Company
Global Markets Research
Europe
Building & Construction
Industry Update
19 August 2011
European Contractors
Contracting for Beginners
Luis Prieto Bartolome
Manu Rimpela
Research Analyst
(+44) 20 754-50791
luis.prieto@db.com
Research Analyst
(+44) 20 754-55669
manu.rimpela@db.com
A tool for navigating through the
complexity of today's European
contractors
The European contracting sector has
changed dramatically over the past 15
years. Companies have mutated from
plain vanilla contractors in the 1990s into
integrated infrastructure players at
present.
Although
the
companies’
IR/communication efforts have developed
accordingly, we feel that a guide
analyzing all the key areas we usually
focus on when we look at the industry
could be useful for both beginners and
the initiated alike.
Deutsche Bank AG/London
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.
MICA(P) 146/04/2011.
Europe
Building & Construction
19 August 2011
European Contractors
Contracting for Beginners
Luis Prieto Bartolome
Manu Rimpela
Research Analyst
(+44) 20 754-50791
luis.prieto@db.com
Research Analyst
(+44) 20 754-55669
manu.rimpela@db.com
Industry Update
Companies featured
ACS (ACS.MC),EUR26.00
Balfour Beatty (BALF.L),GBP239.60
Bouygues (BOUY.PA),EUR22.00
FCC (FCC.MC),EUR17.26
Ferrovial (FER.MC),EUR7.96
Eiffage (FOUG.PA),EUR30.15
OHL (OHL.MC),EUR16.96
Vinci (SGEF.PA),EUR33.86
Skanska (SKAb.ST),SEK89.20
STRABAG SE (STRV.VI),EUR21.12
YIT Corporation (YTY1V.HE),EUR12.65
Hold
Hold
Hold
Hold
Buy
Hold
Buy
Buy
Hold
Hold
Buy
A tool for navigating through the complexity of today's European contractors
The European contracting sector has changed dramatically over the past 15 years.
Companies have mutated from plain vanilla contractors in the 1990s into
integrated infrastructure players at present. Although the companies’
IR/communication efforts have developed accordingly, we feel that a guide
analyzing all the key areas we usually focus on when we look at the industry could
be useful for both beginners and the initiated alike.
How have we approached the subject?
After introducing what we understand by ‘Contractor’, we analyse the three key
elements in companies’ activity portfolios: Contracting, Concessions and Other
forms of diversification. We then move on to the balance sheet implications of the
companies’ transition to becoming integrated infrastructure players. Finally, we
drill into our sum-of-the-parts-based valuation methodology with special emphasis
on concessions. For this report we have built an earnings/valuation model of a
theoretical toll road asset in order to show as cleanly as possible what contractors
focus on when investing in greenfield concessions.
Deutsche Bank AG/London
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.
MICA(P) 146/04/2011.
19 August 2011
Building & Construction European Contractors
Table of Contents
1. What do we understand by ‘Contractor’? ................................... 3
1.1. The consolidation process in the 1990s and early 2000s................................................... 3
1.2. No longer plain vanilla contractors but diversified entities ................................................. 3
1.3. Different diversification models ......................................................................................... 5
2. Contracting, where it all began .................................................... 6
2.1. What is contracting? .......................................................................................................... 6
2.2. A risk management business with low barriers to entry .................................................... 6
2.3. Negative working capital and low operating leverage........................................................ 7
2.4. Low margins are the name of the game ............................................................................ 8
2.5. As late cyclical as it gets .................................................................................................... 8
2.6. Backlog as a measure of future performance .................................................................... 9
2.7. The accounting of contracting.......................................................................................... 11
2.8. A clear infrastructure bias ................................................................................................ 12
2.9. A subdued long term outlook for infrastructure ............................................................... 13
2.10. Could PPPs revive the infrastructure construction market?... ........................................ 15
2.11. …and emerging markets?.............................................................................................. 15
2.12. Key construction sector indicators ................................................................................. 17
3. Concessions, the obvious way to diversify ............................... 20
3.1. Why did contractors move on to infrastructure concessions?......................................... 20
3.2. What is a concession? ..................................................................................................... 20
3.3. The inflation hedge........................................................................................................... 20
3.4. The traffic element in demand risk concessions .............................................................. 21
3.5. Very particular financial structures ................................................................................... 22
3.6. The accounting of concessions........................................................................................ 22
3.7. Greenfield vs brownfield .................................................................................................. 23
3.8. Infrastructure market players ........................................................................................... 24
3.9. Overview of the key developed PPP markets .................................................................. 25
3.10. The role of emerging markets in concessions ............................................................... 30
3.11. Valuation of PPP concessions ........................................................................................ 31
4. Other forms of diversification .................................................... 36
4.1. The rationale behind other forms of diversification .......................................................... 36
4.2. Engineering / Professional Services ................................................................................. 36
4.3. Cement and other heavyside materials............................................................................ 36
4.4. Housing and commercial development ........................................................................... 36
4.5. Renewable energy assets................................................................................................ 37
4.6. Taking the business model to the extreme: electric utilities ............................................ 37
5. Diversification’s impact on financial structures........................ 38
5.1. Two clear groups of contractors ...................................................................................... 38
6. Valuation of contractors ............................................................. 40
6.1. Sum of the Parts, the key valuation approach.................................................................. 40
6.2. We cannot read too much into multiples ......................................................................... 40
6.3. Conglomerate discounts .................................................................................................. 41
Appendix A – Historical M&A activity in the sector ..................... 42
Appendix B – Euroconstruct ........................................................... 49
Appendix C – Output....................................................................... 53
Appendix D – Confidence................................................................ 55
Appendix E – Housing ..................................................................... 56
Page 2
Deutsche Bank AG/London
19 August 2011
Building & Construction European Contractors
1. What do we understand by
‘Contractor’?
Traditionally, contractors had been companies of a relatively small size providing construction
services in their domestic markets. Nonetheless, when we analysed the current industry
configuration, we quickly realized it has evolved significantly. Traded contractors today are
much larger companies with a high degree of activity and geographical diversification.
Figure 1: Contractors ranked by 2010 sales (EURm)
Figure 2: Contractors ranked by 2010 EBITDA (EURm)
6,000
40,000
35,000
5,000
30,000
4,000
25,000
3,000
20,000
15,000
2,000
10,000
1,000
5,000
0
0
Source: Deutsche Bank, Company data
Source: Deutsche Bank, Company data
1.1. The consolidation process in the 1990s and early 2000s
The current configuration of European contractors has been the result of numerous mergers
and acquisitions over the past 20 years. Because contracting markets are, in essence,
extremely fragmented and local, consolidation has been the only way to gain critical mass.
Merged entities have benefited from more efficient structures, more evolved
management/control systems and access to higher value added segments. Critical mass has
also provided European contractors with direct access to financial markets, a key catalyst of
diversification.
Two very good examples of these consolidation processes would be the following:
„
ACS’s current structure was the result of the merger between OCP and Gines Navarro in
1997 and the absorption of Dragados in 2003. These two key transactions have been
further underpinned by numerous acquisitions of businesses and stakes in traded
companies domestically and internationally.
„
Vinci as we know it today is the result of the merger between Vinci and GTM in 2000
(endorsed by GTM’s key shareholder at the time, Suez Lyonnaise des Eaux) and the
acquisition of ASF in 2006, which took the company deep into concession territory.
1.2. No longer plain vanilla contractors but diversified entities
The reason behind the diversified nature of the European contractors that emerged from the
consolidation process described above is threefold: 1) the reinvestment of the strong cash
flow generation during the 2000-2007 period; 2) the strategic desire to move away from
Deutsche Bank AG/London
Page 3
19 August 2011
Building & Construction European Contractors
cyclical activities into more stable businesses; and 3) the increasing budgetary constraints of
the companies' key clients, governments (which led to the strong development of
companies' PPP concession divisions).
Very acquisitive companies
In addition to the consolidation process, companies have also been extremely active on the
M&A front. The following table summarises the key transactions that the companies have
carried out in the 1991-2011 period.
Figure 3: Summary of European contractors’ largest acquisitions in the last 20 years
1991-1995
Acciona
ACS
Cobra
1996-2000
2001-2005
2006-2011
Press Cargo, Mostostal
Warazawa
Elektrim Finance, Inversiones
Tecnicas Urbanas, Service
Corporation International, EHN, stake
in FCC
Stake in Endesa
Continental Auto, ONYX and
Imes
Dragados, Stake in Abertis, Stake in
Union Fenosa
Stakes in Iberdrola, Stake in
Hochtief
Balfour Beatty
Bouygues
Eiffage
Kentons, Mansell, stake in Gammon, Charter, Cowlin Group, Centex,
Dean & Dyball, GMH, Douglas E
Pennine Group, SBB
Barnhart, Schreck-Mieves, RT
Dooley, Parsons Brinckerhoff,
SpawMaxwell, Halsall Group
Basil Read
SAE, Walter Bau
FCC
Ferrovial
Agroman
Erosport Group, Telecom Italia, E.ON
SCR, Beugnet, Gerland
APRR, Crystal and Clemessy
Giant Cement
Portillo, Cementos Lemona, ASA,
Marepa Group, Grupo Logistico
Santos
Waste Recycling Group, Uniland,
Alpine Mayreder Bau, SmVaK,
Olivento
Budimex, 407-ETR
Amey, Webber Group, Swissport
BAA, Cintra
OHL
Skanska
Spie Rail, SEMI, Gouyer, SRD,
Leadbitter group, NT1, TMC
I2000, Fumisa, Centrovias, ZPSV
Vianorte, Toluca airport, Arellano
Uhersky Ostroh, Intervias, Amozoc- Construction, Stride Contractors,
Judlau Contracting, Sthim
Perote
Maquinaria
Beers Construction Company
Börje Larsson Bygg i Nyköping
AB, SADE, A.J.Etkin, Budexpol,
EMV, Exbud, Böge Larsen
Projects Oy and Proconord
International Oy, Barclay White
MGT, Yeager, MIAB, BFW
Construction Co, Klimavex
Stamakt, McNichilas, SkyBAu
Strabag
Deutsche Asphalt Group, Walter-Bau Preusse-Group and StratebauGroup, Dywidag, Heilit+Woerner,
Group, Fahrleitungsbau GmbH
and Eichholz Group, Linde KCAEd.Züblin AG
Umweltanlagen GmbH, Ottokar
Klug GmbH, Oden, Viamont
DSP, Rimex Group, ECM Facility
Vinci
Environmental Analysis Limited,
Genfio Technology Limited, Crispin &
Borst, TCL Granby, ASF
ASF, PEL Limited, Weaver,
Fifehrad Limited, Taylor
Woodrow, Gordon Durham,
Faceo, Cegelec, Tarmac quarries
Calor AB, Primatel Lts, Nordic
Building Systems, A/S Emico,
Nortelco System-Teknikk
Alueputkitus Oy and Konepaja
Alueputkitus Oy, Inesco Oy,
MCE AG, Caverion GmbH,
Reding
YIT
Oy Huber Ab
Mongstad Industrier AS, VSP i
Göteborg AB, AB Kausta, SähköSoikkeli Oy
Source: Deutsche Bank
Some are even no longer considered contractors
There are two extreme diversification cases where the contracting activities have become so
diluted that the companies are no longer considered contractors, Acciona and Bilfinger
Berger. In the case of Acciona, management’s strategic shift into renewable energy activities
has resulted in as little as 15% of the EV of the company being underpinned by
contracting/infrastructure operations (including concessions). As far as Bilfinger is concerned,
the significant stress laid on the development of industrial services activities over the last
Page 4
Deutsche Bank AG/London
19 August 2011
Building & Construction European Contractors
years (mainly through acquisitions) and the divestment of Valemus in Australia following the
decision to exit the contracting business have left contracting at a negligible 5% of EV.
1.3. Different diversification models
Although it is difficult to generalize given the companies’ very different activity portfolios, we
can assume European contracting names follow two main diversification models
„
Transport infrastructure oriented diversification model. Besides their heritage
contracting activities (and some services operations) Eiffage, Ferrovial, OHL and Vinci
have heavily diversified into toll roads (ASF, APRR, 407-ETR) and airports (BAA).
„
Wider diversification model. ACS, Balfour Beatty, Bouygues, FCC, Skanska, Strabag
and YIT have shown less focus on transport infrastructure assets than the peers in the
previous category. These companies’ main diversification areas are: electric utilities,
services concessions, telecoms, environmental/urban services, cement and
residential/commercial development
Figure 4: EBITDA 2010 breakdown by activity group (% of total)
ACS
Balfour Beatty Bouygues
Contracting
65
91
Infrastructure concessions
2
-6
Service concessions
21
45
FCC
25
56
Cement
Ferrovial
Eiffage
OHL
Skanska
(EBIT)
Strabag
(EBIT)
Vinci
YIT (EBIT)
9
29
22
82
85
37
19
76
72
76
6
15
62
16
15
Development
6
27
Headquarters & other
12
15
49
4
-1
-1
2
-15
Total
100
100
100
100
100
100
100
100
61
1
20
100
100
100
Source: Deutsche Bank
Figure 5: Estimated equity value breakdown by activity group (% of total)
ACS
Balfour
Beatty
Bouygues
(EV)
FCC
Ferrovial
Eiffage
OHL
Skanska
(EV)
Strabag
(EV)
Vinci
YIT (EV)
Contracting
68
78
30
33
43
46
52
58
88
56
15
Infrastructure concessions
12
26
5
62
80
101
6
12
52
Service concessions
12
55
Cement
12
Development
Headquarters & other
Total
23
7
35
58
9
-4
59
-0
-28
-26
-52
1
100
-8
27
100
100
100
100
100
100
100
100
100
100
100
Source: Deutsche Bank
Deutsche Bank AG/London
Page 5
19 August 2011
Building & Construction European Contractors
2. Contracting, where it all
began
2.1. What is contracting?
We use the term ‘contracting’ to refer to a wide range of services that companies can
provide in the construction space. Although construction project execution has historically
been at the heart of ‘contracting’ operations, the term ‘contracting’ also refers, in the
companies in our universe of coverage, to pre-construction activities such as strategic
consultancy, program management or engineering (design) as well as to other forms of more
specialized industrial construction/installation activities.
Engineering
In the ‘pre-construction’ phases of projects, the market providing consultancy and design
services to the construction industry tends to be quite fragmented making an interesting area
of expansion for the larger European contractors as evidenced by Balfour Beatty’s
strengthening of its Professional Services division with the Parsons Brinckerhoff acquisition in
2009. See the section Other forms of diversification.
General contracting
General contracting is the more common form of contracting in our universe of coverage. It
involves executing construction work in the residential, non-residential and infrastructure
segments by subcontracting a significant percentage of the work to more specialized
subcontractors, carrying out the non-subcontracted portion and, obviously, managing the
whole process (human resources, materials, machinery, legal, etc).
Specialised and industrial contracting
The general rule of thumb is that the more specialized the contracting, the higher the
operating margin potential. In addition, specialized forms of contracting can provide very
interesting competitive advantages in certain segments/geographies. Activities like complex
civil work, HVAC, electrical engineering or industrial installations are good examples of this.
In our universe of coverage, companies like ACS, Vinci or Eiffage are well exposed to more
advanced forms of contracting through their Industrial Services, Vinci Energies or Eiffage
Energy divisions.
2.2. A risk management business with low barriers to entry
The contracting business is mainly about managing all the risks involved in any given
contract. Given the relatively low technological value added in most of construction activities,
contractors minimize risk by means of applying stringent bidding, contract management and
control techniques.
Fixed vs variable price contracts
A key area of risk management in contracting is the nature of the contract itself. In residential
work, for example, contracts have historically been of a fixed-price nature, implying that the
contractor would assume all cost risks during the execution of the contract. This adds
material volatility to profitability in environments of raw material price volatility. Consequently,
contractors try to minimize the fixed price component of their order backlogs in favor of
variable cost or cost-plus contracts.
Page 6
Deutsche Bank AG/London
19 August 2011
Building & Construction European Contractors
It needs to be highlighted that cost-plus contracts are common in areas where cost
effectiveness is not as important as the long term quality of the work. Civil engineering
projects are a good example of this.
Low barriers to entry
Another key characteristic of the contracting business is that there are no meaningful barriers
to entry. However, it is rare to see contractors succeeding outside their home markets; the
key reason for this is that the construction business tends to be a very local business in
which knowing the client plays a key role.
2.3. Negative working capital and low operating leverage
The contracting business is generally characterised by low operating leverage and a negative
working capital.
The reason for the low operating leverage is the very limited fixed cost base (from 5%
to 10% of the total) despite the relatively low margins. It needs to be highlighted,
however, that the more specialised the work contractors carry out, the higher the
operating leverage tends to be as companies cannot subcontract as much and usually
own/manage a more relevant percentage of their fixed assets/workforce. As general
guidance, we calculate that a contractor would have a 2x EBITDA leverage to changes in
sales on the assumption of fixed costs at 7.5% of the total cost base and 6.5% EBITDA
margin.
„
Figure 6: EBITDA operating leverage calculation
Year 1
Sales
100
Change in sales
Operating costs
Fixed costs
% of op. Costs
Variable costs
% of op. Costs
EBITDA
Operating leverage
90
-10%
94
85
7
7
8%
8%
86
78
93%
92%
7
Change in EBITDA
EBITDA margin
Year 2
5
-20.8%
6.5%
5.7%
2.1
Source: Deutsche Bank
Deutsche Bank AG/London
Page 7
19 August 2011
Building & Construction European Contractors
Figure 7: Cost structure vs other building industries
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
30.0%
25.0%
20.0%
Fixed
35.0
30.0
25.0
20.0
10.0%
15.0
0.0%
Variable
40.0
15.0%
5.0%
Source: Deutsche Bank
Figure 8: Operating leverage vs other building industries
10.0
5.0
0.0
Leverage to 1% price var.
Margin
Leverage to 1% volume var
Source: Deutsche Bank
„
European contractors generally exhibit negative operating working capital figures as
they tend to get paid by clients before they pay subcontractors. The key exception to this
is emerging markets where in order to grow, companies may need to guarantee the
availability of subcontractors by paying them in advance; this translates into a positive
working capital, in other words, a need to finance growth.
2.4. Low margins are the name of the game
The particular nature of the contracting business (low capital intensity, negative working
capital, low barriers to entry, extensive use of subcontractors, etc) results in low operating
margins (on average mid single digit or slightly above mid single digit EBITDA margins).
