Industry Update Heavy Construction Q4 2017

Transcription

1 Industry Update Heavy Construction Q New York Boston Chicago Orlando Philadelphia Princeton

2 Table of Contents * Industry Overview... 2 Key Indicators... 4 M&A Overview Public Market Data... 6 * This publication is also available in soft copy on the MPI website: Page 1 1

3 Industry Overview This publication focuses on developments and trends within the Heavy Construction industry. The Heavy Construction industry is comprised of companies engaged in large-scale construction projects, often infrastructure. Heavy Construction companies provide a variety of services including; planning, design, engineering, consulting, and construction. Below, we touch on a few of the subsectors within the industry: Road & Highway Construction: Companies in this industry subsector construct new highways, streets, roads and airport runways (excluding elevated roadways). The industry also includes highway and street construction management operators and special trade contractors that perform subcontracting work on projects (e.g. grading, laying pavement and installing guardrails and public sidewalks). Contractors may subcontract some or all of the actual construction work. The Road and Highway Construction industry experienced a host of early issues over the five years to 2017, mainly budgetary constraints and weak investments in transport infrastructure. Local and state governments, which are the largest sources of industry-specific project funding, have maintained prudent budgets since the recession, while federal programs like the Highway Trust Fund have remained precarious. The industry has only recently returned to growth due to greater local government spending and the passing of 2015 s five-year Fixing America s Surface Transportation (FAST) Act. Over the five years to 2017, industry revenue is expected to increase at an annualized rate of 0.3% to $105.4 billion, with no discernable change in Bridge & Elevated Highway Construction: This industry subsector comprises companies that primarily engage in the construction of bridges and elevated highways. These types of projects include new work, reconstruction and repairs. This industry subsector does not include road and highway construction activity. The Bridge and Elevated Highway Construction industry has stagnated in the aftermath of the recession. Since most funding for industry projects comes from local and state governments, regional spending cuts caused revenue to drastically decline during the economic downturn. However, temporary federal government stimulus spending helped bridge the gap created by the reduction of state and municipal funding. Over the past five years, revenue is expected to increase at an annualized rate of just 0.3% to $18.0 billion, including a 4.0% bump in Heavy Engineering Construction: Operators in this industry subsector are primarily engaged in heavy engineering construction projects, with the exception of highway, street, bridge and airport construction. Work performed includes new work, reconstruction, rehabilitation and repairs. The industry also includes specialty trade contractors, if they are primarily active in activities related to engineering construction projects. Such, construction projects include waterworks, marine facilities development and open space improvement. This includes engineering projects such as the construction of new oceanic navigational channels, beach dredging, mass transit construction, hydroelectric power plants and conservation development. The industry s performance over the five years to 2017 was mixed, with revenue growing strongly early in the period, but falling in more recent years. Most projects in this industry are carried out by state and local governments independently or in conjunction with the federal government. Consequently, constrained state budgets have remained an overall drag on the industry s performance over the period. Page 2 2

4 Airport Terminal Construction: Operators in this industry subsector construct airport terminals, with contractors specifically engaging in new terminal construction, reconstruction and additions. This industry also includes construction management companies and special trade contractors that participate in the building of airport terminals. The industry falls under institutional and municipal construction, which has risen since 2012 as a result of broad-based economic growth. Industry performance is heavily tied to government funding for transportation, long-term demand for air travel and business confidence. Airport construction is typically financed by state and federal grants, passenger facility charges, bonds and airportgenerated revenue. Oil & Gas Pipeline Construction: This industry subsector comprises contractors that are responsible for the construction of oil and gas pipelines, mains, pumping stations, refineries and storage tanks. It also includes construction management companies and special trade contractors that are primarily involved in pipeline construction. The Oil and Gas Pipeline Construction industry subsector constructs pipelines that are essential for transporting fuel supplies to households and businesses. Rising global energy prices and the opening of natural gas fields over the first half of the five years to 2017 led to extraordinary investment growth in domestic energy resource development, benefiting the industry through increased natural gas and oil infrastructure construction. Increasing energy prices and advancements in extraction technologies caused significant increases in domestic oil and natural gas production, which boosted demand for pipeline construction. However, falling crude oil and natural gas prices over the latter half of the past five years slashed energy producers capital expenditure budgets, causing declines in industry revenue. Overall, industry revenue is expected to fall at an annualized rate of 1.3% to $41.9 billion over the five years to Source: IBISWorld. Page 3 3

5 Key Indicators Sources: IBISWorld, fred.stlouisfed.com (Federal Reserve Bank of St. Louis FRED Economic Data), and WhiteHouse.Gov (Office of Management and Budget) Page 4 4

