Growth: 14.6% 5Y CAGR in sales, focused in high EU economic growth regions (Poland, Germany)

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1 BUDIMEX SA BUDIMEX INVESTMENT SUMMARY Growth: 14.6% 5Y CAGR in sales, focused in high EU economic growth regions (Poland, Germany) Profitability: historic record of profitability, industry leading ROE and ROIC Cash: strongest domestic balance sheet out of Polish construction peers New EU budget: firm is a pure play on a recovery and then growth of the Polish construction industry Solvency: company should have little trouble servicing their debt and investing in the expansion of their business Competition: firm has the leading market share in the Polish construction industry within government led contracts Valuation: firm is trading at a 15% discount to comparable EV/EBITDA construction companies 25 th November, 2013 BUY 12 month target price PLN WAR:BDX- Budimex SA Poland Industrials Construction Price (PLN) Year high/low /54.15 PLN/EUR 4.18 Shares Outstanding (Million) Market Cap ( Million) Free float 25.8% Free float ( Million) Avg daily turnover ( Million) 0.29 Index WIG Bloomberg BDX PW Target Price Page 1 Budimex security analysis, November 24 th 2013

2 OUTLINE OF BUSINESS Budimex SA is the second largest (by sales) and largest (by mkt cap) Poland-based construction company, having been established in 1968, listing on the Warsaw Stock Exchange in As of December 31, 2012, Budimex SA operated 17 direct and indirect subsidiaries and two affiliated companies active on the domestic market, as well as abroad. The firm is heavily geared towards the Polish domestic market and to infrastructure projects making Budimex an attractive play on the largest CEE economy and the current heavy infrastructure investments. It operates as a general contractor, subcontractor and developer. Its main activities consist of the construction of roads, bridges, airports; environmental facilities, public and commercial facilities, and development of residential property. On top of this the company pursues own development projects with the main objective of immediate sales upon completion. Since the year 2000 the Spanish Ferrovial Group has been holding a controlling stake in Budimex which currently amounts to 59.1%. Ferrovial has repeatedly communicated that there are no plans to take over the outstanding shares and delist the company. The business is concentrated into three operational units: Infrastructure (Road, Hydro, Rail) 47% of revenue Focuses on large-scale, long lead domestic projects with a high certainty of completion General Construction 36% of revenue Maintenance and new-build of government lead projects, PPP and private works Residential (including Danwood) 17% of revenue Aims at capturing the development of domestic residential properties, acting as lead developer and contractor Source: company filings Page 2 Budimex security analysis, November 24 th 2013

3 COMPETITIVE STRENGTHS Strong balance sheet, positive cash flow Domestic leader + in infrastructure + + delivery Long-standing supply contracts Regulatory expertise and mobile resources Domestic leader in infrastructure delivery Largest share of government infrastructure projects, with a track-record of delivery Capital Structure Low debt, positive cash flow and PLN 1bln net cash, producing a financial position far superior to domestic rivals Mobile resources Domestic expertise in government regulations, tender strategies COMPETITION Porter s Five Forces Analysis SUPPLIER POWER Medium supplier power Raw materials significantly affects margins Long-standing contracts in place THREAT OF ENTRY High barriers to entry Economies of scale make it difficult to establish new firms Lower margins have decreased foreign presence INDUSTRY RIVALRY Competitive rivalry is medium Possible future industry consolidation Currently a fragmented market THREAT OF SUBSTITUTES Medium substitution threat Scale is a prime differentiating factor Product differentiation is difficult # BUYER POWER Medium bargaining power Reliant on government spending and domestics Cash collection is a major issue Page 3 Budimex security analysis, November 24 th 2013