Besides company-specific issues, margins are determined by two key factors:
„
Geographical exposure. There are markets like Germany where the contracting industry
remains highly competitive, which has historically put material pressure on margins (the
post-reunification downturn did not take as much capacity out of the market as the
decline in output); this has obliged companies to widen their service offering in the last
years (engineering, facility management) so as to become more competitive. There are
other European markets like France or Spain where the consolidation process of the last
10-15 years has left a limited number of players resulting in above-average margin
figures. In emerging markets, margins can be particularly high as a reflection of the risk
assumed, the lack of local know-how or the need to operate on a positive operating
working capital.
„
Segment exposure. The higher the value added the work, the higher the margin. Civil
Works usually show the highest technical complexity and more often than not require
specialized machinery (tunnel boring machines for example), which implies that margins
are higher than average and can even reach double digit (EBITDA level) for some projects
in developed markets. On the residential and non-residential fronts, competition is high
(smaller contractors), operating margins tend to be much lower and fixed price contracts
are more common, which gives more volatility to margins.
2.5. As late cyclical as it gets
In construction contracts, the client’s decision to build is taken in a particular operating
environment but the actual construction work, and the generation of earnings, can take place
in a completely different economic context due to the long execution periods. There are
several reasons why construction contracts tend to be quite long:
Page 8
Deutsche Bank AG/London
19 August 2011
Building & Construction European Contractors
„
The nature of the business. Construction projects usually take years to complete due to
the complexity of the end product and the particularities of the production process
(subcontracting) and of the building materials employed.
„
The nature of the contract. Some contracts can be remarkably long due to ambitious
design characteristics (usually in transport infrastructure).
„
Legal hurdles. Transport infrastructure work typically goes through lengthy expropriation
processes as land owners are not always willing to sell the affected land. Increasingly
strict environmental laws also result in longer engineering and execution periods.
„
Financial requirements. When construction work is associated to PPP projects, the
project needs to reach financial close before work can begin. The financial close time
frame will depend on the economic/financial environment as well as on the particular
characteristics of the project.
„
Delays. Although obviously not in the initial design of construction projects, unforeseen
circumstances (reduced client liquidity, weather conditions, unfavorable geology) can
lead to delays and, therefore, much longer execution periods.
2.6. Backlog as a measure of future performance
The late cyclical nature of the contracting business just described implies that the analysis of
the orders that companies will be working on in coming years is relevant to get an idea of
future earnings performance.
Backlogs / Orderbooks
Contracting order backlogs or orderbooks are defined as the pipeline of customers orders
that are in the process of completion or have not yet been started. Backlogs are usually
expressed in EURm as well as months of average activity levels. Depending on the type of
contracting carried out and the country mix, European contractors tend to have between one
and two years of average activity in their orderbooks (see table below), which generally feeds
the next three (or more) years of revenue.
Figure 9: European contractors orderbooks in months of activity (Dec 2010)
30
25
20
15
10
5
0
Source: Deutsche Bank, Company data
Deutsche Bank AG/London
Page 9
19 August 2011
Building & Construction European Contractors
Figure 10: Balfour Beatty’s December 2009 and 2010 orderbook distribution (GBPbn)
6
5
5.1
4.9
4
3
2.5
2.1
2
1.6
1.2
1
0
FY+1
FY+2
FY+3 onwards
2009
2010
Source: Company data
Figure 11: Bouygues Construction’s Dec 2009 and 2010 orderbook distribution
(EURbn)
8.0
7.0
7.1
6.7
6.0
5.3
5.0
4.0
4.0
3.0
2.0
1.3
1.8
1.0
0.0
FY+1
FY+2 to FY+5
2009
FY+6 onwards
2010
Source: Company data
A key issue with backlogs is that companies use different criteria to define them. Some
companies will only include in their figures signed contracts where financing and
subcontractors have been arranged. Other companies, however, consider preferred bidder
status or even framework agreements part of their backlogs, which can add a good number
of months of activity but imply a higher degree of uncertainty when risk of cancellation is
taken into consideration.
European contractors do not provide much detail about the quality of their orderbooks, which
is a problem when it comes to assessing their quality. There is always a marked lack of
visibility on the operating margins to be attained by the contracts in the backlog. In addition,
when accounting changes take place (like in 2010 with the way joint ventures are accounted),
or acquisitions are made, backlogs get more difficult to analyse.
Page 10
Deutsche Bank AG/London
19 August 2011
Building & Construction European Contractors
Order intake
Order intake is a variable on which investors like to focus on in order to gain a better
understanding of how the underlying demand is performing given the markedly late cyclical
nature of earnings. Order intake is calculated as the backlog at the end of the period minus
the backlog at the beginning of the period plus the work completed during the period.
We would highlight, however, that the order intake for shorts periods of time (quarters for
example) does not necessarily give a reliable idea of underlying demand. Companies tend to
look at their order intake statistics for longer periods of time (6-12 months).
Figure 13: Vinci’s ex-Energies order intake (EURm)
3,500
500%
3,000
400%
2,500
300%
2,000
200%
1,500
100%
1,000
0%
500
0
-100%
Order intake
YoY chg (%)
Source: Deutsche Bank, Company data
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
Q2 2006
Q3 2006
Q4 2006
Q1 2007
Q2 2007
Q3 2007
Q4 2007
Q1 2008
Q2 2008
Q3 2008
Q4 2008
Q1 2009
Q2 2009
Q3 2009
Q4 2009
Q1 2010
Q2 2010
Q3 2010
Q4 2010
Figure 12: Ferrovial’s order intake (EURm)
Order intake + acquired orderbook
YoY chg (%)
Source: Deutsche Bank, Company data
How good a leading indicator is orderbook?
Although there is obviously a degree of correlation between contracting revenue and
orderbook performance (as evidenced by the following charts) the nature of the orders
(length of the project, etc) or how companies treat them make it difficult to base top line
projections exclusively on orderbook/order intake figures.
Figure 14: FER’s orderbook vs annualised sales (EURm)
Figure 15: Vinci’s orderbook vs annualised sales (EURm)
12,000
26,000
11,000
24,000
10,000
22,000
9,000
8,000
20,000
7,000
18,000
6,000
16,000
5,000
14,000
4,000
3,000
12,000
2,000
10,000
Orderbook
Source: Deutsche Bank, Company data
Sales (last 12 months)
Orderbook
Sales (last 12 months)
Source: Deutsche Bank, Company data. Note: Orderbook and sales exclude Vinci Energies
2.7. The accounting of contracting
The accounting treatment of revenue and costs associated with construction contracts are
regulated by IAS 11. There are two accounting methods for construction contracts:
Deutsche Bank AG/London
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19 August 2011
Building & Construction European Contractors
„
Percentage of completion method: If the outcome of the construction contract can be
estimated reliably, the revenues and costs should be recognised in proportion to the
stage of completion of the contract activity. By reliable it is meant that reliable estimates
of total contract value, the completion stage and the costs to complete the contract can
be measured.
„
If the outcome of the construction company cannot be estimated reliably, no profit
should be recognised. Instead, contract revenue should be recognised only to the extent
that contract costs are expected to be recovered and contract costs should be expensed
as incurred. An expected loss on a construction contract should be recognised as an
expense as soon as such loss becomes probable.
2.8. A clear infrastructure bias
Due to the material profitability differences, lower margin volatility and higher barriers to
entry, European contractors infrastructure exposures are quite significant. In addition, the
material development of PPP markets in Europe has given a further boost to these exposures
in recent years.
Figure 16: ACS’s contracting orderbook by segment
Non Residential
Building
9%
Figure 17: FCC’s contracting orderbook by segment
Residential
building
5%
Residential
Building
3%
Nonresidential
building
19%
Civil engineering
76%
Civil Works
88%
Source: Company data
Source: Company data
Figure 18: Ferrovial’s contracting orderbook by segment
Figure 19: Eiffage’s contracting orderbook by segment
Non-residential
work
14%
Metal
8%
Industrial
6%
Energy
21%
Residential work
4%
Construction
43%
Civil work
76%
Public Works
28%
Source: Company data
Page 12
Source: Company data
Deutsche Bank AG/London
19 August 2011
Building & Construction European Contractors
2.9. A subdued long term outlook for infrastructure
In the last few years developed market governments have moved from stimulus packages to
fiscal consolidation (see the following chart on IMF’s fiscal balance projections for different
geographies). The general environment of austerity for coming years implies that the
infrastructure construction pipeline will suffer accordingly and that European contractors’
construction operations will remain particularly subdued in their domestic markets.
Figure 20: General government cyclically adjusted fiscal balance (% of GDP)
2008
2009
2010
2011E
2012E
World
-2.4
-4.1
-4.4
-4.0
-3.2
Developed countries
-3.3
-5.5
-5.6
-5.1
-4.2
United States
-4.6
-6.8
-7.2
-7.2
-5.8
Euro Area
-2.8
-4.6
-4.3
-3.2
-2.6
France
-2.9
-5.2
-4.9
-4.2
-3.6
Germany
-0.9
-1.1
-2.4
-1.9
-1.3
Italy
-2.4
-3.2
-2.8
-2.5
-1.8
Spain
-5.3
-9.7
-7.5
-4.7
-4.1
Japan
-3.7
-7.0
-7.7
-8.1
-7.7
United Kingdom
-5.9
-8.5
-8.0
-6.5
-5.1
Canada
0.0
-3.2
-4.0
-2.9
-2.2
Emerging markets
-2.2
-4.5
-4.0
-3.3
-3.0
China
-0.9
-3.4
-2.9
-1.8
-1.0
India
-9.3
-10.7
-9.6
-8.9
-8.6
Russia
3.7
-3.4
-1.7
-0.6
-1.3
Brazil
-2.1
-2.0
-3.1
-3.0
-2.9
Mexico
-1.8
-4.5
-4.1
-3.0
-3.0
South Africa
-2.1
-4.8
-5.0
-4.9
-4.4
Source: IMF
Spain, a very interesting case in point
„
Cuts to public infrastructure spend. In early 2010, the Spanish government announced
budget cuts of EUR6.4bn for the Ministry of Civil Works for the following two years as
part of the general austerity program. This cut target was slightly revised downwards to
industry pressure and now stands at EUR5.7bn. If we add the Ministry’s direct
infrastructure investment to that of other public entities, 2011’s total infrastructure
investment should be close to EUR15bn vs the EUR21bn in 2010’s budget (-31%).
Figure 22: Spain – Total civil works awards
Total awards (€mn)
Source: Seopan, Deutsche Bank
Deutsche Bank AG/London
% YoY chg
Total awards (€mn)
Apr-11
Sep-10
Jul-09
Feb-10
Dec-08
Oct-07
-60.0%
May-08
-40.0%
0
Mar-07
-20.0%
5,000
Jan-06
10,000
Aug-06
Apr-11
Sep-10
Jul-09
Feb-10
Dec-08
Oct-07
May-08
Mar-07
Jan-06
Aug-06
Jun-05
Apr-04
Nov-04
Sep-03
Jul-02
Feb-03
Dec-01
0
0.0%
15,000
Jun-05
10,000
20.0%
20,000
Apr-04
20,000
40.0%
25,000
Nov-04
30,000
60.0%
30,000
Sep-03
40,000
80.0%
35,000
Jul-02
50,000
40,000
Feb-03
60%
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
60,000
Dec-01
Figure 21: Spain - Total public construction awards
% YoY chg
Source: Seopan, Deutsche Bank
Page 13
19 August 2011
Building & Construction European Contractors
„
The Spanish Extraordinary Infrastructure Plan (PEI) to the rescue? As a way of
offsetting the infrastructure budget cuts, the Spanish Government launched last year the
PEI, which envisages EUR17bn of PPP-based investments in transport infrastructure in
2011-2012. Around 70% of the investments will be railways and the rest road transport.
The financing of the plan should be provided by EIB (50%), ICO (20%), financial
institutions and developers (the remaining 30%).
„
Little PEI progress. After making very slow progress due to the close scrutiny from the
Treasury, the EUR17bn PPP-based PEI seemed to gather some momentum before the
summer (probably boosted by the imminent regional elections). In May the public railway
infrastructure entity, ADIF, tendered two PPP contracts within the Madrid-Galicia rail
project, amounting to EUR2.3bn. In April, the Ministry of Public Works had tendered
another two contracts relating to the Madrid-Badajoz rail project for EUR3.8bn. These
contracts joined the three HSR PPP projects already launched by the government in
2010 for EUR615m.
„
The troubled toll road sector. The viability of a number of recently developed toll road
concessions in Spain (see table below) has been compromised by the following issues:
1) operators’ insufficient cash flows as assets have seen traffic levels well below initial
traffic estimates; 2) heavy debt servicing costs; 3) higher expenses from land owner
compensation at the time of construction; according to the government these expenses
could amount to as much as EUR2bn vs the well below EUR500m initially paid.
Figure 23: Inventory of troubled toll road operators in Spain
R-2
Concessionaire
Shareholders
Henarsa
Globalvia - 10%
Abertis - 30%
ACS - 35%
Acciona - 25%
R-3 and R-4
Accesos de Madrid
Globalvia - 20%
Abertis - 35.1%
ACS - 19.7%
Sacyr - 25.16%
R-4
Madrid-Sur
Ferrovial - 55%
Sacyr - 35%
Caja Castilla La Mancha - 10%
M-12
Eje aeropuerto
OHL - 100%
AP-41
Madrid Toledo
Isolux, Comsa, Sando, Acvi, BES
AP-7 (Cartagena-Vera)
Aucosta
GlobalVia - 75%
AP-36 (Ocana-La Roda)
Madrid-Levante
Ferrovial - 52.25%
Sacyr - 40%
Budimex - 5%
Kutxa - 2.75%
AP-7 (Alicante)
Ciralsa
ACS - 50%
Abertis - 25%
Globalvia - 25%
Source: Deutsche Bank, Reuters, Company data
„
Page 14
What are contractors proposing? In January 2011, a three year compensation program
became effective. This program guarantees minimum revenues to these assets, which in
2011 should represent a EUR80m cash outflow for the government. However, the sector
is asking for a 20 year compensation account by which operators would get
compensation for traffic failing to meet a percentage of the initial traffic forecasts in the
concession contract. This would take demand risk out of the equation and allow the
companies to refinance assets. Assets like the R-3 and R-5 in Madrid only managed to
Deutsche Bank AG/London
19 August 2011
Building & Construction European Contractors
recently extend their current loans until October 2012. The sector’s proposal also
includes measures the government could use to fund the EUR120m estimated annual
compensation: 1) implementing an actual toll in existing shadow toll roads; 2) charging
trucks for infrastructure usage (as contemplated in the Eurovignette Directive).
„
Why is a long term solution important? Given the current budgetary constraints, a
recovery in Spanish infrastructure investment requires PPP-based initiatives like the PEI
to be fully supported by the contracting and banking sectors. However, the uncertainties
surrounding the government’s level of long term support to the mentioned troubled toll
road assets are a key obstacle to the development of PPP schemes.
2.10. Could PPPs revive the infrastructure construction market?...
Given the subdued short/medium term outlook for this particularly late cyclical segment,
many have referred to PPP/PFI projects as a way to mitigate the infrastructure gap in
developed economies. However, this market is also constrained by financing issues.
The European PPP market has historically been financed mainly by banks. Nonetheless, the
EPEC (European PPP Expertise Center) estimates that the banking market capacity for PPPs
could have shrunk by over 50% in 2009 compared to previous years (although tenors are
starting to lengthen again and margins to reduce). The obvious alternative, bond financing,
has been most prevalent in the UK, but is not well developed in the rest of Europe.
Consequently, the industry is searching for additional ways of financing: unwrapped bonds,
reviving monolines, state financing/guarantees, infrastructure debt funds, etc. It also needs to
be noted that there will be substantial refinancing needs in the 2012-15 period (five to seven
year bullet maturities of deals carried out at the peak of the cycle), which should put
additional pressure on the sector.
2.11. …and emerging markets?
The attractiveness of emerging markets is explained by their outperformance in terms of
GDP growth over the past 20 years, which according to IMF, should be expected to continue
in coming years. As the emerging market economies develop, construction demand and, in
particular, infrastructure needs increase materially.
Figure 24: Emerging vs developed market GDP growth
Figure 25: Cement consumption per capita
1,600
Saudi Arabia
10%
8%
1,400
6%
1,200
2010 cement consumption per capita
China
4%
2%
0%
-2%
1,000
South Korea
800
Iran
Egypt
Vietnam
Algeria
600
Turkey
Italy
Australia
Spain
Malaysia
Iraq
Morocco
Syria
400
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
-4%
Developed economies
Emergin market economies
Poland
Russia
Japan
Germany
France
ThailandRomania
Mexico
Brazil
Argentina
South
Africa
Colombia
Ukraine
Indonesia
The Philippines
India
Pakistan
Nigeria
200
Canada
USA
UK
0
0
10,000
20,000
30,000
40,000
50,000
2010 GDP per capita in USD (current prices)
Source: IMF, Deutsche Bank
Deutsche Bank AG/London
Source: Deutsche Bank
Page 15
19 August 2011
Building & Construction European Contractors
Figure 26: Developed vs emerging economies infrastructure ranking
Roads
Railroad
Port
Transport Electricity supply
Developed
economies
Germany
6
6
6
7
6
United States
14
14
14
14
14
Spain
28
21
33
24
18
United Kingdom
53
24
45
37
22
Italy
79
50
83
85
45
Czech Republic
59
36
53
48
26
Mexico
71
71
71
71
71
Russia
86
86
86
86
86
India
89
89
89
89
89
Argentina
94
94
94
94
94
127
56
121
97
48
Emerging economies
Poland
Source: Deutsche Bank, Global Competiveness Report 2009-2010 (World Economic Forum)
The key issue with contracting in emerging markets is risk management, which explains how
reluctant European contractors have historically been to materially increase their exposure to
these geographies. However, there are two markets, India and China, where the business
opportunity should be material in coming years.
Significant Indian opportunity but European players to follow a cautious approach
Business Monitor International expects India’s overall construction industry to grow at 8.6%
per annum on average between 2010/11 and 2015/16, with infrastructure being the main
driver of this growth and significantly outperforming the residential and non-residential
sectors. It also points out that infrastructure projects under construction or in the pipeline
currently are worth more than US$363bn and this excludes projects without cost estimates.
