Trevi Finanziaria. New investments to meet material intake. 12 May 2008 Capital Goods Update. Price: Target price: 16.

Transcription

1 12 May 2008 Capital Goods Update Price: Target price: Outperform /5/ E 2009E EPS Adj. ( ) DPS ( ) BVPS ( ) M J J A S O N D J F M A M TREVI MILAN MIBTEL - PRICE INDEX Source: DATASTREAM EV/Ebitda(x) P/E adj (x) Div.Yield(%) FCF Yield(%) <0 7.1 <0 5.5 New investments to meet material intake Market Data Market Cap ( m) 1,154 Shares Out. (m) 70 Main Shareholder Trevisani Fam (55.9%) Free Float (%) 44.1% 52 week range ( ) Rel Perf vs Mibtel (%) -1m 17.2% -3m 44.9% -12m 52.6% 21dd Avg. Vol. ('000) 237 Reuters/Bloomberg TFI.MI / TFI IM Key Financial Data ( m) Turnover 874 EBITDA 129 EBIT 99 Net Profit 56 Shareholders' Funds 156 Net Debt (-) Cash (+) -143 Gearing % 87.3% Fine tuning of estimates 2008E EPS confirmed; 2009E up by 7.8% We confirm our 2008E EPS of 1.0 per share, while increasing our 2009E EPS by 7.8% to 1.3. This is the result of higher profitability expected in the drilling divisions (Petreven and Drillmec) thanks to the execution of more profitable orders won in 2007 (impacting 2008 and 2009 figures). We remind investors that our EPS calculation takes into account the dilution effect from the conversion of the 70m convertible bond that we have already factored in ( strike price, expiring in 2011). New investments to meet expected material intake The company should accelerate its capex in 2008 ( 72m in 2008E vs. 50m in 2007) in order to meet the substantial order intake expected over the next two years. We refer to the opportunities coming from the US market in the ground engineering sector, coupled with confirmed active Middle East/African markets on both the foundation and the drilling side. In the short term, positive newsflow might come from the tender for the repair of two dams in the US (around USD 200m intake of USD 600m tender) and from Iraq (USD 200m order to provide six conventional rigs). We do not exclude the acquisition of small/mid operators in the case of an order backlog reaching 1bn by August. Under those conditions our 2008E NFP would increase from our current estimate of 166m to 190/200m. Outperform confirmed - cheap multiples despite stock performance Our SOP based on 2009E figures and the main current peer multiples points to per share. We quantify at some 1.8 the additional equity value per share of potential intake coming from the US and the Middle East in the short term and we have factored this in, reaching a target price of We maintain our Outperform rating since our 2009E forecasts (which do not include the impact of the potential intake mentioned above) imply a current multiple of 12.9x earnings, which is cheap considering the 24% CAGR between 2007 and 2009E and the 0.54x PEG ratio. Andrea Scauri Sales desk Equity Analyst mailto:andrea.scauri@mediobanca.it

2 Brilliant presentation a bullish view on the future The company held an analyst presentation on 6 May, in which the management provided a comment on the FY 2007 figures and an outlook for Both the two core businesses (ground engineering and drilling) are expected to have a rosy future. As far as the ground engineering division is concerned, management confirmed our expectations (see our report published on 4 April) of substantial potential new orders coming from the US in the light of the investment plan already approved and financed by the US government (USD4bn over 4/5 years) to refurbish and modernise existing bridges and dams. Two new contracts for a total of some USD600m are expected to be assigned in the short term and the company has a good chance of winning a stake of around USD200m given the low level of competition (the two European players Bauer and Soletanche) and its historical presence and excellent track record in the US market. The drilling division should benefit from a confirmed strong intake from the Middle East and improved profitability following the execution of more recent orders with higher margins. The current oil price level should boost the capex plans of oil companies to replace old equipment. It seems that Trevi's HH rigs now have an undeniable technological advantage (its HH technology). Finally, the new project Trevi Energy focusing on alternative energy (wind farms) seems appealing but is still a question mark since no details have been provided yet. The company is in the process of obtaining authorisation for 600MW to build a wind farm in the sea in Italian waters. The goal here is to set up the infrastructure which can then be sold on to energy operators. Below we provide our new forecasts which imply a confirmed 2008E EPS at 1.00 and a 2009E EPS increasing by 7.8% to 1.30 per share. Trevi group 2007 historical figures, 2008E and 2009E forecasts 2007 % 2008 % 2009 % Sales % 1, % 1, % Others % Turnover % 1, % 1, % EBITDA % % % EBITDA margin 14.8% 15.3% 15.9% D&A (26.4) +10.4% (30.4) +15.0% (32.8) +8.0% EBIT % % % EBIT margin 11.4% 12.3% 13.1% Net financial charges (13.7) +31.0% (17.0) +24.5% (13.0) -23.5% Pre-tax profit % % % Taxes (28.1) +91.3% (37.7) +34.2% (46.7) +24.1% Tax rate 32.7% 34.0% 34.0% Minorities (2.0) +72.1% (3.5) n.m. (1.2) -65.7% Net profit % % % EPS increase vs. old estimates 0.0% 7.8% Source: Company data, Mediobanca Securities 12 May

