUTE NEITHER AN OFFER TO SELL NOR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY. WE WILL ASSUME, UNLESS YOU NOTIFY US OTHERWISE, THAT YOU HAVE SUFFICIENT KNOWLEDGE, EXPERIENCE AND/OR PROFESSIONAL ADVICE TO UNDERTAKE YOUR OWN ASSESSMENT. ALL OF THE VIEWS EXPRESSED IN THIS RESEARCH REPORT ACCURATELY REFLECT THE RESEARCH ANALYST'S PERSONAL VIEWS REGARDING THE SUBJECT COMPANY. NO PART OF ANALYST COMPENSATION WAS, IS OR WILL BE, DIRECTLY OR INDIRECTLY RELATED TO THE SPECIFIC RECOMMENDATIONS OR VIEWS EXPRESSED IN THIS RESEARCH REPORT. MEDIOBANCA SECURITIES USA LLC ACCEPTS RESPONSIBILITY FOR THE CONTENT OF THIS REPORT. ANY US PERSON RECEIVING THIS REPORT AND WISHING TO EFFECT ANY TRANSACTION IN ANY SECURITY DISCUSSED IN THIS REPORT SHOULD CONTACT MEDIOBANCA SECURITIES USA LLC AT 001(212) PLEASE REFER TO THE CONTACT PAGE FOR ADDITIONAL CONTACT INFORMATION. 02 December

11 Profit & Loss account ( m) E 2009E 2010E Turnover 874 1,164 1,357 1,493 Turnover growth % EBITDA EBITDA margin (%) EBITDA growth (%) Depreciation & Amortization EBIT EBIT margin (%) EBIT growth (%) Net Fin.Income (charges) Non-Operating Items Extraordinary Items Pre-tax Profit Tax Tax rate (%) Minorities Net Profit Net Profit growth (%) n.m Adjusted Net Profit Adjusted Net Profit growth (%) n.m Balance Sheet ( m) E 2009E 2010E Working Capital Net Fixed Assets Total Capital Employed Shareholders' Funds Minorities Provisions Net Debt (-) Cash (+) Cash Flow Model ( m) E 2009E 2010E Cash Earnings Working Capital Needs Capex (-) Financial Investments (-) Dividends (-) Other Sources / Uses Ch. in Net Debt (-) Cash (+) Multiples E 2009E 2010E P/E Adj P/CEPS P/BV EV/ Sales EV/EBITDA EV/EBIT EV/Cap. Employed Yield (%) FCF Yield (%) 7.1 < Per Share Data ( ) E 2009E 2010E EPS EPS growth (%) EPS Adj EPS Adj. growth (%) CEPS BVPS DPS Ord Key Figures & Ratios E 2009E 2010E Avg. N of Shares (m) EoP N of Shares (m) Avg. Market Cap. ( m) Enterprise Value ( m) Labour Costs/Turnover (%) 11% 10% 10% 0% Depr.&Amort./Turnover (%) 3% 3% 2% 2% Prod. Ratio (Turn./Op.Costs) Gearing (Debt / Equity) (%) 87% 88% 43% 12% EBITDA / Fin. Charges 9.5 >10 >10 >10 Cap.Employed/Turnover (%) 37% 41% 37% 35% Capex / Turnover (%) 6% 9% 4% 2% Pay out (%) 13% 11% 11% 11% ROE (%) 36% 36% 31% 27% ROCE (%) (pre tax) 30% 30% 34% 37% ROCE (%) (after tax) 21% 20% 23% 24%