In the 2011/12 Budget, funding for infrastructure was increased by 23.3% over 2010/11. The
government set out aggressive plans to spend above USD1tr on infrastructure in the next 5-6
years.
„
Railways. Vision 2020 was introduced in 2010 and intends to add 25,000km of lines by
2020 and increase passenger train speed from 110-130kmph to 160-200kmph. The rail
budget 2011-12 envisages yearly investment in railways of over USD13bn going into
completing new lines, gauge conversion and the acquisition of rolling stock.
„
Roads. An ambitious target of building 20km of new roads every day (currently 5km)
was set by the government. The Golden Quadrilateral project is worth USD12bn and is a
part of the National Highways Development Project (started in 1998); most projects
should be completed by the end of 2015.
„
Ports. Around 90% of India’s foreign trade is carried out by sea and therefore ports are
of strategic importance to the country; it is predicted that major ports (with an utilisation
rate of around 90% already) will see an increase in traffic from 560m tonnes currently to
1.2bn tonnes by 2020. To meet this demand, the government is planning to upgrade port
capacity to 3.23bn tonnes by 2020 (963m currently). 23 contracts for port expansion
worth USD3.8bn are to be awarded in 2012.
„
Energy. 16 Ultra Mega Power Projects (UMPPs) have been identified and 4 awarded
(each has a capacity of about 4,000MW). India signed a nuclear power cooperation
contract with South Korea to build about 40 more power generating nuclear reactors by
2032 (currently has 20 in operation and 6 under construction).
Regarding the funding of these infrastructure plans, investors globally have shown interest in
funding Indian infrastructure projects (funds set up by Nomura, Kotak, Morgan Stanley as well
as USD7.4bn lending from Asian Development Bank to be spread out through 2011-13). The
government has also introduced measures to increase incentive for foreign/private
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Deutsche Bank AG/London
19 August 2011
Building & Construction European Contractors
investment in this area (tax exemption on income of foreign infrastructure fund; tax free
bonds; attractive TDS rate). The key issue at present is the potential for significant delays in
project implementation: 53% of the total projects in 2010 was behind schedule.
We have seen little activity in India so far from European contractors. Despite the material
pipeline we have just described and the willingness to provide financing from international
investors, risks are material leading us to expect a generally cautious approach from the
companies in our universe of coverage.
European contractors unlikely to enter China
There has been concern over the sustainability of the rapid growth in China’s construction
sector. However, although the country is aiming to transform the economy from exportdriven to domestic consumption driven, infrastructure remains a focus of the Government’s
12th 5-year plan (2011-2015), along with providing housing to meet growing demand from the
country’s urbanization progress. Therefore, although growth is likely to moderate there is still
significant scope for demand in this sector.
„
Railway. The total length of high speed railway should reach 45,000km by 2015 with
total investment in rail will at RMB746bn in 2011 and RMB3tr during 2011-2015 as the
network is extended in the western regions.
„
Road. A highway network suitable for the entire Chinese population by 2020 with total
length to reach 83,000km by 2015 (currently 74,000km). It is estimated that 74.1% of
China’s freight traffic and 94.5% of passenger volumes are transported by roads.
„
Aviation. Over RMB1.5tr investment in the aviation industry was outlined by the
Government including a rise in the number of airports from 175 to 220 over the next 5
years, including a new airport in Beijing.
„
Power. The country aims to increase non-fossil energy share to 15% in the energy mix
by 2020 and 1/3 by 2050. In hydropower, RMB400bn should be invested in building 4
hydroelectric dams of which 2 will be in operation within the next two years.
„
Residential: An affordable housing plan is intended to tackle people’s inability to buy
homes in cities with soaring property prices. The Government plans to build 10m units of
affordable housing this year and 36m units by 2015; these 10m units should require
RMB1.3tr-1.4tr investment, over RMB500bn of which will be funded by central and local
governments.
Key issues:
„
Local competition. There are over 100,000 contractors in operating in China and around
a quarter of the top 200 contractors worldwide are Chinese. The strong local players and
numerous barriers to entry (cultural, legal and financial) should make it relatively difficult
for international contractors to operate in China.
„
High government debt. According to China’s state auditor, by the end of 2010 local
governments had borrowed over RMB10tr. This raises the concern of local
governments’ ability to fund future projects as well as whether they will need a bailout in
the future.
2.12. Key construction sector indicators
Euroconstruct (Europe)
Euroconstruct is a group of local country research institutes and consulting organizations
today consisting of 19 member countries (including four Eastern European countries, Poland,
Slovakia, Czech Republic and Hungary). This is the most widely used benchmark for
European construction forecasts, both with investors and the industry, due to both its depth
Deutsche Bank AG/London
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19 August 2011
Building & Construction European Contractors
and breadth. As forecasts are done on a national level by the local construction associations it
has a greater chance of capturing the local market flavors and peculiarities. Forecasts are
published twice a year, during summer (usually July) and winter (usually December) at the
Euroconstruct conference.
Forecasts include both macro and demographic forecasts and construction growth forecasts
on a detailed level by type of work and building and also private and public work split. It also
includes cement growth forecasts.
There is no doubt that Euroconstruct is a useful tool for predicting the long-term industry
trends and obtaining market specific data on country level. However, as it is only published
twice a year, it tends to lag the actual market developments, especially in a rapidly changing
environment as the one experienced during 2008-2010. Despite this it is a good indicator of
the general market direction and as it is widely used by both investors and companies it is
the key tool for forecasting European construction markets.
Eurostat (Europe)
Eurostat is the only organization that provides monthly aggregated production (building and
civil engineering), building permits (non-residential and residential) and new orders (building
and civil engineering) data for the European Union member countries. The data is sourced
from the domestic statistical organizations and is the most comprehensive data set available
from a single source in Europe.
Data is released with a 2-4 months lag depending on the country compared to the more
timely US Census Bureau construction output data, released one month after the end of the
observation month. Also, national organizations can change their reporting standards which
can potentially lead to inconsistencies between different markets reducing the reliability of
the aggregated numbers.
Construction confidence (Europe)
Construction confidence data is available for most European countries on a monthly basis.
This series gives an indication of the current market environment for construction firms but
the correlation varies greatly by country. For France, for example, the correlation between
construction output and confidence is north of 60% whereas the same figure for Germany is
around 10%.
Figure 27: France - Construction output vs confidence
60
120
115
40
Figure 28: Germany - Construction output vs confidence
10
180
0
160
110
-10
140
100
-20
120
95
-30
100
-40
80
80
-50
60
75
-60
40
105
0
-20
90
-40
85
-60
Mar-90
Jan-91
Nov-91
Sep-92
Jul-93
May-94
Mar-95
Jan-96
Nov-96
Sep-97
Jul-98
May-99
Mar-00
Jan-01
Nov-01
Sep-02
Jul-03
May-04
Mar-05
Jan-06
Nov-06
Sep-07
Jul-08
May-09
Mar-10
Jan-11
-80
Construction confidence index (LHS)
Source: Datastream
Construction output index (RHS)
Jan-91
Oct-91
Jul-92
Apr-93
Jan-94
Oct-94
Jul-95
Apr-96
Jan-97
Oct-97
Jul-98
Apr-99
Jan-00
Oct-00
Jul-01
Apr-02
Jan-03
Oct-03
Jul-04
Apr-05
Jan-06
Oct-06
Jul-07
Apr-08
Jan-09
Oct-09
Jul-10
Apr-11
20
Construction confidence index (LHS)
Construction output index (RHS)
Source: Datastream
Architecture Billings Index (US)
The Architecture Billing Index (ABI) is the most important leading indicator for the nonresidential construction market in the US. It is a diffusion index compiled from the monthly
Page 18
Deutsche Bank AG/London
19 August 2011
Building & Construction European Contractors
Works-on-the-boards survey conducted by AIA Economics & Market Research Group. The
survey is conducted by asking architecture firms whether their billing have increased,
decreased or stayed unchanged in the month that just ended. As the charts below clearly
show, it leads the US non-residential construction activity by approximately 9-12 months. A
billings reading above 50 indicates growth and below 50 contraction. The relationship
between billings and non-residential construction activity is clear as it represents the lag
between the award of the design contracts and the construction contact. ABI also includes
an inquiries index, but it is more volatile and therefore has less predicting power.
Figure 29: ABI vs. non-residential construction output
Figure 30: ABI by subsector
40%
65
30%
60
70
65
60
45
40
40
35
-30%
35
30
-40%
30
US Private non residential YoY grow th lagged 12m
Source: AIA, Deutsche Bank
Residential
ABI Billings
Commercial/ Industrial
Dec-10
Jun-09
Mar-10
Sep-08
Dec-07
Jun-06
Mar-07
Sep-05
Dec-04
Jun-03
Mar-04
Sep-02
Dec-01
25
Dec-95
Feb-96
Sep-96
Apr-97
Nov-97
Jun-98
Jan-99
Aug-99
Mar-00
Oct-00
May-01
Dec-01
Jul-02
Feb-03
Sep-03
Apr-04
Nov-04
Jun-05
Jan-06
Aug-06
Mar-07
Oct-07
May-08
Dec-08
Jul-09
Feb-10
Sep-10
Apr-11
-20%
Jun-00
-10%
50
Mar-01
45
Sep-99
0%
55
Dec-98
50
Jun-97
10%
Mar-98
55
Sep-96
20%
Institutional
Source: AIA
Portland Cement Association (US)
The PCA is the main association of cement companies in North America (USA and Canada).
Its Economic Research department provides detailed national construction and cement
consumption forecasts three times a year (spring, summer and winter) as well as forecasts
and rankings by state.
It needs to be noted that the PCA forecasts have the same limitations as those of
Euroconstruct as it also tends to lag the market in volatile periods.
US Census Bureau (US)
The US Census bureau is a federal organization collecting data on the US’ population and
economy. On the construction front it provides very useful monthly series on housing starts,
and new home sales. The National Association of Realtors also provides monthly information
on existing home sales and pending home sales.
Deutsche Bank AG/London
Page 19
19 August 2011
Building & Construction European Contractors
3. Concessions, the obvious
way to diversify
3.1. Why did contractors move on to infrastructure concessions?
As we have already highlighted in the first section of the report, the strong cash flow
generation of the contracting business and the net cash positions that originally characterised
contractors' balance sheets implied that companies looked for new businesses to invest in. It
needs to be highlighted that a good number of these companies had strong shareholders
who were not interested in the companies returning capital.
Besides contractors' balance sheet health, three additional catalysts triggered the search for
concession assets: 1) the governments' constrained finances leading to a wider use of
infrastructure concessions; 2) the increasing availability of very cheap financing during the
previous decade; 3) search for a less cyclical profile.
3.2. What is a concession?
A concession is a contract between a public entity and a private operator for the provision of
a public service or the operation of a public asset. The contract does not only contain the
economic terms of the service but also regulates all aspects of the relationship between the
public entity (grantor) and private operator (concessionaire). Concession contracts have
varying lengths depending, amongst other things, on the nature of the service and the life
cycle of the associated assets. Toll road concessions exhibit the longest lives with up to 100
years in extreme cases (averaging 25-30 years); public services such as hospitals, water
distribution or urban waste collection have shorter lives ranging from 1 to 20 years.
The Public-Private-Initiatives (PPP) concession contracts in which European contractors are
active in can be divided into
„
Demand risk concessions. These are concessions where the operator gets paid by the
concession user. Toll roads are the key example as drivers pay a toll for the distance
travelled.
„
Availability concessions. These are concessions where the grantor pays the operator a
fixed amount for providing a public service at the required level of quality. Hospitals,
schools or prisons are good examples of availability concessions.
Regulatory considerations
PPP concessions are regulated by the contract itself and terms cannot be changed
unilaterally by either the grantor or the operator. Any disagreement about the terms of the
concessions is, therefore, solved in court.
It needs to be highlighted that there are some infrastructure assets where, despite the
similarities with concessions, there is no concession contract as the operator owns the asset
(BAA’s Heathrow). In these cases, there is proper regulation unilaterally set by a regulator in
consultation with the involved parties.
3.3. The inflation hedge
PPP concessions are generally characterized by some degree of inflation indexation of
revenues. Although it is difficult to generalize, transport infrastructure assets, for example,
usually see their tariffs updated every year by a multiple of inflation (from 70% to 100%
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Deutsche Bank AG/London
19 August 2011
Building & Construction European Contractors
being the most common in developed markets). In some cases, a fixed component can be
added to the formula to enhance returns in exchange for additional investments (French toll
roads).
There is an extreme example, the 407-ETR in Toronto, where tolls can be raised way beyond
inflation as long as traffic does not decline below certain thresholds as a result. Real tariff
growth is a way of making assets more attractive for potential operators.
3.4. The traffic element in demand risk concessions
GDP, the key traffic driver
In exemplifying long-term traffic trends and correlations, we use US data given the long
history available. The correlation between growth in US annual miles travelled and GDP
growth is 0.75 measured annually since 1970. Despite the fact that correlation stays above
0.70 throughout the period, the GDP growth multiplier falls from slightly above 0.6x in 19702008 to slightly below 0.5x GDP in 1990-2008 (see the following charts). The higher GDP
growth multiplier in the early years can be explained by a proportionately higher growth in
average American’s well-being, increasing number of vehicles per household, higher number
and length of trips (families moving to larger homes in the suburbs).
Figure 31: US GDP growth vs annual miles travelled
8%
Figure 32: Traffic, income and population growth (US)
250%
6%
200%
4%
150%
2%
0%
100%
-2%
50%
-4%
-6%
0%
197019721974197619781980198219841986198819901992199419961998200020022004
US GDP growth YoY
US annual vehicle miles travelled
Source: Datastream, Deutsche Bank
Population
Real Personal Income
Passenger VMT
Source: RITA
Other traffic drivers
Deutsche Bank AG/London
„
Consumer confidence. Not surprisingly passenger traffic is positively correlated to
consumer confidence as it increases spending.
„
Disposable income growth. A higher level of income translates into more holiday trips,
more trips to shopping areas and increased new car sales.
„
New car registrations. A higher number of vehicles on the roads also feeds traffic.
„
Fuel prices have a negative correlation with traffic as trips become more expensive.
„
Seasonal factors and weather. Different distribution of national holidays from the
previous year can have a material impact on quarterly traffic growth statistics (not on full
year figures). Bad weather, especially harsh and long winters, can have a particularly
negative impact on traffic.
„
New sections to existing roads and ramp-up periods. Road extensions or new
junctions, for example, boost traffic immediately on mature roads. Traffic growth tends
to be quite material during the ramp-up period of new roads.
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19 August 2011
Building & Construction European Contractors
Figure 33: Correlation analysis with key drivers of traffic (1980-2010)
Fuel prices
New car
registrations
GDP
Consumer
confidence
Disposable
income
growth
Population
growth
Real
disposable
income
Overall annual vehicle miles driven
-0.26
0.53
0.69
0.54
0.21
0.13
0.52
Overall monthly vehicle miles driven
-0.36
0.46
0.62
0.44
0.27
0.06
0.53
Overall annual vehicle miles driven, excl 2008-2010
-0.49
0.49
0.64
0.43
-0.07
0.06
0.43
Overall monthly vehicle miles driven, excl. 2008-2010
-0.53
0.45
0.61
0.35
0.11
0.00
0.47
Source: Deutsche Bank
Industrial production the key driver for heavy goods traffic
Heavy goods traffic (HGV) is more cyclical than light vehicle traffic (LVT), as the goods
transported on trucks are more exposed to industrial cycles and hence destocking and
restocking cycles. The figure below clearly shows the high correlation between HGV traffic
growth and the change in industrial production for APRR in France (partly owned by Eiffage).
Figure 34: Heavy traffic vs industrial production in APRR
15%
Figure 35: US - Heavy vs light vehicle traffic growth
10.0%
8.0%
10%
6.0%
5%
4.0%
0%
2.0%
0.0%
-5%
-2.0%
-10%
-4.0%
-15%
-6.0%
-8.0%
HGV
Source: Deutsche Bank, Company data
-10.0%
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Q1 2005
Q2 2005
Q3 2005
Q4 2005
Q1 2006
Q2 2006
Q3 2006
Q4 2006
Q1 2007
Q2 2007
Q3 2007
Q4 2007
Q1 2008
Q2 2008
Q3 2008
Q4 2008
Q1 2009
Q2 2009
Q3 2009
Q4 2009
Q1 2010
Q2 2010
Q3 2010
Q4 2010
Q1 2011
Q2 2011
-20%
Trucks mileage
Industrial production
Passanger cars mileage
Source: Datasteram
3.5. Very particular financial structures
Although we will later describe in more detail the financing terms of PPP concessions, it is
important to briefly comment on the very particular financial structure of these assets. The
relatively high predictability of cash flows in PPPs results in high gearing structures where
financial debt can range from 50% to 100% of the initial investment.
The European PPP market has historically been financed mainly by banks as the obvious
alternative, bond financing, has been most prevalent in the UK, but is not well developed in
the rest of Europe. Even if the sector counted on a more developed bond market, it would be
unlikely to see bond investors actively participating in greenfield projects with any degree of
demand risk.
The industry is searching for additional ways of financing: unwrapped bonds, reviving
monolines, state financing/guarantees, infrastructure debt funds, etc.
3.6. The accounting of concessions
The International Financial Regulation Standards (IFRS) contemplate two types of Service
Concession Arrangements according to whether the concessionaire operators a financial or
an intangible asset.
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Deutsche Bank AG/London
19 August 2011
Building & Construction European Contractors
„
In the case of financial assets, the operator constructs or upgrades a public sector
asset, maintains and operates it for a certain period of time, and, in return, receives from
the government a specified amount of cash or another financial asset. In addition, the
government guarantees to pay any shortfall between amounts received from users and
the specified amounts. Examples of this are hospital or school concessions.
„
When the operator receives an intangible asset, it is entitled to charge for the use of
the public service. However, this is not an unconditional right to receive cash, because
the amounts are subject to demand for the service. The key example of this are toll
roads.
Consequently, IFRS considers two accounting methods for the valuation of the concessions.
„
The Financial Asset Model. The grantor pays the operator for the services provided.
The operator recognises a financial asset, attracting interest, in its balance sheet, in
consideration for the services it provides (designing, building, operation or maintenance).
Such financial assets are recognised in the balance sheet under Loans and receivables,
for the amount of the fair value of the infrastructure on first recognition and subsequently
at amortised cost. The receivable is settled by means of the grantor’s payments
received. A financial income calculated on the basis of the effective interest rate,
equivalent to the project’s internal rate of return, is recognised under operating income.