3 Looking at the Group s business divisions, we highlight the positive trend expected in all four business lines. In detail: Foundation works and foundation equipment (Trevi and Soilmec) are expected to confirm the growth trend posted in 2007 as well as the profitability level; Petreven (Drilling services) should benefit by additional six rigs operating, resulting in a total of 15 rigs of which ten are 100% owned and five are part of a joint venture. Assuming an average USD/EUR exchange rate of 1.55 we reach a figure for revenues of some 63m in 2008 with a 22% EBITDA margin. Profitability should jump by 800 bps in 2009 with all the rigs operating at full capacity; Drillmec (Drilling equipments) should record a 27% increase in 2008 with an increase in profitability thanks to higher margins from orders gained in 2007 and to be executed in 2008 (14.5% EBITDA margin from 13.6%). Trevi group breakdown by business lines E 2009E Foundation works (Trevi) % % % EBITDA % % EBITDA margin 16.4% 16.6% 16.6% Drilling services (Petreven) % % % EBITDA % % EBITDA margin 22.0% 22.0% 30.0% Trevipark % % % EBITDA % % EBITDA margin 12.2% 12.0% 12.0% Foundation equipment (Soilmec) % % % EBITDA % % EBITDA margin 13.5% 14.0% 14.0% Drilling equipment (Drillmec) % % % EBITDA % % EBITDA margin 13.6% 14.5% 14.5% Source: Company data, Mediobanca Securities Note that our 2009E forecasts do not include the impact of the mentioned potential intake from the US and Iraq. We assume some USD 200m order from the tender in the US and USD 200m from Iraq to provide six conventional rigs (in this case to be split between 2009 and 2010). As such, the potential additional EBIT in 2009 should be around 23m (by assuming a 12% average EBIT margin and a 1.55 Forex). Additional EBIT on 2009 figures from potential short term intake m Additional revenues from the US (USD 200m in 2009) Additional revenues from Iraq (USD 200m in 2 years) 64.5 Total additional revenues in EBIT margin 12.0% Additional EBIT in May

4 New investments to meet expected material intake The company is expected to accelerate its capex plan in 2008 in order to meet the material order intake expected over the next two years. The above-mentioned USD 200m potential intake from the USD 600m tender for the repair of two dams should be the first step of an order flow relating to a USD 4bn plan over the next four years - already budgeted and financed by the US government to refurbish/modernize existing infrastructure. In addition, the Middle East is expected to confirm its growth opportunities not only in the drilling segment but also in ground engineering given the heavy need for infrastructure. This explains management s intention to continue investing in new plants/factories in order to take up the significant opportunities that the market will present. We are assuming capex of some 72m in 2008E, around 22m above the level recorded in 2007 and split as follows: Trevi group: capex plan E 2009E Maintenance capex 30n 30m 30m Capex for new plants/factories 20m 30m 15m Rig 0m 12m 0m Total capex 50m 72m 45m Note that our 72m 2008E capex assumption includes 12m for the construction of a rig (operated by Petreven). Despite the heavy investments and an expected worsening in net working capital, the company is expected to burn only some 23m cash (dividends included), leading to a Group net financial position of 166/170m by year end, or a very modest 1.05x Debt/EBITDA ratio and 0.7x gearing E 2009E Net Profit and minorities Non cash items Cash low Change in net working capital Capex Free operating cash flow Dividends Others Free cash flow Net financial position Debt/EBITDA ratio 1.10x 1.05x 0.60x Gearing 0.9x 0.7x 0.4x We do not exclude the acquisition of small/mid operators in the event of an order backlog standing at 1bn by August. 12 May

