OHLA Group – Busy bees
All,
Please find our unchanged analysis here.
In our recent update to clients on OHLA, we talked about what we wanted to see in the 1H22 results. Mostly this revolved around order cancellations if the company was addressing cost inflation in its existing order book and how successful it was in winning new, profitable orders. Needless to say that management have been sparse with their comments in these items, but how much can we conclude so far?
How much inflation is not yet reflected in margins?
- We were a little disappointed about the lack of clarity on the impact of inflation within the order book. Management did affirm FY EBITDA guidance at €110m, but it also acknowledged that it was still working through its order book to identify where there were potential inflation “issues”. If there is significant inflation risk in the book, OHLA will have to renegotiate pricing. There is a risk that governments refuse to cooperate and that margins in H2 could come under pressure.
- OHLA will have €4.4bn of contracts to comb through where repricing negotiations may be needed. We have seen anecdotal evidence of governments allowing repricing of bids to ensure projects are completed.
- The construction order book is now €6.6bn, with €2.2bn in new orders won in 1H22. Around 1/3rd of the book has been priced and won in the new pricing environment and should be much more inflation proofed. US/EU forecasts indicate Inflation has peaked and expect the rate to begin falling in 2H22. With €400m of cash OHLA can afford some margin pressure in H2, but loss-making contracts will eventually crimp its ability to bid for new business as banks will not release bonding lines.
Significant Order book rebound.
- We believe OHLA has learned the lessons of the past about pricing contracts so the Short Term order book 22% up on December 21 and 31% up on the first half of 2021 is something we welcome. These new orders will be less susceptible to inflation shocks as they have been priced in the new environment.
- We modelled more modest book growth and EBITDA margins of ~4% and projected FCF of €125m in 2022-25 (excluding the remaining Cemenosa cash), if we assume growth of 3% sequentially for 2 quarters and flat thereafter, that grows to €200m.
- In Q1 the growth from December was 3%, so there has been a huge surge in Q2. If this continues we may need to increase our baseline order book and with it our expectation for Revenue and EBITDA generation.
Positioning:
- We have a long position of 4.3% NAV in the bonds and 3.5% in the equity. From today we would expect a return of 10% from the bond portion and 30% from the equity leg (Current price €0.58 – model value €0.78) in the next 12 months.
- OHLA has done an excellent job in winning orders but the weak answer on whether construction margins could be hurt by inflation in H2 was a disappointment to us. To our surprise, the analyst call was very focused on the sale of Montreal Hospital [coming soon], and Canalejas [could take 12 to 18 months]. OHLA is not in desperate need of the liquidity from these sales and management is more focused on getting the order book humming.
I look forward to discussing this with you all.
Aengus
E: amcmahon@sarria.co.uk
T: +44 203 744 7055