The financial asset is accounted for according to the IAS 39 Financial Instruments:
Recognition and Measurement. The revenue and costs are recognised according to IAS
18 Revenue and IAS 11.
„
The Intangible Asset Model. The users pay the operator for the services provided. The
right to receive toll payments (or other remuneration) is recognised in the concession
operator’s balance sheet under concession intangible assets. This right corresponds to
the fair value of the asset under concession plus the borrowing costs capitalised during
the construction phase. It is amortised over the term of the arrangement in a manner
that reflects the pattern in which the asset’s economic benefits are consumed by the
entity, starting from the entry into service of the asset. The intangible asset is accounted
for according to the IAS 38 Intangible Assets.
3.7. Greenfield vs brownfield
The fact that the operation of mature toll roads is, in essence, a low risk business does not
imply that the full infrastructure asset cycle is exempt from risks. To the contrary, we can
easily identify four key risks during the life of a greenfield project:
Deutsche Bank AG/London
„
Financing risk. Once a concession has been awarded to an operator, the financing of
the project has to be closed in similar terms to those assumed by the operator in the
bidding process.
„
Development risk. The construction of toll roads has to be carried out on schedule and
on budget in order to avoid altering the economic balance of the concession in
subsequent years. Higher than expected construction costs or delays can have a material
impact on the IRR of the project.
„
Traffic risk. As it has been demonstrated by the troubled Spanish toll roads, traffic is a
particularly difficult variable to estimate in greenfield concessions. Although it is unusual,
there are instances in which actual traffic can be a double digit figure below initial
expectations.
„
Refinancing risk. Given the previous risks, greenfield toll road projects are initially
financed with bank debt that, as they mature, should be substituted by more suitable
bond financing. These refinancing milestones introduce an element of material
uncertainty as changes in financial market conditions can lead to very different terms or
simply the impossibility of raising sufficient debt.
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19 August 2011
Building & Construction European Contractors
3.8. Infrastructure market players
Contractors, the developer role
European contractors are the only sector players that are present in the full infrastructure
cycle. They participate in the financing of the project, its construction, its operation and the
eventual disposal. We believe that this developer role gives contractors a clear advantage
over other sector players as they can obtain higher returns from the project by assuming
more risk than plain vanilla operators. As we stated in earlier sections, controlled risk taking is
an integral part of contractors’ business model.
Plain-vanilla infrastructure operators
Although a significant part of the traded plain vanilla transport infrastructure sector has been
acquired by European contractors (BAA and Cintra by Ferrovial, APRR by Vinci and APRR by
Eiffage), there are still several traded players active in the sector (Abertis, Atlantia and the
different airport operators).
It is important to note, however, that these companies are rarely involved in the development
of greenfield assets other than as financial partners with minority stakes. Therefore they
should be considered as brownfield players.
The role of infrastructure funds…
Infrastructure funds first appeared in the mid1990s in Australia, followed by the UK and then
Europe in the 2000s. These funds were structured as Limited Partnerships and worked like
Private Equities. The Fund manager, called General Partner, collected the money from
investors (Limited Partners) and invested in assets on their behalf.
The infrastructure fund market developed significantly before the recession. According to
Preqin, the average size of infrastructure funds increased from USD159m in 2003 to
USD3.3bn in 2008. Fund raising saw its peak in 2007 and then experienced a sharp decline in
2009, which triggered a wave of divestments in order to reduce leverage.
However, the appeal of this asset class has again started to attract new investors. Fund
raising improved in 2010 and the positive trend is expected to continue given the high
number of funds on the road.
...and pension funds
In addition to infrastructure funds, pension funds are also becoming quite active in the
infrastructure space. How infrastructure construction will be financed in the next few years
remains a key issue in the current environment of austerity. The OECD published a report in
June (Strategic Transport Infrastructure Needs to 2030) in which the role of pension funds in
infrastructure financing was discussed in detail. The OECD highlighted that the life span of
infrastructure concessions matches the long-term returns sought by pension funds, and that
the relatively stable returns of these projects can act as hedge against the volatility of more
traditional asset classes. Given the expectations of even more constrained traditional sources
of financing for infrastructure projects, the OECD believes that pension funds could help to fill
the gap between what governments/traditional funding sources can provide and the
estimated EUR35tr in infrastructure requirements before 2030.
An undersupplied secondary infrastructure market
The material number of players in the secondary infrastructure market implies that there is
currently sound demand for these relatively scarce assets, which should keep IRRs at
relatively low values. We believe we should expect brownfield availability concessions to be
exchanged at mid to high single digit IRRs and brownfield demand-risk concessions at high
single digit to low double digit IRRs. This implies that for a demand risk concession operator
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Deutsche Bank AG/London
19 August 2011
Building & Construction European Contractors
to obtain an IRR well into double digit territory, it needs to assume development risk
(greenfielding).
3.9. Overview of the key developed PPP markets
The following information was obtained by taking a sample of PPP projects for each country
and using this sample as an estimate of the infrastructure credit conditions in each
geographical area. We also used the project data to estimate the value and number of
transactions that reached financial close from 2004 to 2010.
Figure 36: Historical value and # of PPPs in Europe
Figure 37: Avg. project finan. spread above benchmark
35000
160
30000
140
410
360
120
25000
310
100
20000
EURm
80
260
bps
60
210
40
160
15000
10000
5000
20
110
0
0
60
2004
Value of projects (Left axis)
2005
2006
2007
2008
2009
2010
Number of projects (Right axis)
France
Portugal
UK
Spain
Italy
Source: Deutsche Bank, EIB
Source: Deutsche Bank, InfraNews
Figure 38: Share of European deals (Sep 2010 YTD)
Figure 39: Europe’s PPP deals by country (Dec ‘10 YTD)
Telecom
5%
EUR m
Public Order
and Safety
6%
Environment
1%
Education
34%
General
Public
Services
16%
5000
4500
4000
3500
3000
2500
2000
1500
1000
500
0
50
45
40
35
30
25
20
15
10
5
0
value
number of deals
Healthcare
17%
Transport
21%
Source: Deutsche Bank, EPEC
Deutsche Bank AG/London
Source: Deutsche Bank, EPEC
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19 August 2011
Building & Construction European Contractors
Figure 40: Value (EURbn) of PPP pipeline by phase
Figure 41: Same as left but excl. pre-launch / on hold
160
70
140
60
120
50
100
80
40
60
30
40
20
20
10
0
UK
Spain
Portugal
Italy
Germany
France
US
Pre- Launch
Transaction launch
Pre- qualified proponents
Shortlisted proponents
Bids
Preferred proponents
0
UK
Spain
Transaction launch
Bids
On hold
Source: Deutsche Bank, InfraNews
Portugal
Italy
Germany
France
US
Pre- qualified proponents
Shortlisted proponents
Preferred proponents
Source: Deutsche Bank, InfraNews
US, an underdeveloped PPP market with limited visibility on pipeline
The US PPP market is much less developed relative to Europe. There are still numerous
cultural, legal, tax and financing hurdles preventing it from taking off. Our analysis shows that
the number and value of PPP projects has gone up vs previous years but still remains very
low compared to the potential size of the market. Unfortunately, there is no available
information on financing terms.
Figure 42: US- Value and # of greenfield PPP projects
Figure 43: US- Value and # of brownfield PPP projects
6
7000
12
6000
5
6000
10
5000
8
4000
6
3000
4
2000
1000
2
1000
0
0
5000
4
4000
3
3000
2
2000
1
0
2004
2005
2006
2007
Value of projects (RHS)
Source: Deutsche Bank, InfraNews
2008
2009
2010
# Projects (LHS)
0
2004
2005
2006
2007
Value of projects (RHS)
2008
2009
2010
# Projects (LHS)
Source: Deutsche Bank, InfraNews
If we take the full public infrastructure project pipeline in the US, we get to a total project
value of USD150bn, however, if we deduct the projects in pre-launch phase as well as those
on hold, we get a pipeline of USD39bn between the transaction launch and preferred bidder
phases. Although the figure is material, there is limited visibility on timing especially in the
current market circumstances.
UK: A well developed PPP market with significant pipeline but some question marks
Despite the PPP market deceleration caused by the economic downturn, the volume of UK
infrastructure projects has been material compared to the rest of geographies in our analysis.
In addition, if we look at the pipeline figures, it is the largest if we again exclude pre-launch
transaction and on-hold projects. However, we need to take into account that post-CSR, the
government’s concerns about PPPs were evident. This could have an impact on the
materialization of the said pipeline.
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Deutsche Bank AG/London
19 August 2011
Building & Construction European Contractors
UK’s financial terms for PPP projects are very interesting. We clearly see that spreads over
benchmark in project finance financing have gone up vs recent history, but the equity
contributions from developers (as a percentage of total investment) have remained virtually
unchanged.
Figure 44: UK- Value and # of greenfield PPP projects
80
70
Figure 45: UK- Value and # of brownfield PPP projects
12000
12
10000
10
8000
8
6000
6
25000
20000
60
50
15000
40
GBPm
10000
30
4000
4
2000
2
0
0
20
10
0
2004
2005
2006
2007
2008
Value of projects (RHS)
2009
5000
0
2005
2010
2006
2007
2008
Value (LHS)
# Projects (LHS)
Source: Deutsche Bank, InfraNews
2009
2010
Number (RHS)
Source: Deutsche Bank, InfraNews
Figure 46: Estimated average spread over Libor and capital structure 2004-2010
100%
300
90%
250
80%
70%
200
60%
bps
50%
150
40%
100
30%
20%
50
10%
0
0%
2004
2005
2006
% Equity (RHS)
2007
% Debt (RHS)
2008
2009
2010
Spread (bps)
Source: Deutsche Bank, InfraNews
French PPP market: Gathering some momentum but still relatively small
Although France has not historically had a big PPP market (despite its large toll road
operators), the last years have seen an increasing number of projects (with the exception of
2009). The equity committed in these projects has been rising in the last years but does not
seem to be at worryingly high levels. Proof of the French government’s commitment to PPPs
is provided by its three high speed rail links (at various stages of advanced development).
Deutsche Bank AG/London
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19 August 2011
Building & Construction European Contractors
Figure 47: Number and value of greenfield PPP projects
14
2500
Figure 48: Estimated average capital structure 2004-10
100%
90%
12
80%
2000
10
70%
60%
1500
8
EURm
6
1000
50%
40%
30%
4
500
2
20%
10%
0
0
2004
2005
2006
Value of projects (RHS)
2007
2008
# Projects (LHS)
2009
0%
2004
2010
2005
2006
% Equity
Source: Deutsche Bank, InfraNews
2007
2008
2009
2010
% Debt
Source: Deutsche Bank, InfraNews
Portugal: Deteriorated financial terms and increased sovereign risk are key concerns
Although the market seems to register a higher level of activity than in the past, the
increasing spreads combined with the significant sovereign risk issues raises concerns about
the attractiveness of potential projects. In terms of pipeline, Portugal is the smallest of our
sample and future projects could be quite negatively affected by the adverse financial terms.
Figure 49: Number and value of greenfield PPP projects
Figure 50: Estimated avg spread over Euribor 2004-10
8
4000
400
7
3500
350
6
3000
5
2500
4
2000 EURm
3
1500
2
1000
1
500
0
0
300
250
bps 200
150
2004
2005
2006
2007
Value of projects (RHS)
Source: Deutsche Bank, InfraNews
2008
2009
2010
# Projects
100
50
0
2008
2009
2010
Source: Deutsche Bank, InfraNews
German PPP market does not take off
The limited amount of information available as well as the very few projects convey a clear
message on German PPPs. Although the government had clear longer term targets in terms
of the weight of private procurement in public investment (to be increased to double digit
percentage contribution from low single digit), the cultural and tax hurdles have prevented a
noticeable development of the sector. As in the case of the US, there is no visibility on
financial terms.
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Deutsche Bank AG/London
19 August 2011
Building & Construction European Contractors
Figure 51: Number and value of greenfield PPP projects
Figure 52: No. and value of brownfield PPP projects
9
8000
3.5
4000
8
7000
3
3500
7
6000
6
5000
5
3000
2.5
2500
2
2000 EURm
4000EU Rm
4
1.5
1500
3000
3
2000
2
1000
1
0
2005
2006
2007
2008
Value of projects (RHS)
2009
1000
0.5
500
0
0
2004
1
0
2004
2010
2005
2006
2007
2008
Value of projects (RHS)
# of projects (LHS)
Source: Deutsche Bank, InfraNews
2009
2010
# of projects (LHS)
Source: Deutsche Bank, InfraNews
Spain: uncertainties around the Extraordinary Infrastructure Plan
Spain’s PPP market should be negatively impacted going forward by sovereign risk concerns
and their effect on financing spreads. Although we have already discussed it in this report, it
is important to note that the success of the government’s Extraordinary Infrastructure Plan
(PEI), which envisages EUR17bn of PPP-based investments in transport infrastructure in
2011-2012, will depend on the level of support from potential investors and financial
institutions; at the moment there is limited visibility on this front.
Figure 53: Number and value of greenfield PPPs
25
Figure 54: : Estimated avg spread over Euribor
350
8000
7000
20
300
6000
250
5000
15
200
4000 EU Rm
bps
10
3000
150
2000
5
100
1000
0
0
2004
2005
2006
2007
Value of projects (RHS)
Source: Deutsche Bank, InfraNews
Deutsche Bank AG/London
2008
2009
2010
# of projects (LHS)
50
0
2004
2005
2006
2007
2008
2009
2010
Source: Deutsche Bank, InfraNews
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19 August 2011
Building & Construction European Contractors
Italy: Similar trends to the preceding countries
Figure 55: Number and value of greenfield PPP projects
14
Figure 56: Estimated average spread over Euribor
2500
300
2000
250
12
10
1500
8
EURm
6
200
150
1000
4
100
500
2
50
0
0
2004
2005
2006
2007
Value of projects (RHS)
Source: Deutsche Bank, InfraNews
2008
2009
2010
# of projects (LHS)
0
2004
2005
2006
2007
2008
2009
2010
Source: Deutsche Bank, InfraNews
In conclusion
The previous figures evidence that the PPP business model has been damaged by the
downturn as financing costs have increased and the potential leverage of projects declined.
In addition, we have seen increasing concerns about the long term viability of PPPs as a
more meaningful public procurement method than what it is today.
We believe that, although the PPP system might have its flaws, it is the way forward as it is
probably the only efficient way governments have not to overburden their budgets with
necessary infrastructure investment.
3.10. The role of emerging markets in concessions
Although emerging markets are conceptually an obvious area of future concession
development for contractors, companies have not been particularly active in these
geographies. The reason for this is that developed markets have historically offered good
opportunities on the concession front. However, the current environment implies that
companies will have to more closely look at emerging markets.
OHL, an interesting case study
In contrast with the other European infrastructure companies, OHL’s growth strategy has
been strongly driven by emerging market concessions in Latin America. In 2010 Latin
American concessions accounted for roughly 70% of OHL’s EBITDA with Brazil and Mexico
being the key drivers. The decision to seek growth from Latin America was a long-term
strategic decision taken in the early 2000 for two key reasons, the significant long-term
potential of these emerging countries as well as their attractive risk-reward profile.
OHL implemented a gradual expansion strategy in order to minimize risks, as understanding
the local market and the regulatory framework are absolute musts. In Brazil OHL started off
by acquiring a 9% stake in one concession and gradually building up a larger stake as well as
adding new concessions. In Mexico, OHL already had presence as a contractor and then
gradually started expanding into concessions.
The flotation of its two key Latin American subsidiaries, OHL Brasil and OHL Mexico, has
been the final stage in the company’s value creation strategy in emerging markets. It has
allowed OHL to capitalize on its investments by 1) offering a valuation benchmark for these
assets, 2) allowing both subsidiaries to become self-sufficient in terms of both operations
and financing, 3) providing cash proceeds from the flotation (as well as an exit strategy) and
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Deutsche Bank AG/London
19 August 2011
Building & Construction European Contractors
4) increasing the local company perception thanks to the listing (which is beneficial when
negotiating with governments and gaining local support for projects).
3.11. Valuation of PPP concessions
DCF is the key methodology
The good cash flow visibility of concession projects, the relatively low capex requirements
and the high dividend payouts imply that shareholders often use dividend discount models
(also known as discounted cash to equity models).
It needs to be noted that the finite life of concessions imply that DCFs are built for the entire
life of assets and, therefore, there is no residual value. The key consequence of this is that
while the NAV increases as we approach the years of strongest cash flow generation, it also
declines rapidly in the years before maturity.
The key criticism against this methodology is that the very long life of the assets raises
questions about the validity of the business model (transport technology changes in the case
of toll road concessions), the credibility of traffic assumptions in demand-risk concessions or
refinancing risks. This implies that equity markets have been historically reluctant to value
PPP concessions at their full DCF value.
While the previous concerns are understandable, it needs to be noted that PPP concession
transactions in the secondary market have been taking place at above equity-market
valuations, which has increased investors’ level of comfort with the DCF approach. Also, let’s
not ignore the fact that concessions DCF model can be built on conservative assumptions of
accelerated debt repayment and reasonable traffic figures in order to limit valuation
downside.
Why not earnings multiples?
As evidenced by the charts in the section on financial structure scenarios, given the very
particular nature of the business, the EV/EBITDA multiples of concessions change very
dramatically throughout their lives, from double digit in the initial years to negligible in the
final years. Consequently, companies with different number of years left until the end of their
concessions will be simply not comparable from an earnings multiple perspective.
We would highlight, however that earnings multiples are still used by investors on account of
the concerns expressed above.
Deutsche Bank AG/London
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19 August 2011
Building & Construction European Contractors
Figure 57: Atlantia, Abertis and Brisa – Average 12 month prospective EV/EBITDA
14.0
13.0
12.0
11.0
10.0
9.0
8.0
7.0
6.0
EV/EBITDA
Avg
+1stdv
Aug 11
Aug 10
Aug 09
Aug 08
Aug 07
Aug 06
Aug 05
Aug 04
Aug 03
Aug 02
Aug 01
5.0
-1stdv
Source: Deutsche Bank
Building a theoretical toll road earnings/valuation model
In order to evidence the key valuation drivers of concessions we have built an
earnings/valuation model of a theoretical toll road concession. The detailed earnings of our
different scenarios can be found in the Appendices section of this report but the following
tables and charts summarise the key assumptions.