5 Q1 forecasts The company will publish its Q1 results on 15 May. We are expecting strong figures with sales up by 30% (thanks also to an easier comparison base we remind investors that growth in Q107 was well below that posted in the following quarters) and EBIT increasing by 57% to 29.8m. Net profit should be up by 58%, assuming a 35% tax rate. Order backlog should be in the region of 800m vs. the 709m posted at the end of Trevi group Q1 forecasts Q1 07 Q1 08E % ch. Order backlog , % Total sales % Turnover % EBITDA % EBITDA margin 14.1% 15.4% EBIT % EBIT margin 10.6% 12.7% Charges from Forex Net financial charges Pre-tax profit % Taxes Tax-rate 33.6% 35.0% Minorities Net Profit % 12 May

6 Trevi: 2009E Sum-of-the-parts Valuation update We are updating our SOP which, based on 2009E figures and the main peer multiples, now indicates 15.0 per share. EV EV/Sales EV/EBITDA 2009E Sales 2009E EBITDA EBITDA margin Ground engineering divisions (Trevi and Soilmec) x 5.6x % Drilling service (Petreven) x 6.3x % Drilling equipment (Drillmec) x 6.9x % Total 1, , E net debt (111.1) 2009E net debt (adjusted by the convertible bond) (41.1) Equity Value 1,049.1 Shares outstanding 64,000 Shares outstanding (fully diluted) 70,150 Equity value per share 15.0 Source: Datastream, Mediobanca Securities We quantify the additional impact of the potential intake from the US and Iraq at some 1.80 per share on the basis of the following assumptions (see also the table on page 3): a USD/EUR exchange rate at 1.55; a 12% EBIT margin to be applied to the USD300m additional sales; an EV/EBIT multiple of 6.0x; additional capex of 13m (10% of the intake) to the 2009E capex. Additional revenues from the US ( m) Additional revenues from Iraq ( m) 64.5 Total additional revenues ( m) Additional EBIT on 2009E figures (12% EBIT margin) 23.2 Additional EV Additional capex Additional equity value Additional value p/s to SOP 1.8 We have added this additional value of 1.80 to our SOP, leading to a target price of 16.80, since we feel the company has a material chance of winning such orders. Despite the modest upside of our target price compared to the current price, we maintain our Outperform recommendation for the following reasons: 2008E earnings show 100% visibility in the light of the current backlog, in a context of equity markets characterised by modest visibility; the multiples are still attractive, despite solid absolute and relative performance. The stock is currently trading at 12.9x earnings on 2009, cheap considering the 24% CAGR between 2007 and 2009E and the 0.54x PEG ratio; taking a conservative approach, we did not include any premium to the peer multiples in our SOP, even though the higher growth rates and profitability would justify this. 12 May

