Guidance achievable, but concerns remain

●  A mixed Q3: PORR has released its Q3 results, with profit before tax (PBT) flat yoy at 2%. This suggests that management has been able to quickly cut costs following the company’s profit warning on 22 August 2017. FY 2017 guidance now looks achievable. However, we believe this is overshadowed by a further deterioration in working capital and the group’s 3% PBT margin target being pushed back again to 2019/20. Following the roll forward of our SOTP valuation, we raise our price target to EUR27 and reiterate our Hold rating. We also transfer coverage to Saravana Bala.

 

●  FY 2017 guidance is within reach: Guidance is for 2017 PBT to fall “somewhat below” that of FY 2016 (EUR91m). We estimate this infers c5% below FY 2016 PBT, ie 15% growth in Q4 2017. This is achievable, in our view; we forecast acquisitions made this year will contribute c10% growth to PBT in Q4. We forecast PBT of EUR57.3m in Q4 (+14% yoy), implying FY 2017 PBT of EUR85.7m, which is in line with consensus.

 

●  However, cash generation may continue to be an issue: Operating cash flow fell by EUR207m yoy to -EUR371m in 9M 2017. This has been driven mainly by a further deterioration in working capital, as consolidated acquisitions have caused receivables to increase by 75%. We forecast a net debt position of cEUR180m by year-end, versus EUR53m net cash in 2016. We expect net debt to grow to cEUR250m by 2019E as working capital outflows continue to restrict cash generation. We note that Andreas Sauer will arrive as the new CFO in February 2018, following the current CFO’s resignation at the end of this year. We expect to hear more about Mr Sauer’s plans for the group at the FY 2017 results in April 2018.

 

●  Higher opex may limit the potential for margin uplift: Management has stated that from 2018 the focus will be on cost control and project delivery, rather than M&A. The large order backlog (EUR5.8bn) should allow PORR to cherry-pick contracts with more attractive terms. However, we believe high operational costs in Qatar and Germany may persist in 2018. As a result, we do not believe PORR will reach its 3% PBT target by 2019/20. We forecast a 2.3% PBT margin in 2018E and 2.6% in 2019E.

 

●  Valuation: PORR trades on 11.3x P/E and 11.6x EV/EBIT 2018E, compared to STRABAG on 10.9x and 7.8x, respectively. We believe this is unwarranted given STRABAG’s more attractive end-market positions and its cost advantage from using its own raw material production plants.