In our model we calculate the IRR against the initial construction investment for the project
and for the equity. Obviously the high level of financial leverage allows the equity IRR to be
materially higher than the project IRR. If we considered this a brownfield project acquired at
more than 1x book value, the equity and project IRRs would be materially lower.
Three financial structure scenarios with material impact on equity IRRs
Obviously the financial structure does not impact the project IRR but when it comes to the
equity IRR, the structure has a decisive impact. We have built three versions of our model:
Figure 58: Our different financial structure scenarios
Equity IRR
NVP of equity on 8% cost of
equity
Project IRR
Aggressive scenario
16.6%
337
8.6%
Base case scenario
13.0%
292
8.6%
Conservative scenario
11.6%
269
8.6%
Source: Deutsche Bank
„
Page 32
Aggressive scenario. In this scenario we assume that the concession does not repay its
debt until the final years. This obviously implies that the asset will have to refinance its
debt at some point with the associated cost of debt risk. An obvious exception to this
would be a concession with bond financing matching the maturity of the asset. In this
scenario the equity IRR is maximised as the dividend stream is quite significant in the
first half of the life of the asset. Our theoretical concession would have a 16.6% IRR,
compared to a project IRR of 8.6%.
Deutsche Bank AG/London
19 August 2011
Building & Construction European Contractors
Figure 59: Aggressive scenario - Net debt vs dividend
Figure 60: Aggressive scenario – NPV of eq vs net debt
400
900
350
800
300
700
600
250
500
200
400
150
300
100
200
50
100
0
-50
0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Net debt
1
-100
2
3
4
5
Dividend
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Net debt
NPV of equity
Source: Deutsche Bank
Source: Deutsche Bank
Figure 61: Aggressive scenario – P&L structure
Figure 62: Aggressive scenario – EV/EBITDA
25
200
20
150
15
100
10
50
5
0
1
2
3
4
5
-50
Operating expenses
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
-5
Depreciation
Financial expenses
Taxes
Attributable profit
Source: Deutsche Bank
EV/EBITDA
Source: Deutsche Bank
„
Base case scenario. In this scenario we assume the gradual repayment of debt
throughout the life of the concession which still gives a reasonable dividend stream in
the first half of the life of the asset but reduces refinancing risks. The equity IRR of our
theoretical concession would be 13.0%, compared to a project IRR of 8.6%.
Figure 63: Base case - Net debt vs dividend
Figure 64: Base case – NPV of equity vs net debt
400
800
350
700
300
600
250
500
200
400
150
300
100
200
50
100
0
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Net debt
Source: Deutsche Bank
Deutsche Bank AG/London
1
2
3
4
5
6
7
8
Net debt
Dividend
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
NPV of equity
Source: Deutsche Bank
Page 33
19 August 2011
Building & Construction European Contractors
Figure 65: Base case – P&L structure
Figure 66: Base case – EV/EBITDA
200
25
150
20
15
100
10
50
5
0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
0
1
-50
Operating expenses
Depreciation
Financial expenses
Taxes
2
3
4
5
6
7
8
Attributable profit
Source: Deutsche Bank
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
EV/EBITDA
Source: Deutsche Bank
„
Conservative scenario. If we conservatively assume that debt has to be fully repaid
before any dividend is paid to the shareholders, the resulting equity IRR is obviously
lower than in our previous scenarios.
Figure 67: Conservative scenario - Net debt vs dividend
Figure 68: Conservative scenario – NPV of eq vs net debt
400
700
350
600
300
500
250
400
200
300
150
200
100
100
50
0
0
-50
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Net debt
1
-100
2
3
4
5
Dividend
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Net debt
NPV of equity
Source: Deutsche Bank
Source: Deutsche Bank
Figure 69: Conservative scenario – P&L structure
Figure 70: Conservative scenario – EV/EBITDA
200
25
150
20
15
100
10
50
5
0
1
2
3
4
5
-50
Operating expenses
Source: Deutsche Bank
Page 34
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
0
1
Depreciation
Financial expenses
Taxes
2
3
4
Attributable profit
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
EV/EBITDA
Source: Deutsche Bank
Deutsche Bank AG/London
19 August 2011
Building & Construction European Contractors
Sensitivities to changes in key variables
Besides the financial structure of the project, the equity IRR is significantly impacted by traffic
growth, inflation and cost of debt assumptions. The following table shows the variations for
our base case scenario.
Figure 71: base case scenario – IRR and equity value sensitivities
IRR
Equity value
Base case
13.0%
292
Change in equity value
1% more traffic growth every year
14.5%
358
22.6%
1% higher inflation every year
14.0%
336
15.1%
1% higher cost of debt
12.4%
278
-4.8%
Source: Deutsche Bank
Deutsche Bank AG/London
Page 35
19 August 2011
Building & Construction European Contractors
4. Other forms of
diversification
4.1. The rationale behind other forms of diversification
Once companies had explored and invested in the concession space extensively, they looked
for additional forms of diversification.
„
Some businesses are in companies’ portfolios for historical reasons. Activities like
cement or real estate development are good examples.
„
Other activities intended to provide exposure to the full contracting cycle through
engineering (pre-construction) and maintenance (post construction) activities.
„
Companies have also invested in other concession-based or regulated activities where
the grantor is a client they know well: public authorities. Public services concessions or
renewable energy assets are good examples of this.
4.2. Engineering / Professional Services
Professional services mainly focus on the design and planning of new construction projects
and, therefore, most of the work is done off-site in an office. It also does some program
management where it could supervise a construction project for example. The main
difference with contracting is that billing is based on worked man-hours clearly mitigating the
risks compared to contracting. The model is asset heavier than pure contracting also
explaining the higher margins together with the highly skilled employees needed. For Balfour
Beatty, for example, professional services net assets in 2010 accounted for 16% of sales; the
company targets much higher EBITA margins of 6-7%.
Risk transferral
In the contracting model the construction company which has been awarded a construction
project has the obligation to fulfil the agreement by delivering the agreed asset. Whether it
does the work itself or uses a subcontractor is irrelevant to the client. From a risk perspective
this means that if the subcontractor defaults or fails to fulfil its obligations the contractor will
be responsible to the client. In professional services the contractor gets paid by the hour so
cost overruns are not an issue as the additional work will be added to the final bill.
4.3. Cement and other heavyside materials
European contractors’ presence in the road building sector is usually associated to exposure
to aggregates production. Companies like Vinci, Eiffage or Strabag try to secure raw material
supply in order to minimize risk in their road contracting activities.
FCC also has exposure to the cement business but not due to a vertical integration strategy
but for historical reasons. Cementos Portland’s material domestic operations (around two
thirds of sales) boost FCC’s exposure to the domestic construction cycle.
4.4. Housing and commercial development
Although residential construction has generally had a small contribution to European
contractors’ contracting earnings, companies like Vinci, Bouygues, YIT or FCC have been
active players in the housing development market either directly or indirectly (FCC’s stake in
Page 36
Deutsche Bank AG/London
19 August 2011
Building & Construction European Contractors
Realia). In YIT, residential development is a key driver and brings an interesting emerging
market element through its Russian operations. Ferrovial had sizeable housebuilding
operations in Spain but they were disposed of in 2006. Skanska is the main player in
commercial development in our universe of coverage.
The synergies between housing/commercial development and contracting activities are
relatively straightforward but it has to be noted that this kind of vertical integration can
noticeably increase the cyclicality of earnings. This is explained by the fact that development
operations exhibit high operating leverage as well as capital intensity (which leads to financial
leverage), characteristics not shared by the contracting business.
In a way, real estate development is to an extent similar to infrastructure concession
development but radically differs in the demand driver of the developed asset: housing/real
estate demand (very cyclical) vs public service demand (defensive).
4.5. Renewable energy assets
Companies like ACS or FCC have exposure to renewable assets and Acciona’s move into the
wind farm business in 2003 was the initial step towards becoming a electric utility company.
The key reason behind contractors’ historical interest in this sector is its concession-like
nature; companies are familiar with regulated businesses and their financing.
It needs to be noted, however, that a key difference between renewable energy assets and
transport infrastructure concessions is regulatory risk. Infrastructure PPPs are ‘regulated’ by a
contract between the operator and the public grantor and the terms cannot be unilaterally
changed by either party.
4.6. Taking the business model to the extreme: electric utilities
European contractors’ high level of comfort with regulated utilities has led some companies
in the sector to boost exposure to energy by taking stakes in traded companies. The two key
examples are Acciona through Endesa (now disposed of) and ACS through Union Fenosa
(now disposed of) and Iberdrola.
Although we will cover this issue in more detail in our final section on valuation, holding
stakes in traded companies takes European contractors one step closer to a conglomerate
structure. strengthening the argument for applying higher holding company discounts. In
addition, it raises the key issue of value creation mechanisms on the assumption of limited or
no management input in the participated company.
Deutsche Bank AG/London
Page 37
19 August 2011
Building & Construction European Contractors
5. Diversification’s impact on
financial structures
5.1. Two clear groups of contractors
In the first section of this report we described the significant transformation that European
contracting groups have experienced over the last decade through very active M&A.
Depending on the impact that diversification has had on balance sheets, we can divide our
universe of coverage into two groups.
„
Debt-laden contractors. For a good number of contractors, the M&A process
significantly boosted financial gearing levels as companies moved into more capital
intensive activities taking advantage of the good availability of very cheap financing
before the downturn. As a consequence of this, in names like Ferrovial, ACS and FCC,
constrained cash flow generation and lower asset valuations during the downturn have
put pressure on their financial structures leading them to implement de-leveraging
strategies. In the case of Eiffage and OHL, no big disposals are on the agenda but the
companies are seeking long term financing arrangements so as to secure the desired
financial stability.
„
Debt-free contractors. Other companies in our universe of coverage, despite
participating in the general diversification trend, maintained a much more conservative
approach to financial gearing, which has led them to currently show net cash positions
on their balance sheets (Balfour Beatty, Skanska, Strabag and Bouygues).
Figure 72: ACS’ net debt vs net debt/EBITDA (group)
18,000
16,575
16,000
14,000
10,000
9,356
9,000
7.0
8,000
8,747
5.0
9,271
8,003
8,000
4.0
3.0
6,000
4,265
2.0
4,000
1,424
0
2004
Net Debt
2005
2006
2007
Net debt/EBITDA
Source: Company data, Deutsche Bank
Page 38
8.0
6.0
12,000
2,000
Figure 73: FCC’s net debt vs net debt/EBITDA (group)
2008
2009
2010
Net debt/EBITDA (ex-stakes)
6.0
7,967
7,655
7,749
5.0
6,893
7,000
6,000
4.0
5,204
5,000
3.0
4,000
3,000
2.0
2,000
1.0
1,000
0.0
0
1.0
264
403
2004
2005
0.0
Net debt
2006
2007
2008
2009
2010
Net debt/EBITDA
Source: Company data, Deutsche Bank
Deutsche Bank AG/London
19 August 2011
Building & Construction European Contractors
Figure 74: FER’s net debt vs net debt/EBITDA (group)
Figure 75: Eiffage’s net debt vs net debt/EBITDA (group)
16.0
16,000
14.0
14,000
12.0
12,000
10.0
10,000
8.0
8,000
6.0
6,000
4.0
4,000
5,000
2.0
2,000
0
0.0
0
35,000
32,818
30,265
30,000
24,111
25,000
19,789
15,000
8,487
2004
2005
2006
2007
Net debt
11,034 10,732
22,272
20,000
10,000
9.0
13,966
2008
2009
11,761
12,494
8.0
7.0
6.0
5.0
4.0
3.0
2.0
72
-2,000
-16
2001
2002
-83
2003
1.0
264
327
2004
2005
0.0
2006
Net debt
Net debt/EBITDA
2007
2008
2009
2010
-1.0
Net debt/EBITDA
Source: Company data, Deutsche Bank
Source: Company data, Deutsche Bank
Figure 76: OHL’s net debt vs net debt/EBITDA (group)
Figure 77: Vinci’s net debt vs net debt/EBITDA (group)
5,000
4,420
4,500
4,000
3,447
3,500
2,000
1,500
4.0
14,000
2.5
2.0
1,700
1,080
16,000
3.0
2,260
2,500
18,000
4.5
3.5
2,756
3,000
5.0
1.5
1,213
4,000
2,000
0.0
0
Net debt
Source: Company data, Deutsche Bank
Deutsche Bank AG/London
2007
2008
2009
Net debt/EBITDA
2010
3
2.5
2
1.5
6,000
0.5
2006
13,059
8,000
1.0
2005
3.5
13,684
10,000
500
2004
4
15,371
12,000
1,000
0
16,303
14,796
1
2,433
1,579
0.5
0
2004
2005
Net debt
2006
2007
2008
2009
2010
Net debt/EBITDA
Source: Company data, Deutsche Bank
Page 39
19 August 2011
Building & Construction European Contractors
6. Valuation of contractors
6.1. Sum of the Parts, the key valuation approach
The heavily diversified nature of European contractors implies that the most reliable
methodology to value them is the sum of the parts approach. This allows us to apply the
most suitable methodology to the different units depending on the nature of the business
and the amount of information available as well as to make the relevant considerations about
holding company discounts. We use the following criteria:
„
DCFs or earnings multiples for Contracting. In those companies where full earnings
and balance sheet information is provided for the contracting units, we build DCF
models. Obviously the resulting valuations will be strongly dependent on working capital
and long term growth assumptions. Given the cyclical nature of contracting activities we
tend to use negligible perpetual growth. In those companies where information is not
available we use the earnings multiples (mainly EV/EBITDA) implied in the preceding DCF
valuations.
„
DCF or P/BV multiples for Concessions. Given the good amount of information
available and the relative simplicity of the earnings structure of these assets, DCF is our
preferred valuation methodology. Given the finite life of the assets and good earnings
visibility we project cash flows for the whole concession period. Evidently, the discount
rate calculation and the debt repayment/refinancing assumptions (with the
corresponding impact on dividend payout) are key issues. Our previous section within
the PPP concessions sections goes into deeper detail.
„
Services concessions. As in the case of contracting activities, we carry out DCF
valuations when there is sufficient information available about the division's financials.
Although we are dealing with services concessions that generally have many things in
common with infrastructure concessions, the much larger number of contracts and the
lack of information about individual projects implies that we have to rely on divisional
DCF models. In times of constrained public finances, working capital variations (highly
dependent on client payment conditions) become a key variable of the valuation model.
„
Market value for stakes in traded companies. There is no consensus on this front as,
while methodologically it would justifiable to use target prices for the valuation of the
stakes in traded companies that diversified contractors hold, reality is that investors are
rarely willing to apply them.
„
Other adjustments. Besides the divisional values determined by the previous
methodologies, we also deduct from the sum of the parts: holding company debt,
contracting prepayments (cash advanced by clients for contracting work pending
execution), corporate headquarters (the NPV of running the companies in their current
configuration), pension liabilities and any minorities not deducted at divisional level.
6.2. We cannot read too much into multiples
We must highlight that the structural and accounting peculiarities of the companies in the
contracting space make earnings multiples not fully comparable and difficult to interpret.
However, it is interesting to take a look at the last decade of performance of prospective
multiples in order to gain a better understanding of the market’s perception of the companies
in the same period.
Page 40
Deutsche Bank AG/London
19 August 2011
Building & Construction European Contractors
Figure 78: 12-months forward looking P/E
Figure 79: 12-months forward looking P/BV
19
3.8
17
3.3
15
2.8
13
2.3
9
1.8
7
1.3
P/E
Avg
+1stdv
-1stdv
P/BV
Avg
+1stdv
Aug 11
Aug 10
Aug 09
Aug 08
Aug 07
Aug 06
Aug 05
Aug 04
Aug 03
0.8
Aug 01
Aug 11
Aug 10
Aug 09
Aug 08
Aug 07
Aug 06
Aug 05
Aug 04
Aug 03
Aug 02
Aug 01
5
Aug 02
11
-1stdv
Source: Deutsche Bank
Source: Deutsche Bank
Figure 80: 12-months forward looking EV/EBITDA
Figure 81: 12-months forward looking EV/Sales
1.4
9.5
1.2
8.5
1.0
7.5
0.8
6.5
0.6
5.5
0.4
4.5
Avg
Source: Deutsche Bank
+1stdv
-1stdv
EV/Sales
Avg
+1stdv
Aug 11
Aug 10
Aug 09
Aug 08
Aug 07
Aug 06
Aug 05
Aug 04
Aug 03
Aug 02
Aug 11
Aug 10
Aug 09
Aug 08
Aug 07
Aug 06
Aug 05
Aug 04
Aug 03
Aug 02
Aug 01
EV/EBITDA
Aug 01
0.2
3.5
-1stdv
Source: Deutsche Bank
6.3. Conglomerate discounts
We apply a holding company discount to the NAV calculations resulting from our sum of the
parts. The reasons for applying this discount are: 1) European contractors have holding
company structures; 2) Management teams have to divide their time between a very large
number of very different businesses/assets; 3) There is limited transparency on individual
businesses; 4) Companies have very rarely traded in line or above with their pre-discount
NAVs (stocks have consistently traded at discounts ranging form 5% to 40% to their prediscount NAVs).
We apply holding company discounts of between 25% to 5%; the lower the number of
activities/assets, in other words, the lower our perception of conglomerate structure, the
lower the discount. Companies with traded subsidiaries merit, in our view, the highest
discounts.