7 THIS RESEARCH REPORT IS ISSUED BY MEDIOBANCA - BANCA DI CREDITO FINANZIARIO S.P.A. (MEDIOBANCA S.P.A.) AUTHORIZED BY BANK OF ITALY TO PROVIDE FINANCIAL SERVICES. THIS RESEARCH REPORT IS PROVIDED FOR INFORMATION PURPOSES ONLY AND DOES NOT CONSTITUTE OR SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL, OR A SOLICITATION OF AN OFFER TO BUY OR SELL, ANY SECURITIES. IT IS NOT INTENDED TO REPRESENT THE CONCLUSIVE TERMS AND CONDITIONS OF ANY SECURITY OR TRANSACTION, NOR TO NOTIFY YOU OF ANY POSSIBLE RISKS, DIRECT OR INDIRECT, IN UNDERTAKING SUCH A TRANSACTION. THE INFORMATION CONTAINED HEREIN, INCLUDING ANY EXPRESSION OF OPINION, HAS BEEN OBTAINED FROM OR IS BASED UPON SOURCES BELIEVED TO BE RELIABLE BUT IS NOT GUARANTEED AS TO ACCURACY OR COMPLETENESS ALTHOUGH MEDIOBANCA S.P.A. CONSIDERS IT TO BE FAIR AND NOT MISLEADING. SAVE AS OTHERWISE PROVIDED IN THE RESEARCH REPORT, MEDIOBANCA S.P.A. HAS NO OBLIGATION TO UPDATE, MODIFY OR AMEND THIS REPORT AND INFORM THE READER ACCORDINGLY. ALL PRICES ARE MARKET CLOSE PRICES UNLESS DIFFERENTLY SPECIFIED. MEDIOBANCA S.P.A. AND ITS NON U.S. AFFILIATED COMPANIES MAY FROM TIME TO TIME DEAL IN, HOLD OR ACT AS MARKET-MAKERS OR ACT AS ADVISERS, BROKERS OR BANKERS IN RELATION TO THE SECURITIES, OR DERIVATIVES THEREOF, OF PERSONS, FIRMS OR ENTITIES MENTIONED IN THIS DOCUMENT, OR BE REPRESENTED ON THE BOARDS OF SUCH PERSONS, FIRMS OR ENTITIES, EMPLOYEES OF MEDIOBANCA S.P.A. AND ITS AFFILIATED COMPANIES, OR INDIVIDUALS CONNECTED TO THEM MAY FROM TIME TO TIME HAVE A POSITION IN OR BE HOLDING ANY OF THE INVESTMENTS OR RELATED INVESTMENTS MENTIONED IN THIS REPORT. TREVI FINANZIARIA INITIAL COVERAGE AS OF 06/03/2006.MEDIOBANCA S.P.A. AND ITS AFFILIATED COMPANIES, OR INDIVIDUALS CONNECTED TO THEM ARE UNDER NO OBLIGATION TO DISCLOSE OR TAKE ACCOUNT OF THIS DOCUMENT WHEN ADVISING OR DEALING WITH OR FOR THEIR CUSTOMERS. FOR FURTHER INFORMATION REGARDING QUARTERLY RATING STATISTICS AND DESCRIPTIONS, CHINESE WALL MECHANISMS PUT IN PLACE BY MEDIOBANCA S.P.A. AND ANY OTHER DISCLAIMERS, PLEASE REFER TO THE MB SECURITIES SECTION OF THE MEDIOBANCA S.P.A. WEBSITE AT TO ACCESS PREVIOUS RESEARCH NOTES AND ESTABLISH TRENDS IN RATINGS ISSUED, PLEASE SEE THE RESTRICTED ACCESS PART OF THE MB SECURITIES SECTION OF THE MEDIOBANCA S.P.A. WEBSITE AT ADDITIONAL NOTES TO U.S. INVESTORS: THIS RESEARCH REPORT IS PREPARED BY MEDIOBANCA - BANCA DI CREDITO FINANZIARIO S.P.A. AND DISTRIBUTED IN THE UNITED STATES BY MEDIOBANCA SECURITIES USA LLC, A FINRA MEMBER FIRM. THIS INFORMATION PROVIDED IN THIS COMMUNICATION IS FOR DISCUSSION AND IS NOT BINDING ON MEDIOBANCA SECURITIES USA LLC OR ANY OF ITS AFFILIATES. MEDIOBANCA SECURITIES USA LLC IS AN AFFILIATE OF MEDIOBANCA - BANCA DI CREDITO FINANZIARIO S.P.A.. MEDIOBANCA - BANCA DI CREDITO FINANZIARIO S.P.A. HAS NO OBLIGATION TO UPDATE, MODIFY OR AMEND THIS REPORT AND INFORM THE READER ACCORDINGLY, EXCEPT WHEN TERMINATING COVERAGE OF THE ISSUER OF THE SECURITIES DISCUSSED IN THIS REPORT. THIS DOCUMENT IS NOT INTENDED TO REPRESENT THE CONCLUSIVE TERMS AND CONDITIONS OF ANY SECURITY OR TRANSACTION, NOR TO NOTIFY YOU OF ANY POSSIBLE RISKS, DIRECT OR INDIRECT, IN UNDERTAKING SUCH A TRANSACTION. THE ATTACHED TERMS ARE INDICATIVE AND CONSTITUTE NEITHER AN OFFER TO SELL NOR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY. WE WILL ASSUME, UNLESS YOU NOTIFY US OTHERWISE, THAT YOU HAVE SUFFICIENT KNOWLEDGE, EXPERIENCE AND/OR PROFESSIONAL ADVICE TO UNDERTAKE YOUR OWN ASSESSMENT. ALL OF THE VIEWS EXPRESSED IN THIS RESEARCH REPORT ACCURATELY REFLECT THE RESEARCH ANALYST'S PERSONAL VIEWS REGARDING THE SUBJECT COMPANY. NO PART OF ANALYST COMPENSATION WAS, IS OR WILL BE, DIRECTLY OR INDIRECTLY RELATED TO THE SPECIFIC RECOMMENDATIONS OR VIEWS EXPRESSED IN THIS RESEARCH REPORT. MEDIOBANCA SECURITIES USA LLC ACCEPTS RESPONSIBILITY FOR THE CONTENT OF THIS REPORT. ANY US PERSON RECEIVING THIS REPORT AND WISHING TO EFFECT ANY TRANSACTION IN ANY SECURITY DISCUSSED IN THIS REPORT SHOULD CONTACT MEDIOBANCA SECURITIES USA LLC AT 001(212) PLEASE REFER TO THE CONTACT PAGE FOR ADDITIONAL CONTACT INFORMATION. 12 May

