Boskalis September 2015
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BoskalisEQUITY September RESEARCH 2015 . Change in recommendation 11 September 2015 Boskalis Hold (previously Buy) Strong, but not immune Price (10/09/15) We downgrade our recommendation for Boskalis from Buy to HOLD and cut €44.70 our target price from €49.0 to €45.0. The key reason is that we believe too Target price (12-mth) €45.00 (previously €49.00) many people are taking the one-off positives for granted. We believe chances Forecast total return are high for the Dredging unit to soon start showing the underlying indicated 4.3% EBIT margins of 10-12%. In addition, the Offshore Energy unit has visibility until roughly 3Q16 but, with the current weak oil price, few new projects are Construction & Materials being started, while the stable order backlog represents new work from Netherlands Europe’s offshore wind market, which has a lower margin profile compared Bloomberg: BOKA NA Reuters: BOSN.AS with oil & gas work. Given the persistently low oil price, we believe Boskalis will be able to acquire cheap assets in the next few quarters but do not expect Share data any change in the Fugro situation. We do not materially change our 2015-16F Avg daily volume (3-mth) 436,503 operating income forecasts but slightly lower our target valuation metrics on Free float (%) 67.0 the core business units to 7.5x 2016F EV/EBITDA, or €34.39 per share, plus Market cap (€m) 5,466.6 Net debt (1F, €m) 300 €7.68 per share for tugboats and €2.84 per share for the Fugro stake. In our Enterprise value (1F, €m) 5,775 view, Boskalis will come out of this oil downturn stronger than before, but Dividend yield (1F, %) 3.6 things are likely to first get worse before they get better. Source: Company data, ING estimates 1H15 results were a clear beat versus our and consensus expectations, but due to Share price performance Suez Canal dynamics and project-specific characteristics, we increase our 2015F EPS 50 forecasts by 26%, aiming for 2015F net profit of €453m, which we consider well below 45 last year’s €490m. Boskalis guidance says the company “will not approach 2014 net profit 40 levels”. Our forecast includes a €32.4m positive incorporated in holding costs, related to 35 Fugro (€16.84; Hold; TP €18.0), and we have taken no view on Fugro in 2H15F (net profit 30 25 vulnerable to charges and impairments). For 2016F, we lower our net profit forecast by 20 3.6% to €327m, with our numbers excluding income from participations from the tugboat 9/10 9/11 9/12 9/13 9/14 9/15 business and the potential Fugro impact. Price AEX All Share (rebased) Given Boskalis’s excellent financial position and known buy-low, sell-high business Source: ING development approach, we expect the company to acquire cheap assets in the coming period if oil prices remain at the current low levels, causing distress at some too- leveraged oil services companies. Note that we do not expect a bid on Fugro in the short to medium term as Boskalis is supporting the current strategy and Fugro’s balance sheet distress has improved somewhat. In due time, we expect the rather late-cyclical Offshore business to also be negatively impacted by the low oil price environment. In our view, Boskalis’ robust financial position (1H15 leverage ratio: 0.7x) makes it a survivor in this downturn, from which it is likely to emerge stronger. Forecasts and ratios Year end Dec (€m) 2013 2014 2015F 2016F 2017F Revenues 3,635 3,178 3,051 2,859 2,826 Normalised EBITDA 800 889 765 615 583 Normalised net profit 366 490 453 327 309 Normalised EPS (€) 3.09 4.03 3.61 2.60 2.46 Normalised PER (x) 14.5 11.1 12.4 17.2 18.2 EV/normalised EBITDA (x) 7.6 6.7 7.5 9.4 9.9 FCF yield (%) 7.0 13.2 8.6 5.7 6.0 Tijs Hollestelle Dividend yield (%) 2.8 3.6 3.6 3.6 3.6 Amsterdam +31 20 563 8789 Price/book (x) 2.1 1.7 1.6 1.5 1.5 [email protected] Normalised ROE (%) 16.5 17.3 13.6 9.1 8.3 Source: Company data, ING estimates research.ing.com SEE THE DISCLOSURES APPENDIX FOR IMPORTANT DISCLOSURES & ANALYST CERTIFICATION1 Boskalis September 2015 New divisional forecasts Dredging We have encountered too Figure 1 shows our divisional revenue and operating income forecasts for the Dredging many investors who take division. Boskalis has consistently stated in the past few years that conditions in the one-off positives for granted Dredging market are stable and that new work entering the order book includes a pre- calculated