Deutsche Bank AG/London
Page 41
19 August 2011
Building & Construction European Contractors
Appendix A – Historical M&A
activity in the sector
Figure 82: ACS’s historical M&A activity
1992
OCP Construcciones results from the merger between Construcciones Padros and OCISA
1994
Divestiture of non-strategic assets of the company
1995
Takeover of Cobra Group, provider of installations and maintenance services
1996
Acquisition of Auxini, a construction company with specialisation in civil works
1997
Merger with Gines Navarro Construcciones to form ACS
1999
Entry into the road transport sector with the acquisition Continental Auto
Acquisition of ONYX which allows ACS to gain a leading position in the environment sector
Acquisition of Imes Group to strengthen positions in services, communication and energy
2003
Acquisition of Dragados, one of the main Spanish construction and services groups
2005
Purchase of a 22% stake in Union Fenosa
2006
Acquisition of the initial 10% stake in Iberdrola
Acquisition of an additional 10% stake in Union Fenosa
2007
Purchase of 25.1% of Hochtief, a German construction and concessions group
Disposal of Continental Auto
Acquisition of Schiavone Construction in the US
2008
Agreement to dispose of Union Fenosa in two stages
2009
Disposal of SPL (seaport logistics business)
2010
Acquisition of more Iberdrola shares
Partial disposal of stake in Abertis to CVC
Announcement of plan to dispose of renewable assets
Source: Deutsche Bank, Company data
Figure 83: Balfour Beatty’s historical M&A activity
2002
Acquisition of Kentons, utility services provider
2003
Acquisition of Mansell, a UK construction and construction services company
2004
Acquisition of a 50% stake in Gammon from Skanska to expand its presence in Honk Kong
2005
Acquisition of Pennine Group, the UK ground engineering specialist
Acquisition of SBB, the German rail signaling specialist, renamed Balfour Beatty Rail Signal
2006
Acquisition of Charter, the Texas-based construction management business
2007
Acquisition of Cowlin Group, a high-quality building and refurbishment contractor based in Bristol
Acquisition of Centex Construction, a leading US construction management company
2008
Acquisition of Dean& Dyball, a UK regional contractor
Acquisition of GMH, a top player in the US PPP military accommodation market
Acquisition of Douglas E Barnhart Inc, a Californian construction management company
Acquisition of Schreck-Mieves GmbH, the German rail engineering company
2009
Acquisition of RT Dooley Construction, a family owned US construction firm
Acquisition of Parsons Brinckerhoff Inc, a key US professional services company
Acquisition of SpawMaxwell Company, the largest interior construction contractor in Texas
2010
Acquisition of Halsall Group, Toronto-based provider of design and engineering services
Acquisition of certain operations of Rok in housing and general construction
Source: Deutsche Bank, Company data
Page 42
Deutsche Bank AG/London
19 August 2011
Building & Construction European Contractors
Figure 84: Bouygues’ historical M&A activity
1984
Acquisition of ETDE, an energy supply and transmission company
Acquisition of Satur, France's 3rd largest water supply company
1986
Acquisition of Screg group, France's leading roadworks contractor
Acquisition of Dragages
Acquisiton of Smac Acieroid
1987
Acquisition of TF1, France's leading television channel
1989
Acquisition of Grands Moulins de Paris (GMP)
1990
Acquisition of Losinger, Switzerland's 3rd construction group
1993
Purchase of a stake in a South African construction company, Basil Read
1994
Merger of Steam and Batir
1996
Merger of Saur and Cise
1999
The Group spins off its construction business to form Bouygues Construction
The parent company sells 51% of Bouygues Offshore and 100% of ETDE to Bouygues Construction
2001
TF1 acquires 100% of the Eurosport group
2002
Acquisition of Telecom Italia’s stake in Bouygues Telecom
2003
Acquisition of E.ON’s stake in Bouygues Telecom
2006
Acquisition of 23% stake in Alstom
2007
Acquisition of Spie Rail
BNP Paribas acquires a stake in Bouygues Telecom
2008
Acquisition of SEMI, an Australian company
Acquisition of Gouyer and its subsidiaries, a group of companies operating in Martinique and Guadeloupe
2010
Acquisition of 100% in Société de la Raffinerie de Dunkerque (SRD)
Purchase of majority stake in the Leadbitter group
Acquisition of NT1 (100%) and TMC (40%) by TF1
Source: Deutsche Bank, Company data
Figure 85: FCC’s historical M&A activity
2000
FCC and Caja Madrid merge their real estate businesses to form Realia
Cementos Portland, FCC cement division, acquires the American group Giant Cement
2001
FCC acquires 100% of the passenger transport company Portillo
2002
FCC merges with Pórtland Valderrivas
FCC creates Flightcare to consolidate its presence in the handling sector
2003
FCC Group creates Ámbito, new industrial waste management area
2005
Cementos Portland Valderrivas launches a takeover bid for 100% of Cementos Lemona
FCC acquires A.S.A., a East European waste management company
FCC takes control of the Tenerife-based company Entemanser through its subsidiary Aqualia and
becomes the top private water company in the Canary Islands
FCC acquires the Hernández Cerrajero-Marepa Group, which recycles used paper and cardboard
FCC acquires 8.06% of Cementos Portland Valderrivas from Iberdrola
With the purpose to create Spain's leading independent logistics operator, FCC Group buys 100% of
Grupo Logistico Santos
2006
FCC acquires Waste Recycling Group, UK's largest municipal waste management company.
Cementos Portland Valderrivas buys Uniland.
FCC buys 74.76% stake in Alpine Mayreder Bau, leading player in the construction sector in Austria
Acquisition of Czech water company SmVaK.
2007
FCC acquired from Siemens Water Technologies Corp. (SWT) its two US subsidiaries, Hydrocarbon
Recovery Services Inc. (HRS) and International Petroleun Corp.
2008
FCC completes acquisition of Olivento (14 wind farms)
Source: Deutsche Bank, Company data
Deutsche Bank AG/London
Page 43
19 August 2011
Building & Construction European Contractors
Figure 86: Ferrovial’s historical M&A activity
1952
Ferrovial was founded by Rafael del Pino Y Mareno
1985
Acquisition of Cadagua, market leader in the engineering of water treatments
1995
Acquisition of Agroman
1999
Integration of Agroman and creation of Ferrovial Agroman
2000
Acquisition of Budimex, largest contractor in Poland
2003
Purchase of Amey (UK) and Cespa (Spain)
2005
Purchase of Webber Group and Swissport
2006
BBA acquisition and sale of Ferrovial Real Estate
2007
Creation of a new business unit: Airports
2009
Merger with Cintra
Disposal of Gatwick
2010
Disposal of Tube lines
Disposal of the 50% stake in Trados 45
Chilean motorway sale
Sale of the 10% stake in the 407-ETR
Swissport disposal
Source: Deutsche Bank, Company data
Figure 87: OHL’s historical M&A activity
Obrascon
1996
Purchase of Elsan, specializing in asphalt-based construction
Purchase of SATO, specializing in ports and other maritime and coastal civil works projects
Acquisition of 60% of Cida Hidroquimica, waste treatment company
Acquisition of a 40% stake (extended to 100% in 1998) in Ondagua, a company specialized in urban
services infrastructure and water treatment
1997
Acquisition of Huarte, Obrascon's construction rival that was on the edge of bankruptcy
1998
Obrascon and Huarte merger, renamed Obrascon Huarte
Obrascon Huarte
1999
Acquisition of Malvar to focus on Galicia region
1999
Merger with rival group Construcciones Lain and renamed into OHL (Obrascon Huarte Lain)
OHL Group
2000
Acquisition of 60% interest in infrastructure of Chile
2001
Acquisition of parking lots operations in Santiago
94% holding in Autovias
Acquisition of I2000
2002
Acquisition of 10% holding of Fumisa in Mexico
Acquisition of Centrovias in Brazil
2003
Acquisition of a 61.1% stake in ZPSV Uhersky Ostroh, one of the top constructors in Czech Republic
2003
Acquisition of 50% holding in ASA
2004
Acquisition of Intervias in Brazil
2005
Acquisition of Amozoc-Perote in Mexico
2006
Majority shareholder in the US construction companies Community Asphalt and Tower group
Acquisition of Vianorte in Brazil and Toluca Airport in Mexico
2008
Stake in Arellano Construction and Stride Contractors (both US)
2010
50.1% of the US construction company Judlau Contracting, Inc., specialised in civil engineering
Acquisition of Sthim Maquinaria, a company specialized in the handling of solids, aggregates, and cement
Source: Deutsche Bank, Company data
Page 44
Deutsche Bank AG/London
19 August 2011
Building & Construction European Contractors
Figure 88: Skanska’s historical M&A activity
1994
Acquisition of Beers Construction Company, one of the leading construction companies in US
1998
Acquisition of Börje Larsson Bygg i Nyköping AB, building services company in Sweden
1999
Purchase of a 67% stake in SADE, 2nd largest construction company in Argentina
Acquisition of A.J. Etkin, provider of corporate, educational and health-care facilities in the US Midwest
Purchase of an 80% stake in a Polish construction company Budexpol Sp. Z o.o
Acquisition of Gottleib Group in US
2000
Acquisition of Estonian Construction company EMV
Acquisition of Ericsson Real Estate & Services
Acquisition of majority stake in Exbud, Poland's largest construction company
Acquisition of Böge Larsen Projects Oy and Proconord International Oy
Acquisition of IPS, largest Czech construction company
Acquisition of Barclay White Inc., US construction management company
Divestiture of some noncore operations, such as real estate holdings
2001
Acquisition of MG Telecommunication (MGT), a UK telecom service company
2002
Acquisition of Yeager, US construction company
2003
Strategic acquisition of Marieholms Industrirengöring AB (MIAB), an industrial services company
Acquisition of Texas construction company, BFW Construction Co
2004
Sale of mining contracting business in South Africa and Canada
Acquisition of Klimavex, a Slovakian installation company
2005
Divestiture of Skanska Modul AB to focus on core operations - building and civil construction,
development of commercial premises, residential buildings and PPP projects
2006
Acquisition of Stamakt, a Slovak construction company
Acquisition of McNicholas plc, a UK utilities network company
2010
Acquisition of SkyBau, a Slovakian leading construction company
Source: Deutsche Bank, Company data
Deutsche Bank AG/London
Page 45
19 August 2011
Building & Construction European Contractors
Figure 89: Strabag’s historical M&A activity
1999
Strabag, Austria acquires STUAG
2002
Strabag AG, Cologne takes over the Deutsche Asphalt Group
2004
Bauholding Strabag's division specialiazed in concessionary and operating models is merged into the AWAY Holding und Finanz AG
2005
Stabag Group takes over major parts of the insolvent Walter-Bau Group
Acquisition of Dywidag and Heilit+Woerner
Acquisition of the majority of shares of Ed. Züblin AG, Stuttgart
2006
In Germany Strabag AG’s Building Construction and Construction Engineering divisions are acquired by
Ed. Züblin AG
Acquisition of Preusse-Group and Stratebau-Group, market leader in asphalt road construction on Bavaria
Acquisition of the Eichholz Group, one of the market leaders in German railroad construction
2007
Russian company Rasperia acquires a stake in the share capital of Strabag
Strabag SE IPOs in the Prime Market Segment of the Vienna Stock Exchange
Acquisition of Linde KCA-Umweltanlagen GmbH, a Dresden based company specialising in the field of
environmental technology
Acquisition of Ottokar Klug Ges.m.b.H., an Austrian company specialising in the field of waste
management
Acquisition of a railway construction company Fahrleitungsbau GmbH
2008
Acquisition of Adanti SpA (Italy)
Acquisition of Kirchner Holding GmbH (Germany)
Acquisition of F. Kirchhoff AG (Germany)
Acquisition of Deutsche Telekom Immobilien und Service GmbH (Germany)
Acquisition of a Scandinavian construction company Oden
2010
Acquisition of the Czech railway construction company Viamont DSP
Acquisition of the majority interest in Rimex Group, a company specialising in services in the cleaning and
landscaping market
Acquisition of ECM Facility a.s, a Czech provider of property and facility management services
Source: Deutsche Bank, Company data
Page 46
Deutsche Bank AG/London
19 August 2011
Building & Construction European Contractors
Figure 90: Vinci’s historical M&A activity
2000
Vinci PLC is created as the result of a merger between the parent company Vinci and Groupe GTM
2001
Acquisition of Environmental Analysis Limited, provider of chemical and environmental testing services
Acquisition of Genflo Technology Limited, involved in remediation of contaminated soils
2002
Acquisition of Crispin & Borst Holding Limited, a specialist building group based in South East England
2005
Acquisition of four large contracts in the educational sector from Jarvis PLC
2006
Acquisition of TCL Granby, UK provider of building services
Acquisition of PEL Limited, UK provider of interior fit out services
Disposal of Rosser & Russell's Building Services Division
2007
Acquisition of Weaver PLC, a construction company based in the west Midlands
Disposal of Rosser& Russell's Maintenance Limited
Sale of McGill Services Limited, specialised in offshore and ship building as well as in the oil & gas industry
Acquisition of a building contractor Fifehead Limited
2008
Acquisition of Stradform, Wales contractor
Acquisition of Taylor Woodrow, one of the UK's foremost construction companies
Acquisition of Gordon Durham, a regional contractor undertaking contracts throughout the North East of
England
2009
Disposal of Simplex Foundations Limited
Acquisition of certain assets from the administrator of Haymills Group Limited
2010
Acquisition of Faceo, a company operating in facilities management throughout the Europe
Acquisition of Cegelec, major player in four areas: electrical, climate and mechanical engineering;
automation, instrumentation and control; information and communication technologies; and maintenance
and services
Acquisition of the Tarmac quarries in France, Germany, the Czech Republic and Poland
Source: Deutsche Bank, Company data
Deutsche Bank AG/London
Page 47
19 August 2011
Building & Construction European Contractors
Figure 91: YIT’s historical M&A activity
1994
YIT increased its holding in a property investment company YIT-Kiinteistöt Oy from 49.8% to 99.2%
(merger)
1995
Acquisition of Oy Huber Ab, specialised in piping design and maintenance
1998
Acquisition of Mongstad Industrier AS, based in Norway and involved in the oil and petrochemical market
Acquisition of VSP i Göteborg AB, operating in Sweden
Acquisition of 65.6% in AB Kausta, one of Lithuania's leading construction companies
Acquisitions in Finland
1999
Acquisition of Sähkö-Soikkeli Oy, an electrical contracting company in the Greater Helsinki area
2001
Acquisition of Calor AB, a Swedish company specialising in heating, plumbing, air-conditioning and electrical
installations and industrial maintenance services
2002
Aquisition of Primatel Ltd, provider of consulting innovation design services
YIT acquired the shares outstanding in Härkätien Sähkö Oy to expand YIT's range of services in the
economic area of Western Finland
2003
Following the Nordic Building Systems acquisition, YIT became the leading building systems company in the
Nordic countries
2004
Acquisition of the building rights for commercial and business premises in Konepaja area in Vallila, Helsinki
2005
Acquisition of majority holding in the electrical contracting and servicing company A/S Emico in Estonia