8 Profit & Loss account ( m) E 2009E Turnover ,036 1,150 Turnover growth % EBITDA EBITDA margin (%) EBITDA growth (%) Depreciation & Amortization EBIT EBIT margin (%) EBIT growth (%) nm Net Fin.Income (charges) Non-Operating Items Extraordinary Items Pre-tax Profit Tax Tax rate (%) Minorities Net Profit Net Profit growth (%) n.m n.m Adjusted Net Profit Adjusted Net Profit growth (%) n.m n.m Balance Sheet ( m) E 2009E Working Capital Net Fixed Assets Total Capital Employed Shareholders' Funds Minorities Provisions Net Debt (-) Cash (+) Cash Flow Model ( m) E 2009E Cash Earnings Working Capital Needs Capex (-) Financial Investments (-) Dividends (-) Other Sources / Uses Ch. in Net Debt (-) Cash (+) Multiples E 2009E P/E Adj P/CEPS P/BV EV/ Sales EV/EBITDA EV/EBIT EV/Cap. Employed Yield (%) FCF Yield (%) <0 7.1 <0 5.5 Per Share Data ( ) E 2009E EPS EPS growth (%) n.m EPS Adj EPS Adj. growth (%) n.m CEPS BVPS DPS Ord Key Figures & Ratios E 2009E Avg. N of Shares (m) EoP N of Shares (m) Avg. Market Cap. ( m) ,154 1,154 Enterprise Value ( m) ,321 1,266 Labour Costs/Turnover (%) 14% 13% 12% 12% Depr.&Amort./Turnover (%) 4% 3% 3% 3% Prod. Ratio (Turn./Op.Costs) Gearing (Debt / Equity) (%) 138% 87% 73% 36% EBITDA / Fin. Charges >10 Cap.Employed/Turnover (%) 49% 37% 40% 38% Capex / Turnover (%) 8% 6% 7% 4% Pay out (%) 12% 13% 13% 13% ROE (%) 22% 36% 32% 30% ROCE (%) (pre tax) 18% 30% 31% 34% ROCE (%) (after tax) 12% 21% 20% 22%