OHLA – Going by the book
All,
Please find our unchanged analysis here.
OHLA has placed a lot of stores in the potential of its US construction business post-restructuring. So far, the results are encouraging, and the imminent signing of President Biden’s Infrastructure Bill in the US should support the business over the next few years. Order-Book growth was 12.5% for the 9 Month period (11.1% at the half-year) and it is now over €5bn. Equally important was the construction order intake of €2.6bn which equated to a book-to-bill ratio of 1.3x. All of this underlines our confidence that revenue and cash will be strong into 2022 and beyond. We remain long the 2025/26 bonds and equity having opted to take the haircut and equity whilst extending our maturity to March 2025/26. These bonds are trading at around 93c/€ and the equity is at €0.76 (recent high of €0.82).
The order book is growing fast and is dominated by transport infrastructure projects:
- Construction: The bulk of orders (~90%) are in the construction division where new orders for the year were skewed to the US which accounted for 46% (Europe 34.9%, LatAm 18.1%, Other 1%.). In September the book was €4.6bn (24.2 months of sales) and in the period the company won €2.1bn of new orders (1.3x book to bill). Over 80% of these projects are <€150m reducing the lumpiness of risk. Roads account for 46.4% and railways 21.4%. Infrastructure projects like this are often contracted by state-owned entities. The involvement of government agencies reduces completion risks (albeit at the risk of political interference).
The equity should be closer to €1.15, and the bonds closer to 100c/€:
- Our DCF valuation of the equity is in the €1.00 - €1.15 range. We see the catalyst for moving to this level as being a return to an order book of €5.5bn which we expect by mid-2022.
- The book-to-bill ratio is now above 1.2x and with revenue on average 55% of the previous year's order book, we expect a significant rise in the top line. Revenue is linked to order books, historically the average sales to prior year order book is 55%.
- Infrastructure investment plans promised by governments both in Europe and the US, will continue to support orders and revenue in the coming years. If there are delays in getting projects started, we see that as already reflected in the price.
- We are expecting a 2021 EBITDA margin of 3.1% as the company emerges from restructuring. We have let this rise to 3.5% - 4.0%. in the future.
- As the order book continues to build, we also expect a strong full to 100c/€ for the 6.6% 2025/26
Liquidity continues to be strong:
- At 30/9 the company had €216m in cash (€356m less €140m in cash held as collateral). The Navarra concession was sold in the quarter for €25m and an agreement was reached to sell the stake in the Montreal Hospital project, this is expected to close in the first half of 2022 and will further enhance liquidity. We are long OHL for 6% of NAV, initially taken via the 2022 unsecured bonds. In the restructuring we
Seasonal working capital outflows mask earnings progress:
Operating cash flow for the quarter was -€95m, largely through seasonal increases in receivables. Much of this will reverse in Q4. Topline growth was 2%, against easy 2020 comps when management was focused on internal restructuring. EBITDA is still improving largely driven this quarter by a 1% improvement in gross margin. We expect IFRS 16 adjusted EBITDA at €76m for the FY with the working capital reversal leading to unrestricted cash of around €294m.
Positioning:
We remain long the 2025/26 bonds and equity for 6% of NAV having opted for partial equitisation in the restructuring. We are beginning to see the order book reflect a company that is coming out the other side of a painful restructuring process. With new management in place, we expect OHLA to benefit from infrastructure spending and as these projects start to be tendered, we are expecting strong growth in the order book to be reflected in both the debt and the equity of OHLA.
We look forward to discussing this with you.
Regards,
Aengus
E: amcmahon@sarria.co.uk
T: +44 203 744 7055