Acquisition of Nortelco System-Teknikk, a Norwagian company specialised in audiovisual systems and video
conference services
2006
Numerous small scale acquisitions to round out operations in Sweden and Norway
Plot acquisitions in Finland, Russia and Baltic countries
Acquisition of Alueputkitus Oy and Konepaja Alueputkitus Oy to expand the portfolio of services for
customers in the petrochemical industry
2007
Acquisition of plots and business rights in Finland and investment rights in Russia
Acquisition of Inesco Oy, provider of solutions for efficiency improvements in industrial energy and material
use
2008
Acquisition of MCE AG's building system service business in Germany, Austria, Poland, the Czech Republic,
Hungary and Romania
2010
Acquisition of the business operations of Caverion GmbH, a company providing building systems services in
Central Europe
Acquisition of 70% holding in the Slovakian construction company Reding
Source: Deutsche Bank, Company data
Page 48
Deutsche Bank AG/London
19 August 2011
Building & Construction European Contractors
Appendix B – Euroconstruct
Figure 92: Austria - Constr. output growth by segment
20%
Figure 93: Germany - Constr. output growth by segment
15%
15%
10%
10%
5%
5%
0%
0%
-5%
-5%
-10%
-15%
-10%
Residential yoy
Non residential yoy
Civil engineering yoy
Construction output yoy
Residential yoy
Non residential yoy
Civil engineering yoy
Construction output yoy
Source: Euroconstruct (June 2011)
Source: Euroconstruct (June 2011)
Figure 94: Belgium - Constr. output growth by segment
Figure 95: Ireland - Constr. output growth by segment
15%
15%
10%
10%
5%
5%
0%
0%
-5%
-5%
-10%
-10%
-15%
-15%
Residential yoy
Non residential yoy
Residential yoy
Non residential yoy
Civil engineering yoy
Construction output yoy
Civil engineering yoy
Construction output yoy
Source: Euroconstruct (June 2011)
Source: Euroconstruct (June 2011)
Figure 96: France - Constr. output growth by segment
Figure 97: Italy - Constr. output growth by segment
15%
10%
8%
10%
6%
4%
5%
2%
0%
-4%
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
0%
-2%
-6%
-5%
-10%
-8%
-10%
-15%
Residential yoy
Non residential yoy
Residential yoy
Non residential yoy
Civil engineering yoy
Construction output yoy
Civil engineering yoy
Construction output yoy chg (%)
Source: Euroconstruct (June 2011)
Deutsche Bank AG/London
Source: Euroconstruct (June 2011)
Page 49
Building & Construction European Contractors
Figure 98: Portugal - Constr. output growth by segment
Figure 99: Spain - Constr. output growth by segment
20%
30%
15%
20%
10%
10%
5%
2013E
2012E
2010
2011E
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1996
1997
1995
1994
1993
1992
-5%
1991
-10%
1990
0%
0%
1989
19 August 2011
-20%
-10%
-30%
-15%
-40%
-20%
-25%
-50%
Residential yoy
Non residential yoy
Residential yoy
Non residential yoy
Civil engineering yoy
Construction output yoy
Civil engineering yoy
Construction output yoy
Source: Euroconstruct (June 2011)
Source: Euroconstruct (June 2011)
Figure 100: Denmark - Cons. output growth by segment
Figure 101: Finland - Constr. output growth by segment
20%
25%
15%
20%
10%
15%
5%
10%
0%
5%
-5%
0%
-10%
-5%
-15%
-10%
-20%
-25%
-15%
-30%
-20%
Residential yoy
Non residential yoy
Civil engineering yoy
Construction output yoy
Residential yoy
Civil engineering yoy
Non residential yoy
Construction output yoy
Source: Euroconstruct (June 2011)
Source: Euroconstruct (June 2011)
Figure 102: Norway - Constr. output growth by segment
Figure 103: Sweden - Constr. output growth by segment
20%
15%
15%
10%
10%
5%
5%
0%
0%
-5%
-5%
-10%
-10%
-15%
-15%
Residential yoy
Non residential yoy
Residential yoy
Non residential yoy
Civil engineering yoy
Construction output yoy
Civil engineering yoy
Construction output yoy
Source: Euroconstruct (June 2011)
Page 50
Source: Euroconstruct (June 2011)
Deutsche Bank AG/London
19 August 2011
Building & Construction European Contractors
Figure 104: Switzerland - Cons. output gr. by segment
Figure 105: Netherlands - Cons. output gr by segment
20%
15%
15%
10%
10%
5%
5%
0%
0%
-5%
-5%
-10%
-10%
-15%
-15%
Residential yoy
Non residential yoy
Residential yoy
Non residential yoy
Civil engineering yoy
Construction output yoy
Civil engineering yoy
Construction output yoy
Source: Euroconstruct (June 2011)
Source: Euroconstruct (June 2011)
Figure 106: UK - Constr. output growth by segment
Figure 107: Czech Republic - Con. output gr. by segment
20%
60%
50%
15%
40%
10%
30%
5%
20%
10%
0%
0%
-5%
-10%
-10%
-20%
-30%
-15%
-40%
-20%
-50%
Residential yoy
Non residential yoy
Residential yoy
Non residential yoy
Civil engineering yoy
Construction output yoy
Civil engineering yoy
Construction output yoy
Source: Euroconstruct (June 2011)
Source: Euroconstruct (June 2011)
Figure 108: Hungary - Constr. output grwth by segment
Figure 109: Poland - Constr. output growth by segment
30%
35%
25%
30%
20%
25%
15%
20%
10%
15%
5%
10%
0%
5%
-5%
0%
-10%
-15%
-5%
-20%
-10%
-25%
-15%
Residential yoy
Non residential yoy
Residential yoy
Non residential yoy
Civil engineering yoy
Construction output yoy
Civil engineering yoy
Construction output yoy
Source: Euroconstruct (June 2011)
Deutsche Bank AG/London
Source: Euroconstruct (June 2011)
Page 51
19 August 2011
Building & Construction European Contractors
Figure 110: Slovak Rep. - Con. output grwth by segment
40%
Figure 111: WE - Constr. output growth by segment
6.0%
4.0%
30%
2.0%
20%
0.0%
-2.0%
10%
-4.0%
0%
-10%
2003
2004
2005
2006
2007
2008
2009
2010 2011E 2012E 2013E
-6.0%
-8.0%
-10.0%
-20%
-12.0%
-30%
-14.0%
Residential yoy
Non residential yoy
Residential yoy
Non residential yoy
Civil engineering yoy
Construction output yoy
Civil engineering yoy
Construction output yoy
Source: Euroconstruct (June 2011)
Source: Euroconstruct (June 2011)
Figure 112: EE - Constr. output growth by segment
Figure 113: Total Europe - Con. output gr. by segment
20%
6%
4%
15%
2%
10%
0%
-2%
5%
-4%
0%
-6%
-8%
-5%
-10%
-10%
-12%
-15%
-14%
Residential yoy
Non residential yoy
Residential yoy
Non residential yoy
Civil engineering yoy
Construction output yoy
Civil engineering yoy
European construction output yoy
Source: Euroconstruct (June 2011)
Page 52
Source: Euroconstruct (June 2011)
Deutsche Bank AG/London
19 August 2011
Building & Construction European Contractors
Appendix C – Output
Figure 114: Euro area total construction production
index
Figure 115: Euro area total construction production
growth, yoy
120
Building
Nordics
Jan-11
Aug-10
Oct-09
Mar-10
May-09
Jul-08
Dec-08
Feb-08
Apr-07
Eastern Europe
Sep-07
Jun-06
Nov-06
Jan-06
Aug-05
Oct-04
Euro area (16 countries)
Mar-05
May-04
Jul-03
Dec-03
Jan-11
May-10
Jan-09
Sep-09
May-08
Jan-07
Sep-07
May-06
Jan-05
Sep-05
May-04
Jan-03
Construction
Sep-03
May-02
Jan-01
Sep-01
May-00
Jan-99
Sep-99
May-98
Jan-97
Sep-97
May-96
Jan-95
Sep-95
60
Feb-03
70
Apr-02
80
Sep-02
90
Jun-01
100
Nov-01
110
Jan-01
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
Western-Europe
Civil
Source: Deutsche Bank, Eurostat
Source: Deutsche Bank, Eurostat
Figure 116: Euro area building construction production
growth, yoy
Figure 117: Euro area civil construction production
growth, yoy
40%
30%
30%
20%
20%
10%
10%
0%
0%
Euro area (16 countries)
Eastern Europe
Nordics
Western-Europe
Euro area (16 countries)
Nordics
Jan-11
Aug-10
Mar-10
Oct-09
May-09
Dec-08
Jul-08
Feb-08
Apr-07
Eastern Europe
Sep-07
Nov-06
Jun-06
Jan-06
Aug-05
Mar-05
Oct-04
May-04
Dec-03
Jul-03
Feb-03
Apr-02
Sep-02
Nov-01
Jan-01
Jan-11
Aug-10
Mar-10
Oct-09
May-09
Dec-08
Jul-08
Feb-08
Sep-07
Apr-07
Nov-06
Jun-06
Jan-06
Aug-05
Mar-05
Oct-04
May-04
Dec-03
Jul-03
Feb-03
Sep-02
Apr-02
Nov-01
-30%
Jun-01
-20%
-30%
Jan-01
-20%
Jun-01
-10%
-10%
Western-Europe
Source: Deutsche Bank, Datastream, Eurostat
Source: Deutsche Bank, Datastream, Eurostat
Figure 118: US total annualized construction output
(USDbn)
Figure 119: US total construction output growth, yoy
50%
700
1,200
600
1,000
500
40%
30%
20%
Residential
Non-residential
Source: Deutsche Bank, Datastream
Deutsche Bank AG/London
Civil
Total (RHS)
-30%
-40%
Residential
Non residential
Civil
Oct 10
Feb 11
Jun 10
Oct 09
Feb 10
Jun 09
Feb 09
Oct 08
Jun 08
Feb 08
Oct 07
Jun 07
Feb 07
Oct 06
Jun 06
Feb 06
Oct 05
-50%
Jun 05
-
Jun-02
Oct-02
Feb-03
Jun-03
Oct-03
Feb-04
Jun-04
Oct-04
Feb-05
Jun-05
Oct-05
Feb-06
Jun-06
Oct-06
Feb-07
Jun-07
Oct-07
Feb-08
Jun-08
Oct-08
Feb-09
Jun-09
Oct-09
Feb-10
Jun-10
Oct-10
Feb-11
-
-20%
Feb 05
200
Oct 04
100
Jun 04
400
Feb 04
200
0%
-10%
Oct 03
600
300
10%
Jun 03
800
400
Total
Source: Deutsche Bank, Datastream
Page 53
19 August 2011
Building & Construction European Contractors
Figure 120: US non-residential construction output
growth, yoy
Figure 121: US non-residential construction split (2010)
40%
Public safety
2%
Transportation
7%
30%
20%
10%
Other
10%
Educational
16%
Sew age and w aste
disposal + w ater
supply
7%
0%
-10%
-20%
Pow er
15%
Health care
7%
-30%
Private non-residential
Public non-residential
Office
7%
Commercial
7%
Mar-11
Jul-10
Nov-10
Mar-10
Jul-09
Nov-09
Mar-09
Jul-08
Nov-08
Mar-08
Jul-07
Nov-07
Mar-07
Jul-06
Nov-06
Mar-06
Jul-05
Nov-05
Mar-05
Jul-04
Nov-04
Mar-04
Jul-03
Nov-03
-40%
Manufacturing
7%
Highw ays and
Street
15%
Total non-residential
Source: Deutsche Bank, Datastream
Source: Deutsche Bank, Datastream
Figure 122: US total infrastructure output growth, yoy
Figure 123: US total non-residential output growth, yoy
40%
35%
30%
25%
20%
15%
10%
0%
5%
-10%
-5%
-20%
-15%
-30%
Highw ays and streets
Public safety
Transportation
-40%
Sep-04
Dec-04
Mar-05
Jun-05
Sep-05
Dec-05
Mar-06
Jun-06
Sep-06
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Sep-04
Dec-04
Mar-05
Jun-05
Sep-05
Dec-05
Mar-06
Jun-06
Sep-06
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
-25%
Water+Sew age
Educational
Health care
Communication
Source: Deutsche Bank, Datastream
Source: Deutsche Bank, Datastream
Figure 124: US federal and state construction output
growth, yoy
Figure 125: ABI vs. non-residential construction output
40%
40%
65
30%
30%
60
20%
20%
55
10%
10%
50
0%
0%
45
-10%
-10%
40
-20%
35
-30%
-40%
30
Federal
Source: Deutsche Bank, Datastream
Page 54
State
Feb-96
Sep-96
Apr-97
Nov-97
Jun-98
Jan-99
Aug-99
Mar-00
Oct-00
May-01
Dec-01
Jul-02
Feb-03
Sep-03
Apr-04
Nov-04
Jun-05
Jan-06
Aug-06
Mar-07
Oct-07
May-08
Dec-08
Jul-09
Feb-10
Sep-10
Apr-11
-30%
Jan-95
Aug-95
Mar-96
Oct-96
May-97
Dec-97
Jul-98
Feb-99
Sep-99
Apr-00
Nov-00
Jun-01
Jan-02
Aug-02
Mar-03
Oct-03
May-04
Dec-04
Jul-05
Feb-06
Sep-06
Apr-07
Nov-07
Jun-08
Jan-09
Aug-09
Mar-10
Oct-10
-20%
US Private non residential YoY grow th lagged 12m
ABI Billings
Source: Deutsche Bank, Datastream
Deutsche Bank AG/London
19 August 2011
Building & Construction European Contractors
Appendix D – Confidence
Figure 126: Construction confidence Europe, aggregated and key regions
60
40
20
0
-20
-40
-60
EUROPE
Western-Europe
Nordics
Southern-Europe
Oct-10
Mar-11
Dec-09
May-10
Jul-09
Feb-09
Apr-08
Sep-08
Nov-07
Jun-07
Jan-07
Aug-06
Oct-05
Mar-06
May-05
Jul-04
Dec-04
Feb-04
Sep-03
Apr-03
Jun-02
Nov-02
Jan-02
Aug-01
Mar-01
Oct-00
-80
Eastern-Europe
Source: Deutsche Bank, Eurostat, Datastream
Figure 127: Western Europe construction confidence
Figure 128: Southern Europe construction confidence
60
60
40
40
20
20
0
0
-20
-20
-40
-40
-60
-60
Average
France
Belgium
Netherlands
Germany
UK
Average
Portugal
Greece
Italy
Jan-11
Aug-10
Oct-09
Mar-10
May-09
Jul-08
Dec-08
Feb-08
Sep-07
Apr-07
Jun-06
Nov-06
Jan-06
Mar-05
Aug-05
Oct-04
Dec-03
May-04
Jul-03
Feb-03
Sep-02
Apr-02
Nov-01
Jun-01
Jan-01
-80
Aug-00
Aug-00
Jan-01
Jun-01
Nov-01
Apr-02
Sep-02
Feb-03
Jul-03
Dec-03
May-04
Oct-04
Mar-05
Aug-05
Jan-06
Jun-06
Nov-06
Apr-07
Sep-07
Feb-08
Jul-08
Dec-08
May-09
Oct-09
Mar-10
Aug-10
Jan-11
-80
Spain
Source: Deutsche Bank, Eurostat, Datastream
Source: Deutsche Bank, Eurostat, Datastream
Figure 129: Eastern Europe construction confidence
Figure 130: Nordic countries construction confidence
60
80
40
60
20
40
0
20
-20
0
-40
-20
-60
-40
-80
-60
Source: Deutsche Bank, Eurostat, Datastream
Deutsche Bank AG/London
Average
Finland
Jan-11
Aug-10
Mar-10
Oct-09
May-09
Dec-08
Jul-08
Feb-08
Sep-07
Apr-07
Jun-06
Nov-06
Jan-06
Mar-05
Denmark
Aug-05
Oct-04
Dec-03
May-04
Jul-03
Feb-03
Lithuania
Sep-02
Hungary
Latvia
Apr-02
Slovenia
Estonia
Nov-01
Slovakia
Poland
Jun-01
Romania
Czech
Jan-01
Average
-80
Aug-00
Jan-11
Aug-10
Mar-10
Oct-09
May-09
Jul-08
Dec-08
Feb-08
Apr-07
Sep-07
Nov-06
Jun-06
Jan-06
Mar-05
Aug-05
Oct-04
May-04
Jul-03
Dec-03
Feb-03
Apr-02
Sep-02
Jun-01
Nov-01
Jan-01
Aug-00
-100
Sw eden
Source: Deutsche Bank, Eurostat, Datastream
Page 55
19 August 2011
Building & Construction European Contractors
Appendix E – Housing
Figure 131: Europe residential new starts
Figure 132: European Big-Four residential new starts
50%
55%
40%
30%
35%
20%
10%
15%
0%
-10%
-5%
-20%
-30%
-25%
-40%
-50%
Europe 13 countries
France, Germany, UK, Spain
Nordic countries
US new residential starts
-65%
Q4/96
Q2/97
Q4/97
Q2/98
Q4/98
Q2/99
Q4/99
Q2/00
Q4/00
Q2/01
Q4/01
Q2/02
Q4/02
Q2/03
Q4/03
Q2/04
Q4/04
Q2/05
Q4/05
Q2/06
Q4/06
Q2/07
Q4/07
Q2/08
Q4/08
Q2/09
Q4/09
Q2/10
Q4/10
Q4/96
Q2/97
Q4/97
Q2/98
Q4/98
Q2/99
Q4/99
Q2/00
Q4/00
Q2/01
Q4/01
Q2/02
Q4/02
Q2/03
Q4/03
Q2/04
Q4/04
Q2/05
Q4/05
Q2/06
Q4/06
Q2/07
Q4/07
Q2/08
Q4/08
Q2/09
Q4/09
Q2/10
Q4/10
-45%
France
Germany
United Kingdom
Spain
Source: Deutsche Bank, Datastream, OECD, Eurostat
Source: Deutsche Bank, Datastream, OECD, Eurostat
Figure 133: Nordic countries residential new starts
Figure 134: Other Europe residential new starts
Average
100%
80%
55%
60%
35%
40%
15%
20%
-5%
0%
-25%
-20%
-45%
-40%
-65%
Q4/96
Q2/97
Q4/97
Q2/98
Q4/98
Q2/99
Q4/99
Q2/00
Q4/00
Q2/01
Q4/01
Q2/02
Q4/02
Q2/03
Q4/03
Q2/04
Q4/04
Q2/05
Q4/05
Q2/06
Q4/06
Q2/07
Q4/07
Q2/08
Q4/08
Q2/09
Q4/09
Q2/10
Q4/10
Q4/96
Q2/97
Q4/97
Q2/98
Q4/98
Q2/99
Q4/99
Q2/00
Q4/00
Q2/01
Q4/01
Q2/02
Q4/02
Q2/03
Q4/03
Q2/04
Q4/04
Q2/05
Q4/05
Q2/06
Q4/06
Q2/07
Q4/07
Q2/08
Q4/08
Q2/09
Q4/09
Q2/10
Q4/10
-60%
Denmark
Norw ay
Sw eden
Finland
Average
Belgium
Czech Republic
Poland
Greece
Ireland (NSA)
Average
Source: Deutsche Bank, Datastream, OECD, Eurostat
Source: Deutsche Bank, Datastream, OECD, Eurostat
Figure 135: Building permits index (Euro area 16)
Figure 136: Western Europe (three-month rolling
growth, yoy)
160
50%
140
30%
120
100
10%
80
-10%
60
-30%
Residential
Source: Deutsche Bank, Eurostat
Page 56
Non-residential
-50%
Mar-02
Jul-02
Nov-02
Mar-03
Jul-03
Nov-03
Mar-04
Jul-04
Nov-04
Mar-05
Jul-05
Nov-05
Mar-06
Jul-06
Nov-06
Mar-07
Jul-07
Nov-07
Mar-08
Jul-08
Nov-08
Mar-09
Jul-09
Nov-09
Mar-10
Jul-10
Nov-10
Apr-00
Sep-00
Feb-01
Jul-01
Dec-01
May-02
Oct-02
Mar-03
Aug-03
Jan-04
Jun-04
Nov-04
Apr-05
Sep-05
Feb-06
Jul-06
Dec-06
May-07
Oct-07
Mar-08
Aug-08
Jan-09
Jun-09
Nov-09
Apr-10
Sep-10
Feb-11
40
Belgium
France
Germany
Netherlands
Average
Source: Deutsche Bank, OECD
Deutsche Bank AG/London
19 August 2011
Building & Construction European Contractors
Figure 137: Southern Europe (three-month rolling
growth, yoy)
Figure 138: Nordic countries (three-month rolling
growth, yoy)
60%
80%
40%
60%
20%
40%
0%
20%
0%
-20%
-20%
-40%
-40%
Greece
Hungary
Poland
Spain
Turkey
Average
-60%
Mar-02
Jul-02
Nov-02
Mar-03
Jul-03
Nov-03
Mar-04
Jul-04
Nov-04
Mar-05
Jul-05
Nov-05
Mar-06
Jul-06
Nov-06
Mar-07
Jul-07
Nov-07
Mar-08
Jul-08
Nov-08
Mar-09
Jul-09
Nov-09
Mar-10
Jul-10
Nov-10
Mar-02
Jul-02
Nov-02
Mar-03
Jul-03
Nov-03
Mar-04
Jul-04
Nov-04
Mar-05
Jul-05
Nov-05
Mar-06
Jul-06
Nov-06
Mar-07
Jul-07
Nov-07
Mar-08
Jul-08
Nov-08
Mar-09
Jul-09
Nov-09
Mar-10
Jul-10
Nov-10
-60%
Portugal
Denmark
Finland
Norw ay
Sw eden
Average
Source: Deutsche Bank, OECD t
Source: Deutsche Bank, OECD t
Figure 139: US housing starts
Figure 140: US monthly house price indices (season.
adj.)