4 INDUSTRY Poland s construction industry was worth EUR 22bln in 2012 and is the 7th largest construction market in Europe. The market is dominated by infrastructure, with 65% of expenditure in 2011 being focused on the transport, energy and utilities sectors. Despite extensive construction spending through , infrastructure remains basic, with close to the lowest road density in Europe. A consequence of the increased spending was an influx of competition, resulting in lower margins and cashflow problems. A great number contractors struggled and over 100 polish contractors have gone bankrupt in the past 24 months. This highest profile casualty was part of PBG Group, Hydrobudowa Polska, which initiated composition proceedings in June this year. CONTRACTS SIGNED BACKLOG The unsuccessful push from the Chinese Oversea Engineering Group to compete in Polish tenders has left a fragmented market. Foreign companies lack the regulatory understanding and resource mobilisation whilst domestic firms are overly indebted, this creates opportunities. The construction market is at a turning point in Data from the Central Statistical Office (GUS) shows that construction-assembly in January - April of this year was 13% higher than the same period last year, although activity levels actually fell in June and July. Key participants in the domestic market include Erbud, Trakcja-Tiltra and Unibep. Industry is growing (forecast 10% in 2014) Aligned with business cycle and economy Fragmented industry, consolidation is a potential trend Much government regulation/protection Significant investment headwinds are dissipating BACKLOG / INTAKE Source: company filings CORPORATE PROFILE Company is in the growth/shakeout phase of business cycle Average capital expenditure plans Limited history of labour relation disputes Greater than 10% share of domestic infrastructure contracts Page 4 Budimex security analysis, November 24 th 2013

5 EU BUDGET Polish Investments for Development A key driver of investment in construction industry will be the aid funds of the European Union for Poland for the years , EU institutions agreeing on 19 th November 2013 to seal the budget with Poland emerging the major victor in funding gains. Under the cohesion policy framework, Poland can expect an allocation of EUR 72.9bln, EUR 5bln greater than the allocation for the period A large part of the funds will be allocated for investment in infrastructure (preliminary estimates forecast an allocation at the level of EUR 21bln), including the construction of roads and railways. In October 2012, Polish PM Donald Tusk announced the creation of a Polish Investments for Development program (PID) operated by Bank Gospodarstwa Krajowego (BGK). The scheme is to provide equity capital of c. PLN 40bln until According to the Polish Treasury Ministry, the value of the projects financed from PID could reach PLN 400bln 500bln in next decade, with projects related predominantly to energy or infrastructure investments. Poland s efficiency in putting EU funds to work is also appreciated and underscored by rating agency Moody s, as can be read in the agency s February 14 Credit Outlook report. The ability to carry out investment projects reflects the power of Polish institutions, despite their rather low development level against the backdrop of European standards, Moody s wrote. In the next five years a significant increase in investments in railway infrastructure is expected. According to the data contained in the "Long-term Rail Investment Program till the year 2015" prepared by the Ministry of Transport, Construction and Maritime Economy, the expenditures of PKP PLK (the main investor in the sector) in 2013 are expected to reach PLN 7.7bln. In the year 2014 they are assumed to exceed the level of PLN 11bln. Investment in rail has been neglected for decades and although some projects are under construction a number of others have been delayed or postponed. Polish Rail owner and operator (PKP PLK) announced a record PLN 13bln investment in rail for , but nevertheless the government has postponed the landmark PLN 18.5bln High Speed Line project connecting Warsaw, Łòdz, Poznan and Wrocław in order to concentrate on more down to earth needs. The High Speed Line will be developed in stages in The Ministry of Infrastructure records that 38 out of 110 defined investment projects will be delivered beyond 2013, providing some certainty of workload. With the budget now in place, previously delayed infrastructure projects such as a centralised Polish airport and railway modernisation could come online in 2014, in the lead-up to the 2015 Polish general election and the impact of new finance minister Mateusz Szczurek filters through. Page 5 Budimex security analysis, November 24 th 2013