EBIT margin of c.10-12%. Being a contractor, it points out that none of the contracts executed ever end at their pre-calculated margin – the margin is always above or below. Given that Boskalis’s operational execution track record is very good, we see the possibility of the margins reaching the high end of the range, or even 100bp above that. However, we have come across too many people who have started to take these very high operating margins for granted. We believe the likelihood of Boskalis reporting an EBIT margin in the range of 10-13% (let’s add a notch to company guidance) in the foreseeable future is high. Although one can never tell Our Dredging EBIT forecast for 2016F drops by c.€40m YoY. We note that Boskalis’s the exact chance of dredging 1H15 EBIT margin was 18.6%, reporting as much as €151.5m EBIT partly due to the margins reaching 10-12%, Suez Canal and generally high utilisation rates for the hoppers. Boskalis has indicated EBIT is high for 2016-17F that maintenance work has been delayed due to tight deadlines in Egypt, which means that ‘normal’ maintenance has been pushed into 2H15 (higher costs and lower fleet occupancy rates). Maintenance costs, especially for cutters, easily approach 15% of the contract value, hence the impact will be significant in 2H15F. That said, the Suez contract ended in 3Q15, and Boskalis is known to be a conservative – or, to use a better word, realistic – profit recogniser. • We believe the company continues to have positive claim settlements on contracts finished some time ago. However, the substantial contracts from the past are now all settled. For example, a 10% scope change or variation order on a €500m contract versus a similar percentage on a €100m contract. Operating margins in 2014 were impacted by claim settlement payments relating mainly to the Gorgon LNG project (Boskalis scope c.€1bn). • Currently, we do not have any visibility on any very large dredging contracts that are close to being awarded and/or started. The Fehmarn Belt project concerning the tunnel connection between Germany and Denmark is large (dredging, wet infra scope between €800m and €1bn) but has a limited impact on fleet utilisation rates. This project could be awarded at end-2015 or early-2016. That said, nobody talked about the Suez either at the beginning of 2014 and dredging projects, especially in emerging markets, could pop up out of nowhere. • The book-to-bill ratio hit 1.0x which, from a historical perspective, is still acceptable but not exceptionally high, and hence there is a chance of longer-term historical EBIT margins returning. Order book reached €1.72bn, down versus €2.01bn at end-2014. Fig 1 Boskalis: Dredging division (€m) 2013 2014 2015F 2016F 2017F 2018F Revenue 1,725.5 1,664.8 1,648.1 1,598.7 1,598.7 1,614.7 Revenue growth (%) -3.5 -1.0 -3.0 0.0 1.0 EBITDA 352.0 484.4 355.2 315.0 308.2 307.2 EBITDA margin (%) 20.4 29.1 21.6 19.7 19.3 19.0 Depreciation 103.8 107.4 113.8 115.2 116.3 117.5 EBIT 248.2 377.1 241.4 199.8 191.8 189.7 EBIT margin (%) 14.4 22.7 14.7 12.5 12.0 11.8 Participations 6.9 3.1 2.2 2.2 2.2 2.2 EBIT incl participations 255.1 380.1 243.6 202.0 194.0 191.9 EBITDA incl participations 358.9 487.5 357.4 317.2 310.4 309.4 Source: Company data, ING estimates 2 Boskalis September 2015 Offshore Energy Dockwise is late-cyclical and The Offshore Energy division also performed strongly during the first half of 2015. Even currently brings large though some activities have been affected by the low oil price environment, the key modules from Asian vessels of heavy marine transporter Dockwise are still very busy. Dockwise is executing shipyards to LNG sites in the Wheatstone LNG transport contract, bringing the finalised oil platforms and modules Australia, but is likely to see from Asian shipyards to LNG sites in Australia. We note that these contracts relate to lower activity in 2016-17F expansion capex of the oil & gas industry from several years ago. This type of work has visibility well into 2016, but Boskalis is frank about the fact that it currently does not see much tender activity for new large transport contracts. Boskalis also stated that, for instance, its subsea business in the Nord Sea is impacted by the low oil price environment (more equipment from the Northern part of the Nord Sea steaming in the Southern part of the Nord Sea, looking for work). Boskalis’s Offshore Energy division comprises a wide array of activities.