60%
2,000
40%
20%
1,500
0%
1,000
-20%
Jun-10
15%
10%
5%
0%
-5%
-10%
-15%
-20%
Dec-10
Jun-09
Dec-09
Jun-08
Dec-08
Jun-07
Housing starts
Dec-07
Jun-06
Dec-06
Jun-05
Dec-05
Jun-04
Dec-04
Jun-03
-60%
Dec-03
0
Jun-02
-40%
Dec-02
500
20%
Apr-01
Aug-01
Dec-01
Apr-02
Aug-02
Dec-02
Apr-03
Aug-03
Dec-03
Apr-04
Aug-04
Dec-04
Apr-05
Aug-05
Dec-05
Apr-06
Aug-06
Dec-06
Apr-07
Aug-07
Dec-07
Apr-08
Aug-08
Dec-08
Apr-09
Aug-09
Dec-09
Apr-10
Aug-10
Dec-10
2,500
S&P/Case-Shiller - 20 city composite index
Housing starts YoY chg (%)
S&P/Case-Shiller - 10 city composite index
FHFA house price index
Source: Deutsche Bank, Datastream
Source: Deutsche Bank, Datastream
Figure 141: US new home sales
Figure 142: Residential supply in months
50%
1600
40%
1400
30%
1200
20%
1000
10%
0%
800
-10%
14
12
10
8
6
600
-20%
400
-30%
4
-40%
2
200
-50%
US new home sales
Source: Deutsche Bank, Datastream
Deutsche Bank AG/London
Change YoY
3m moving average change
0
May-92
Jan-93
Sep-93
May-94
Jan-95
Sep-95
May-96
Jan-97
Sep-97
May-98
Jan-99
Sep-99
May-00
Jan-01
Sep-01
May-02
Jan-03
Sep-03
May-04
Jan-05
Sep-05
May-06
Jan-07
Sep-07
May-08
Jan-09
Sep-09
May-10
Jan-11
-60%
May-92
Feb-93
Nov-93
Aug-94
May-95
Feb-96
Nov-96
Aug-97
May-98
Feb-99
Nov-99
Aug-00
May-01
Feb-02
Nov-02
Aug-03
May-04
Feb-05
Nov-05
Aug-06
May-07
Feb-08
Nov-08
Aug-09
May-10
Feb-11
0
US MONTHS SUPPLY OF EXISTING 1-FAMILY & CONDO HOMES ON MARKET
Source: Deutsche Bank, Datastream
Page 57
Year
Revenues
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
45
50
55
60
65
70
76
81
87
93
99
104
109
115
121
127
132
137
143
149
155
159
164
169
174
% increase
9.1
9.1
9.1
8.1
8.1
7.1
7.1
7.1
6.1
5.1
5.1
5.1
5.1
5.1
4.0
4.0
4.0
4.0
4.0
3.0
3.0
3.0
3.0
9.0
7.0
7.0
7.0
6.0
6.0
5.0
5.0
5.0
4.0
3.0
3.0
3.0
3.0
3.0
2.0
2.0
2.0
2.0
2.0
1.0
1.0
1.0
1.0
Tariff growth (%)
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
Inflation (%)
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
14
14
15
15
16
16
17
17
18
19
19
20
20
21
22
22
23
24
24
25
26
26
27
28
3.4
3.3
3.3
3.3
3.3
3.3
3.2
3.2
3.3
3.1
3.0
3.0
3.0
3.0
3.0
2.9
2.9
2.9
2.9
2.9
2.7
2.7
2.7
2.7
12
13
13
13
14
14
14
15
15
16
16
16
17
17
18
18
18
19
19
20
20
21
21
22
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2
2
2
2
2
2
3
3
3
3
3
3
4
4
4
4
4
5
5
5
5
5
6
6
11.5
9.5
9.5
9.5
8.5
8.5
7.5
7.5
7.5
6.5
5.5
5.5
5.5
5.5
5.5
4.5
4.5
4.5
4.5
4.5
3.5
3.5
3.5
3.5
36
40
45
50
54
60
64
70
75
80
85
90
95
100
105
110
114
119
124
130
134
138
142
146
14.5
11.4
11.2
11.1
9.6
9.5
8.2
8.1
8.1
6.8
5.5
5.5
5.5
5.5
5.5
4.3
4.3
4.3
4.3
4.3
3.1
3.1
3.1
3.1
72.1
73.6
75.0
76.3
77.4
78.4
79.2
79.9
80.7
81.2
81.6
81.9
82.3
82.6
83.0
83.1
83.3
83.5
83.7
83.9
83.9
84.0
84.0
84.1
Cost base
14
% increase
Fixed costs
% increase
Variable costs
% increase
EBITDA
32
% increase
% margin
Depreciation
% of sales
EBIT
70.0
20
20
20
21
21
21
21
22
22
22
22
22
23
23
23
23
24
24
24
25
25
25
25
26
26
44.4
40.4
37.4
34.6
32.1
30.0
28.0
26.4
24.9
23.5
22.4
21.6
20.7
20.0
19.2
18.5
18.0
17.5
17.0
16.5
16.1
15.8
15.5
15.3
15.1
12
16
20
24
29
33
38
43
48
53
58
62
67
72
77
82
86
90
95
100
105
109
112
116
120
37.9
24.6
21.8
19.7
15.8
14.9
12.1
11.6
11.2
9.1
7.2
7.1
7.0
6.9
6.8
5.2
5.1
5.1
5.1
5.0
3.5
3.5
3.4
3.3
31.7
36.2
40.4
44.3
47.4
50.4
52.8
55.0
57.1
58.8
60.0
61.2
62.3
63.4
64.5
65.2
65.9
66.5
67.2
67.8
68.2
68.5
68.7
68.9
% increase
% margin
25.6
Financial expenses
21
21
21
21
21
21
21
21
21
21
21
21
21
21
21
21
21
21
21
21
19
16
13
9
3
Cost of debt (%)
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
Taxes
-3
-2
0
1
3
4
6
8
9
11
13
15
16
18
19
21
23
24
26
28
30
32
35
38
41
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
Net profit
-6
-3
-1
2
5
8
11
14
18
21
24
27
30
33
36
39
42
45
48
52
56
60
65
70
76
% margin
-13.7
-6.7
-1.5
3.3
7.8
11.4
14.8
17.5
20.1
22.5
24.4
25.9
27.3
28.6
29.9
31.1
32.0
32.9
33.7
34.7
36.1
37.6
39.4
41.4
43.7
9
12
15
18
21
25
29
32
35
40
43
46
50
53
57
61
63
68
70
60
45
30
25
15
0
N/M
N/M
N/M 904.9 413.6 310.6 257.5 224.2 199.6 190.1 177.7 170.7 167.6 161.2 156.5 154.5 149.1 150.7 145.5 116.4
80.7
50.1
38.7
21.4
0.0
485
470
454
438
421
405
387
370
352
333
314
295
275
255
234
213
192
170
147
124
101
76
52
26
0
5
5
5
5
4
4
4
4
4
4
3
3
3
3
3
2
2
2
2
1
1
1
1
1
0
Equity
135
119
104
88
72
55
37
19
2
-17
-36
-55
-75
-95
-116
-137
-158
-181
-203
-211
-200
-170
-131
-76
0
Debt
350
350
350
350
350
350
350
350
350
350
350
350
350
350
350
350
350
350
350
335
301
247
183
102
0
Tax rate (%)
Dividend
Dividend payout(%)
Balance sheet
Fixed assets
Deutsche Bank AG/London
Capex
Source: Deutsche Bank
Building & Construction European Contractors
11.2
Traffic growth (%)
19 August 2011
Page 58
Figure 143: Our theoretical concession earnings model – Aggressive scenario
Revenues
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
45
50
55
60
65
70
76
81
87
93
99
104
109
115
121
127
132
137
143
149
155
159
164
169
174
% increase
9.1
9.1
9.1
8.1
8.1
7.1
7.1
7.1
6.1
5.1
5.1
5.1
5.1
5.1
4.0
4.0
4.0
4.0
4.0
3.0
3.0
3.0
3.0
9.0
7.0
7.0
7.0
6.0
6.0
5.0
5.0
5.0
4.0
3.0
3.0
3.0
3.0
3.0
2.0
2.0
2.0
2.0
2.0
1.0
1.0
1.0
1.0
Tariff growth (%)
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
Inflation (%)
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
14
14
15
15
16
16
17
17
18
19
19
20
20
21
22
22
23
24
24
25
26
26
27
28
3.4
3.3
3.3
3.3
3.3
3.3
3.2
3.2
3.3
3.1
3.0
3.0
3.0
3.0
3.0
2.9
2.9
2.9
2.9
2.9
2.7
2.7
2.7
2.7
12
13
13
13
14
14
14
15
15
16
16
16
17
17
18
18
18
19
19
20
20
21
21
22
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2
2
2
2
2
2
3
3
3
3
3
3
4
4
4
4
4
5
5
5
5
5
6
6
11.5
9.5
9.5
9.5
8.5
8.5
7.5
7.5
7.5
6.5
5.5
5.5
5.5
5.5
5.5
4.5
4.5
4.5
4.5
4.5
3.5
3.5
3.5
3.5
36
40
45
50
54
60
64
70
75
80
85
90
95
100
105
110
114
119
124
130
134
138
142
146
14.5
11.4
11.2
11.1
9.6
9.5
8.2
8.1
8.1
6.8
5.5
5.5
5.5
5.5
5.5
4.3
4.3
4.3
4.3
4.3
3.1
3.1
3.1
3.1
72.1
73.6
75.0
76.3
77.4
78.4
79.2
79.9
80.7
81.2
81.6
81.9
82.3
82.6
83.0
83.1
83.3
83.5
83.7
83.9
83.9
84.0
84.0
84.1
Cost base
14
% increase
Fixed costs
% increase
Variable costs
% increase
EBITDA
32
% increase
% margin
Depreciation
% of sales
EBIT
70.0
20
20
20
21
21
21
21
22
22
22
22
22
23
23
23
23
24
24
24
25
25
25
25
26
26
44.4
40.4
37.4
34.6
32.1
30.0
28.0
26.4
24.9
23.5
22.4
21.6
20.7
20.0
19.2
18.5
18.0
17.5
17.0
16.5
16.1
15.8
15.5
15.3
15.1
12
16
20
24
29
33
38
43
48
53
58
62
67
72
77
82
86
90
95
100
105
109
112
116
120
37.9
24.6
21.8
19.7
15.8
14.9
12.1
11.6
11.2
9.1
7.2
7.1
7.0
6.9
6.8
5.2
5.1
5.1
5.1
5.0
3.5
3.5
3.4
3.3
31.7
36.2
40.4
44.3
47.4
50.4
52.8
55.0
57.1
58.8
60.0
61.2
62.3
63.4
64.5
65.2
65.9
66.5
67.2
67.8
68.2
68.5
68.7
68.9
% increase
% margin
25.6
Financial expenses
21
20
19
18
17
16
16
15
14
13
12
11
10
9
9
8
7
6
5
5
4
3
2
1
0
Cost of debt (%)
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
Taxes
-3
-1
0
2
4
6
8
10
12
14
16
18
20
22
24
26
28
29
31
33
35
37
39
40
42
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
Net profit
-6
-3
0
4
7
11
15
18
22
26
30
33
37
40
44
48
51
55
58
62
66
69
72
75
78
% margin
-13.3
-5.5
0.7
6.3
11.5
15.6
19.5
22.6
25.5
28.2
30.3
32.0
33.6
35.1
36.6
37.9
38.9
39.9
40.8
41.7
42.5
43.1
43.7
44.2
44.6
0
0
0
4
9
13
17
21
26
30
35
38
42
47
51
55
59
63
67
71
76
79
83
86
90
0.0
0.0
0.0 115.4 115.4 115.4 115.4 115.4 115.4 115.4 115.4 115.4 115.4 115.4 115.4 115.4 115.4 115.4 115.4 115.4 115.4 115.4 115.4 115.4 115.4
Tax rate (%)
Dividend
Dividend payout (%)
Balance sheet
Fixed assets
485
470
454
438
421
405
387
370
352
333
314
295
275
255
234
213
192
170
147
124
101
76
52
26
0
Capex
5
5
5
5
4
4
4
4
4
4
3
3
3
3
3
2
2
2
2
1
1
1
1
1
0
Equity
144
141
142
141
140
138
136
133
130
126
121
116
110
104
97
90
82
73
64
55
45
34
23
12
0
Debt
341
328
312
297
281
266
251
237
222
208
193
179
165
151
137
124
110
96
83
69
56
42
29
15
0
Source: Deutsche Bank
Building & Construction European Contractors
11.2
Traffic growth (%)
19 August 2011
Deutsche Bank AG/London
Figure 144: Our theoretical concession earnings model – Base case scenario
Page 59
Revenues
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
45
50
55
60
65
70
76
81
87
93
99
104
109
115
121
127
132
137
143
149
155
159
164
169
174
% increase
9.1
9.1
9.1
8.1
8.1
7.1
7.1
7.1
6.1
5.1
5.1
5.1
5.1
5.1
4.0
4.0
4.0
4.0
4.0
3.0
3.0
3.0
3.0
9.0
7.0
7.0
7.0
6.0
6.0
5.0
5.0
5.0
4.0
3.0
3.0
3.0
3.0
3.0
2.0
2.0
2.0
2.0
2.0
1.0
1.0
1.0
1.0
Tariff growth (%)
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
Inflation (%)
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
14
14
15
15
16
16
17
17
18
19
19
20
20
21
22
22
23
24
24
25
26
26
27
28
3.4
3.3
3.3
3.3
3.3
3.3
3.2
3.2
3.3
3.1
3.0
3.0
3.0
3.0
3.0
2.9
2.9
2.9
2.9
2.9
2.7
2.7
2.7
2.7
12
13
13
13
14
14
14
15
15
16
16
16
17
17
18
18
18
19
19
20
20
21
21
22
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2
2
2
2
2
2
3
3
3
3
3
3
4
4
4
4
4
5
5
5
5
5
6
6
11.5
9.5
9.5
9.5
8.5
8.5
7.5
7.5
7.5
6.5
5.5
5.5
5.5
5.5
5.5
4.5
4.5
4.5
4.5
4.5
3.5
3.5
3.5
3.5
36
40
45
50
54
60
64
70
75
80
85
90
95
100
105
110
114
119
124
130
134
138
142
146
14.5
11.4
11.2
11.1
9.6
9.5
8.2
8.1
8.1
6.8
5.5
5.5
5.5
5.5
5.5
4.3
4.3
4.3
4.3
4.3
3.1
3.1
3.1
3.1
72.1
73.6
75.0
76.3
77.4
78.4
79.2
79.9
80.7
81.2
81.6
81.9
82.3
82.6
83.0
83.1
83.3
83.5
83.7
83.9
83.9
84.0
84.0
84.1
Cost base
14
% increase
Fixed costs
% increase
Variable costs
% increase
EBITDA
32
% increase
% margin
Depreciation
% of sales
EBIT
70.0
20
20
20
21
21
21
21
22
22
22
22
22
23
23
23
23
24
24
24
25
25
25
25
26
26
44.4
40.4
37.4
34.6
32.1
30.0
28.0
26.4
24.9
23.5
22.4
21.6
20.7
20.0
19.2
18.5
18.0
17.5
17.0
16.5
16.1
15.8
15.5
15.3
15.1
12
16
20
24
29
33
38
43
48
53
58
62
67
72
77
82
86
90
95
100
105
109
112
116
120
37.9
24.6
21.8
19.7
15.8
14.9
12.1
11.6
11.2
9.1
7.2
7.1
7.0
6.9
6.8
5.2
5.1
5.1
5.1
5.0
3.5
3.5
3.4
3.3
31.7
36.2
40.4
44.3
47.4
50.4
52.8
55.0
57.1
58.8
60.0
61.2
62.3
63.4
64.5
65.2
65.9
66.5
67.2
67.8
68.2
68.5
68.7
68.9
% increase
% margin
25.6
Financial expenses
21
20
19
18
17
15
13
11
9
6
3
1
0
0
0
0
0
0
0
0
0
0
0
0
0
Cost of debt (%)
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
Taxes
-3
-1
0
2
4
6
9
11
14
17
19
22
23
25
27
29
30
32
33
35
37
38
39
41
42
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
35.0
Net profit
-6
-3
0
4
8
12
16
21
25
31
36
40
43
47
50
53
56
59
62
65
68
71
73
76
78
% margin
-13.3
-5.5
0.7
6.5
12.0
16.8
21.3
25.4
29.2
33.0
36.3
38.6
39.8
40.5
41.2
41.9
42.4
42.8
43.3
43.7
44.1
44.3
44.5
44.7
44.8
0
0
0
0
0
0
0
0
0
0
0
40
63
66
71
74
78
80
85
88
91
95
98
101
104
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
99.5 144.9 141.8 142.7 139.2 139.5 136.1 137.6 135.6 133.5 134.6 134.2 133.8 133.3
485
470
454
438
421
405
387
370
352
333
314
295
275
255
234
213
192
170
147
124
101
76
52
26
0
5
5
5
5
4
4
4
4
4
4
3
3
3
3
3
2
2
2
2
1
1
1
1
1
0
Equity
144
141
142
145
153
165
181
202
227
258
294
294
275
255
234
213
191
170
147
124
101
76
51
26
0
Debt
341
328
312
292
268
239
206
168
124
75
20
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Tax rate (%)
Dividend
Dividend payout (%)
Balance sheet
Fixed assets
Deutsche Bank AG/London
Capex
Source: Deutsche Bank
Building & Construction European Contractors
11.2
Traffic growth (%)
19 August 2011
Page 60
Figure 145: Our theoretical concession earnings model – Conservative scenario
19 August 2011
Building & Construction European Contractors
Appendix 1
Important Disclosures
Additional information available upon request
For disclosures pertaining to recommendations or estimates made on a security mentioned in this report, please see
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The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject
issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any
compensation for providing a specific recommendation or view in this report. Luis Prieto Bartolome/Manu Rimpela
Equity rating key
Buy: Based on a current 12- month view of total shareholder return (TSR = percentage change in share price
from current price to projected target price plus projected dividend yield ) , we recommend that investors
buy the stock.
Sell: Based on a current 12-month view of total shareholder return, we recommend that investors sell the
stock
Hold: We take a neutral view on the stock 12-months
out and, based on this time horizon, do not recommend
either a Buy or Sell.
Notes:
1. Newly issued research recommendations and target
prices always supersede previously published research.
2. Ratings definitions prior to 27 January, 2007 were:
Buy: Expected total return (including dividends) of
10% or more over a 12-month period
Hold: Expected total return (including dividends)
between -10% and 10% over a 12-month period
Sell: Expected total return (including dividends) of 10% or worse over a 12-month period
Deutsche Bank AG/London
Equity rating dispersion and banking relationships
400
350
300
250
200
150
100
50
0
49 %
48 %
38 %
35 %
3 % 28 %
Buy
Hold
Companies Covered
Sell
Cos. w/ Banking Relationship
European Universe
Page 61
19 August 2011
Building & Construction European Contractors
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