GEK TERNA |Cashing in on Construction
Rating: Buy
Target Price: EUR5.40
Strong recovery of Construction signals increased profitability and cash flow generation; Adding stock to Top Picks - The
implementation of the new concession agreements marked cash collections
in 2013 which led to significant deleveraging.
Within this framework, the Construction segment has entered into a strong recovery trajectory, underpinned by additional infrastructure projects, including a large energy project commissioned by PPC. YTD performance is strong, while the impact of the concessions’ resumption is not yet fully reflected and we expect performance to be even stronger in the second half of the year.
At the same time, the group’s EUR3.9bn backlog we believe signals even further improvement in terms of profit and cash flow generation. Overall, we expect that GEK’s Construction arm will generate operating cash flows in excess of EUR170mn in the coming three years (50% of MCap), confirming our view that GEK TERNA could fund with own means the EUR100mn equity injection for its three motorway concessions.
Within this framework, the Construction segment has entered into a strong recovery trajectory, underpinned by additional infrastructure projects, including a large energy project commissioned by PPC. YTD performance is strong, while the impact of the concessions’ resumption is not yet fully reflected and we expect performance to be even stronger in the second half of the year.
At the same time, the group’s EUR3.9bn backlog we believe signals even further improvement in terms of profit and cash flow generation. Overall, we expect that GEK’s Construction arm will generate operating cash flows in excess of EUR170mn in the coming three years (50% of MCap), confirming our view that GEK TERNA could fund with own means the EUR100mn equity injection for its three motorway concessions.
Impressive deleveraging with room for further improvement - The
resumption of construction work at GEK TERNA’s three motorway
concessions combined with the sale of a 25% stake in Heron II to QPI and
the EUR100mn capital injection by York Capital at the end of 2013
further improved the group’s liquidity position, allowing for the
implementation of its investment plans.
In fact, we highlight that on our numbers and excluding the capex-intensive Renewables segment, the group will be in a net cash position by the end of 2015e, an impressive performance considering the significant leverage-related risks that were assigned to GEK TERNA a few quarters back.
In fact, we highlight that on our numbers and excluding the capex-intensive Renewables segment, the group will be in a net cash position by the end of 2015e, an impressive performance considering the significant leverage-related risks that were assigned to GEK TERNA a few quarters back.
Q2 2014 review & Estimates revision - The
group reported a strong quarter both in terms of sales as well as
profitability, reflecting growth in Construction and a solid performance
in Renewables. Given this performance, we raise our 2015-2016e
forecasts reflecting improved assumptions in Construction.
More importantly, we improve our working capital assumptions, assuming upcoming collections in Construction (both concessions as well as PPC-related), which are expected to lead to increased cash flow generation and lower net debt levels.
More importantly, we improve our working capital assumptions, assuming upcoming collections in Construction (both concessions as well as PPC-related), which are expected to lead to increased cash flow generation and lower net debt levels.
Valuation – All
in all we set our new target price for the group at EUR5.40 per share
from EUR5.30 previously. Our new target price implies a significant
upside from current levels and we retain our Buy recommendation on the
shares while we add GEK TERNA to our Top Picks portfolio reflecting the
group’s strong prospects in terms of profitability growth and cash flow
generation as well as its even further deleveraging capacity.
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