OHL - Q2 20 results comments and updated analysis

All,

OHL reported good Q2 20 results. It supports the trend of significantly better than expected results in the High Yield space, supported by temporary cost cutting measures allowed by the government furlough schemes in Europe. Working capital flows improved and management sees a recovery in both EBITDA and order book already in 2H 20, led by the US business.

Our updated files on OHL can be found here.

Key takeaways:

- Revenues down -3% yoy in Q2 20, as the US unit offset the weakness of Spain and Latam.

- EBITDA pre IFRS16 down 70% yoy in Q2 (our estimates). This leaves 1H 20 EBITDA at EUR+13m vs EUR+15m of 1H 19.

- Management is seeing encouraging trends for the recovery in 2H 20, and EBITDA in 2020 to be slightly higher than in 2019.

-Order book down -9.8% in 1H 20 vs YE19. Management expects most of the shortfall to be recouped in 2H 20, but admits that its previous targets for the order book may not be achievable.

- Currently 86% of the order boon is for public sector clients.

- Significantly better working capital trends, which tend to be seasonally negative in Q1-Q3 and positive in Q4. EUR-199m of cash flows from working capital in 1H 20 vs EUR-245m in 1H 19. This trend did not benefit from temporary crisis-related working capital boost (ie tax deferrals, etc.). The run off of the legacy projects are one of the drivers of this improvement, in our view.

- For the long term – Revenues could reach EUR3.5-4bn in 2 years, with an EBITDA margin “above 3%”. The strategic direction will be to diversify the business, re-enter the concessions segment, and expand on industrial and services.

- OHL will pursue all legal options to recover the loan granted by Pacadar/GVM. El Economista reports that GVM may have proposed to give the ownership of Pacadar to OHL as repayment for the loan. According to the article, Pacadar (precast concrete products)  is currently profitable.

OHL's noteholder meeting did not reach the necessary 2/3 quorum on 4 Aug. As a result, the meeting was postponed by one month to 4 Sep, in line with the procedure under the bond documentation. We expect the second meeting to reach a conclusive decision, as the bar is much lower for quorum and approval, as discussed in our note.

We are looking forward to exchanging ideas on OHL with you.

Juliano