6 M&A Overview General M&A Activity in the Government Contractor Industry Looking at the past five years, M&A activity was extremely volatile. Although the industry does contain a relatively large number of operators, the number of annual transactions was low in each period observed. M&A activity in the industry was at its lowest over the observed period in 2013, where there were only four (4) reported transactions, with meaningful data, which totaled $100 million in value was the busiest year of the observed period in terms of M&A activity. In 2014 there were sixteen (16) transactions totaling $9.6 billion in value. In the latest year observed, total transaction value was $4.4 million and was made up of a total of eight (8) deals. Looking at the same data set, we observed that the median revenue multiple ranged from a high of 1.28 times in 2013 to a low of 0.12 times in The multiple increased to 0.58 times in We note that while EBITDA multiples related to the transactions would have been better indicators, data was scarce and not available for most transactions over the observed period. $12.0 $10.0 $8.0 $6.0 $4.0 $2.0 $0.0 $1.0 Heavy Construction - M&A Activity (Announced Transactions) $9.6 Total Deal Value ($bn) $6.5 # of Deals $ $ x 1.30x 1.10x 0.90x 0.70x 0.50x 0.30x 0.10x -0.10x Heavy Construction - Median M&A RevenueMultiples Median Revenue Multiple 1.28x 0.64x 0.54x 0.58x 0.12x Recent Transactions Announced Date 12/18/2017 Buyer McDermott International, Inc. Target Chicago Bridge & Iron Company N.V. Target Description Chicago Bridge & Iron Company N.V. provides conceptual design, technology, engineering, procurement, fabrication, modularization, construction, commissioning, maintenance, program 7/14/2017 Oaktree Capital Management, L.P.; M III Acquisition Corp. Infrastructure & Energy Alternatives, LLC 7/6/2017 AECOM Shimmick Construction Company, Inc. 6/16/2017 Primoris Services Corporation Coastal Field Services (nka:primoris Coastal Field Services) 5/12/2017 Shanghai Safbon Water Service Doosan Hydro Technology, Inc. Co.,Ltd. Heavy Construction 2017 M&A Transactions Infrastructure & Energy Alternatives, LLC, a holding company, operates a portfolio of energy and water infrastructure service companies in North America. Shimmick Construction Company, Inc., a heavy civil construction company, provides general construction, construction management, and design build services to federal, state, and local public agencies and private customers in California and the Western United States. Primoris Coastal Field Services provides pipeline construction and maintenance, pipe and vessel coating and insulation, and integrity support services for the oil and gas industry. Doosan Hydro Technology, Inc. engages in the design, manufacture, and construction of custom engineered water and wastewater treatment plants for public and private sectors. 3/31/2017 Dycom Industries, Inc. Texstar Enterprises, Inc. Texstar Enterprises, Inc. offers aerial, underground splicing, and commercial and residential inside fiber/coax/phone installation services. 2/14/2017 Martin Midstream Partners L.P. MEH South Texas Terminals LLC MEH South Texas Terminals LLC develops and constructs asphalt terminal facility in Texas. 1/19/2017 ERF Wireless, Inc. Accordant Communications, LLC Accordant Communications, LLC provides broadband network development and utility construction services for the communications and power providers primarily in Florida, Tennessee, Alabama, and Georgia. Source: S&P Capital IQ. Page 5 5

7 Public Market Data Company Guideline 12/29/ Week Enterprise EV/EBITDA EBITDA Margin Market Cap/Earnings Ticker Close High Low Value (EV) LTM NFY LTM NFY LTM NFY Heavy Construction Granite Construction Incorporated GVA , x 14.0x 4.9% 5.5% 48.1x 40.2x Primoris Services Corporation PRIM , x 8.6x 7.3% 7.4% 21.8x 22.2x Tutor Perini Corporation TPC , x 7.4x 4.8% 5.3% 12.9x 13.3x Sterling Construction Company, Inc. STRL x 10.9x 3.9% 4.6% NM 37.0x Orion Group Holdings, Inc. ORN x 11.3x 2.7% 4.4% NM NM Layne Christensen Company LAYN x 10.5x 2.3% 7.7% NM NM Median 15.2x 10.7x 4.4% 5.4% 21.8x 29.6x Median EBITDA Multiples Heavy Construction Median Revenue Multiples Heavy Construction 20.0x 18.0x 16.0x 14.0x 12.0x 10.0x 8.0x 6.0x 4.0x 2.0x 0.0x 15.2x 11.9x 10.7x 11.4x 9.9x x 0.90x 0.80x 0.70x 0.60x 0.50x 0.40x 0.30x 0.20x 0.10x 0.00x 0.53x 0.53x 0.62x 0.58x 0.48x Average of Medians (11.8x) Average of Medians (0.55x) Notes: Source: S&P Capital IQ. Closing Price reported in local currency. Enterprise Value in millions of local currency Definitions: Enterprise Value defined by S&P Capital IQ as market cap. + total debt + preferred equity + total minority interest cash and equivalents LTM latest twelve months. EBITDA adjusted earnings before interest, taxes, depreciation and amortization. NFY next fiscal year. EPS earnings per share. NA not available, NM not meaningful. Page 6 6

8 Stock Performance As the first graph below suggests, the stocks of companies in the Heavy Construction Industry, as a whole, have generally underperformed the S&P 500 over the last five years. As expected due to the industry s cyclicality, companies in the Heavy Construction Industry have also exhibited more volatility when compared to the S&P 500. In the chart at the bottom of the page we present the stock performances for the aforementioned companies, the aggregate group of companies, and the S&P 500 for % Quarterly Benchmark Performance* 100.0% 50.0% 0.0% -50.0% % Heavy Construction (57.4%) S&P Homebuilders Select Industry Index (61.9%) S&P 500 (82.8%) Granite Construction Incorporated (NYSE:GVA) (82.0%) Primoris Services Corporation (NasdaqGS:PRIM) (73.9%) Tutor Perini Corporation (NYSE:TPC) (79.4%) Sterling Construction Company, Inc. (NasdaqGS:STRL) (63.1%) Orion Group Holdings, Inc. (NYSE:ORN) (5.1%) Layne Christensen Company (NasdaqGS:LAYN) (-49.0%) 2017 Stock Performance -50.0% -40.0% -30.0% -20.0% -10.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0% Sterling Construction Company, Inc. (NasdaqGS:STRL) 94.5% S&P % Primoris Services Corporation (NasdaqGS:PRIM) 17.4% Granite Construction Incorporated (NYSE:GVA) 15.0% Layne Christensen Company (NasdaqGS:LAYN) 13.1% Heavy Construction 9.6% -10.7% Tutor Perini Corporation (NYSE:TPC) -27.4% Orion Group Holdings, Inc. (NYSE:ORN) Notes: Source: S&P Capital IQ. Heavy Construction is the performance of the aggregate group of guideline companies. Page 7 7

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