6 OUTLOOK Short term (12 months) A decrease in building materials prices resulting from the slowing economy and lower supply of new construction contracts. Materials used in road contracts (aggregates and asphalt) have declined 8% and 6% respectively over the last twelve months and could be under further downward pressure. As a significant portion of the backlogs in Budimex consist of road contracts, this would help the companies to improve margins in Operating margins are healthy (6.9% in the general construction segment, 26% in the residential segment and 10.4% in the other segment) Posting sales and profitability figures broadly in line with consensus estimates, Budimex reported a cash balance exceeding PLN 1,00mln, a dynamic increase in residential pre-sales and sound profitability. On the other hand, however, the order intake of below PLN 500mln has been one of the lowest in recent quarters 2013 construction projects: 16 significant contracts signed, all located in Poland, net contract value PLN 2,755mln Budimex aims to dispose of Danwood the unit producing wooden houses - Danwood generated EBIT of PLN 25mln in 2012, which is expected to increase this year given the production ramp-up, the potential transaction could generate close to PLN 200 m (PLN 8 per share) for shareholders Medium-Long term ( months) Improving macro and employment figures in Poland together with record-low interest rates are likely to support rising residential demand New EU budget, increased infrastructure spending and a forthcoming election in 2015 should see both positive and rebounding sales growth A change in sales mix will enhance net margins, with a longer term impetus on shifting to a developer led segment and reduced reliance on highly competitive and low margin road contracts MANAGEMENT Strategic Goals To improve profitability by controlling and limiting construction risks Achievable through inventory management, declining raw material costs To concentrate the Group's potential on the internal market Company has long been domestically focused To develop activity on the railway and industrial construction market Railway segment contains significant projects set to be undertaken in the next 36 months To achieve a strong position on the internal real estate development market Achievable through use of existing land bank and capitalising on increasing residential demand To enter the concession sector in Poland To maintain profitable export activity in Germany Page 6 Budimex security analysis, November 24 th 2013

7 VALUATION: CAPITAL STRUCTURE Budimex estimates that its annual interest expense and debt amortization will be c.pln 28.76mln annually (net PLN 6.5mln), this is offset by financing income attributable to interest received on outstanding payments due on construction projects. Overall the company has low relative net borrowings compared to the typical industry firm and has the lowest relative outstanding debt compared to their domestic rivals. Loans and LT borrowings Loans and ST borrowings Provision for LT + ST liabilities Total Debt Source: company filings/analyst own estimates Net Debt Budimex has an estimated cash-to-debt ratio of 21.0 Solvency Ratios Numerator Denominator Ratio 12 month change Debt-to-assets (1.2%) Debt-to-Equity (0.72%) Interest Coverage Source: company filings/analyst own estimates Liquidity Ratios Numerator Denominator Ratio 12 month change Current Ratio (1%) Quick Ratio % Cash Ratio (20%) Cash conversion cycle Source: company filings/analyst own estimates (-37) 40% Working capital Budimex currently has PLN 220mln in working capital, relatively unchanged from a year ago, with stable changes in current assets and current liabilities, with a reduction in cash offset by an increase in trade and accounts receivable. Page 7 Budimex security analysis, November 24 th 2013

8 OPERATIONS 5Y Sales Growth 5Y EBIT Growth EBIT Margin ROA ROE 5Y AVE ROE CASH RATIO Sales volatility EBIT volatility 22.7% 18.7% 4.2% 4.7% 33.8% 32.1% % 60% PLNm F 2014F 2015F y/e, 31 Dec FY FY FY FY Net Sales Revenue 6,078 4,639 4,667 4,927 EBITDA Operating Profit Net Income EPS Diluted Source: Company filings/analyst own model Page 8 Budimex security analysis, November 24 th 2013

9 VALUATION: PIOTROSKI F-SCORE F-Score = 9/9 Budimex ranks top within the construction and engineering sector for financial and operational health. Companies with a score of 8 or 9 have been found as a group to outperform weak stocks by 7.5% annually over a 20 year period. The weakest stocks, scoring 2 or lower, were found by Piotroski to be five times more likely to fall into financial problems. Page 9 Budimex security analysis, November 24 th 2013

