Research Notes
Construction industry barometer: Outlook is promising, but not for all
| 24.11.09 |
This report marks the launch of a new research product, which we plan to issue on a regular basis. Our first desk note in the series provides an overview and brief analysis of the quarterly financial results of 11 traded Russian infrastructure companies, and gives an outlook on the current conditions and prospects for the Russian construction industry.
Construction industry business climate improves slightly. Rosstat’s monthly Construction Activities index picked up from 80.7% to 82.2% in 3Q 2009, which reflects the ongoing improvements in the Russian construction industry. Seven companies out of the eleven covered in this report were able to improve their revenues in 3Q 2009 as compared to the previous quarter. What was more important, the same seven companies even managed to close the third quarter at a profit.
Results are still far from the 2008 peak. The majority of infrastructure companies reported depressing financial figures in the first nine months of 2009: average ruble revenues declined by 23% and EBITDA fell by 30%. More than a half of the companies showed either negative or almost zero net income. Margins decreased, even though construction material prices corrected down by 30-50% from their peaks.
Companies engaged in large-scale government projects stand to gain. Of the companies that were able to improve their financial performance in 9M 2009, we specifically point out those participating in large-scale government infrastructure projects, i.e. Mostotrest, Dalmostostroy and Volgomost. Other companies, even large ones, still face a clear lack of orders, and the situation is unlikely to change for the better during the next few quarters. Companies that participate in large-scale government projects that enjoy a stable budgetary financing are definitely in a stronger position.
| Company | Ticker | Mcap, USD mn | Indicative fair price, USD | Upside potential |
|---|---|---|---|---|
| Mostotrest | MSTT | 850 | 1,435 | 109% |
| Dalmostostroy | DMOA | 58 | 110 | 27% |
| Bamtonnelstroy | BTST | 336 | 4,270 | 26% |
| Bamtonnelstroy (prefs) | BTSTP | 30 | 1,070 | 17% |
| Mostostroy-11 | MSTS | 130 | 1,817 | 21% |
| Volgomost | VLGM | 128 | 98 | 9% |
| Mostootrjad-19 | MSOT | 159 | 1,757 | -16% |
Our top picks are Mostotrest and Bamtonnelstroy. In this report, we provide an indicative fair value, using a peer-group analysis (see Appendix 1), only for companies working in the road-construction segment. Mostotrest and Bamtonnelstroy seem to have the most promising and appealing order books for upcoming years. The first has already showed its ability to operate efficiently: its 9M 2009 EBITDA skyrocketed 200%. Bamtonnelstroy has reported quite modest interim results; however, we largely attribute this to the fact that the bulk of construction works for the 2014 Winter Olympics are undertaken by Bamtonnelstroy subsidiaries and the cash-flows are not reflected in the parent company’s interim unconsolidated reports.
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Sector: ConstructionCompany: OJSC Mostotrest