10 VALUATION: RATIO ANALYSIS FY2013 Budimex Bilfinger Skanska Hochtief Taylor Wimpey Babcock Peer Ave Industry Ave P/E (ttm) 24.1x 13.5x 13.7x 18.9x 12.5x 17.8x 16.75x 15.2x EPS Growth 7.8% 13.3% 45.9% 17.5% 34.2% 15.4% 22.35% 34.8% P/S 0.72x 0.44x 0.37x 0.26x 1.71x 1.52x 0.84x 0.84x EV / EBITDA 10.4x 8.56x 9.33x 5.20x 12.50x 15.50x 10.25x 14.32x RoE 33.8% 14.4% 14.8% 5.93% 12.0% 20.5% 16.91% -4.15% RoC 22.4% 11.0% 13.9% 7.45% 9.17% 11.4% 12.55% -0.90% P/FCF 11.1x x x 30.0x x Operating 4.20% 4.88% 3.11% 2.33% 12.20% 7.74% 6.84% -4.33% Margin Source: company filings/analyst own estimates Budimex has historically had a long-run ROE of c.30%. EV/EBITDA is a more suitable metric for valuation comparison due to the volatility in net income. Of concern is the 3y decline in EPS growth, however recent improvements in both gross and operating margins point to potential net income enhancements. Relative to its P/E ratio, the company is trading at a 44% premium to its peer group, however when comparing EV/EBITDA the firm is trading broadly inline. Source: Bloomberg Long-run share performance still significantly lags the top performers in Taylor Wimpey and Babcock, however the shares have appreciated 99% through 2013, pointing to at least short-run over exuberance. With Budimex s asset base and market capitalisation around a quarter of their peer group, a higher P/E is perhaps justified to compensate for the small-cap equity risk premium. When breaking down relative valuation further, considering the EV/EBITDA multiple appropriate a mean of the small cap ( mln) European construction constituents is equal to 12x, this is lower than the industry median due to discounting of extreme outliers. Page 10 Budimex security analysis, November 24 th 2013

11 SUMMARY Budimex current EV/EBITDA = 10.4x Comparable industry EV/EBITDA = 12x Relative discount = 15.38% 12 month target price PLN STRENGTHS Position: demographic presence set to benefit from growth in domestic markets Product: unrivalled local knowledge, supply chains, regulations and capacity within Poland Solvency: superior capital structure to domestic peers Sales: significant projects due to come online in the next 24 months, especially within rail WEAKNESSES Government: overly reliant on public sector contracts Accruals: sector suffers from irregular cashflows and project inflows Volatility: operating and net income have both been volatile in company results RISKS Budimex is well placed and has structures in place to mitigate risks. Some of the most prominent potential risks highlighted by company management include: Difficult financial situation of subcontractors, which may cause delays or increase in the project costs Increase in prices of construction materials, energy and oil-derivatives Delays in timely performance or insufficient quality of subcontracted works Increase in costs of subcontractor services Unfavourable weather or land conditions Changes in the scope of work or technologies as agreed in the contracts CONTACT INFORMATION JAMES OSBISTON, EQUITY ANALYST jamesosbiston@hotmail.com uk.linkedin.com/in/jamesosbiston/ DISCLAIMER/DISCLOSURE Content is for informational and educational purposes only. Investors will need to evaluate the merits and risks associated with the use of this content. Decisions based on information provided are your sole responsibility, and before making any decision on the basis of this information, you should consider (with or without the assistance of a financial and/or securities adviser) whether the information is appropriate in light of your particular investment needs, objectives and financial circumstances. Investors should seek financial advice regarding the suitability of investing in any securities or following any investment strategies. No reference to any specific security constitutes a recommendation to buy, sell or hold that security or any other security. Nothing constitutes investment advice or offers any opinion with respect to the suitability of any security, and the views expressed in this work should not be taken as advice to buy, sell or hold any security. In preparing the information contained, we have not taken into account the investment needs, objectives and financial circumstances of any particular investor. This information has no regard to the specific investment objectives, financial situation and particular needs of any specific recipient of this information and investments discussed may not be suitable for all investors. Every effort has been made to ensure the work is correct, accurate, diligent, however no responsibility will be assumed for any errors or discrepancies in the content or from sourced information used in the content. The analyst currently holds no position in Budimex, however they may purchase shares within the next three months. Page 11 Budimex security analysis, November 24 th 2013