|Shares Out. (in M):||0||P/E|
|Market Cap (in $M):||1,074||P/FCF|
|Net Debt (in $M):||0||EBIT||0||0|
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In this situation, investors are able to take advantage of a company who just recently went public in what was a stressed period in the market. There was nothing obvious in the MT_IM story which would cause them to cut the IPO range from €3.50-4.75 to €2.80-4.75 in a “normal” market, but being linked to the chemical/energy end-markets in a period where all cyclical stocks were being sold on fears of an imminent recession due to a credit crunch conspired against the company. Thus, not only did MT cut the price range, the shares got priced at the bottom of the range, and on November 26, the company started trading publicly at a huge discount. Peers – even those with high specialization and concentration in a specific sub-segment – currently trade at lofty multiples (see below) and so a company with MT’s market share positions and recent performance should be considered in a similar manner. This is an opportunistic investment gifted to us by the market, and investors are able to build positions at current levels before the sell-side initiates on the name and it becomes more obvious to the broader investing public.
From a fundamental business analysis viewpoint, MT stands out amongst peers for its relative margin stability over the last few years, indicating few problematic projects. During the roadshow, mgmt referred to their worst over-run being a 5-6% cost inflation (which thus created 0% margin on the project), on a €2-300mm project. The company takes the full provision as soon as problems become apparent but have historically been able to recoup a significant portion of the cost over-run.
Company description: MT is an Italian engineering and construction firm divided into four units: chemicals and petrochemicals; oil and gas; energy; and, infrastructure and civil engineering. In 2006, these represented 51%, 15%, 8%, and 24%, respectively, of consolidated revenues. MT is the global leader in the design and construction of polyethylene and polypropylene manufacturing plants, with a 30% global market share by installed capacity in the past six years. It is also one of the leading global players in LNG, with a 22% market share of regasification plant projects awarded in the last 4 years. In Italy, the company is a major operator in the design and construction of renewable-source generation plants and has an 11% market share in the country. Finally, MT is also strong in Italy in high-speed rail lines (with 37% market share).
MT has 322.5mm shares outstanding, which at the last price of €3.23 implies a market cap of €1.08bn. Pre-IPO, MT had net cash of €122mm, which if you were to simply add the net IPO proceeds of approximately €58mm would imply a position of €180mm, for an EV of €895mm. Note, however, that the company has a net financial position at the end of September of €345mm (I have used the more conservative figure for valuation purposes).
Note, founder/CEO Di Amato retains 63% of the company.
Current Valuation: At the current price, MT trades at a P/E of 16.0x in 07, 11.7x in 08, and 10.3x in 09. In terms of EV/EBITDA, MT trades at 6.5x in 07, 5.3x in 08, and 4.7x in 09. These are significant discounts to the peers - a group including CBI, FLR, FWLT, JEC, KBR, MDR, and SGR trades on average at 24x 2008 P/E and 13.5x 2008 EV/EBITDA. With the current punitive tax rate, which is a key area of focus for mgmt post-IPO, there should be some discount to the peers from an EV/EBITDA standpoint. [MT is currently at a taxed at a 50% effective tax rate but certain changes in Italian legislation for dividend-paying companies will likely result in a 5% reduction next year, and mgmt sees other improvements by tax optimization steps such as subsidiary consolidation such that they feel comfortable guiding to a sub-42% rate in 08 and beyond.] As this gets resolved, the discount should minimize, though one could also claim that a discount should persist to account for the relative size of the company – it is smaller than the peers listed but often takes on similar-sized projects, which thus by definition presents a relatively larger proportional risk.
Latest Share Price
|Market Cap||€ 1,075|
|Net Debt||(€ 180)|
|Enterprise Value||€ 895|
|FY ends Jan||2006||2007||2008E||2009E||2010E|
|EPS||€ 0.09||€ 0.21||€ 0.28||€ 0.32||€ 0.36|
|EV / Sales||84%||46%||40%||37%||36%|
|Price / FCF||5.4||43.8||10.5||9.5||8.9|
|EBIT||€ 71,913||€ 119,327||€ 152,050||€ 171,089||€ 186,394|
|EBITDA||€ 94,159||€ 136,871||€ 170,149||€ 189,790||€ 205,694|
|FCF||€ 198,586||€ 24,514||€ 102,329||€ 113,054||€ 121,136|
Industry Trends: The global market for plant engineering in MT’s core sectors was estimated at $443bn in 06 and is expected to CAGR at 5% from 07-11. Much of this growth, especially in the polyolefin complex, is occurring in the emerging markets including the
Upside Scenario: At the peer valuation of 24x P/E and 13x
Downside Scenario: The IPO price of €2.80 seems like a lower limit on valuation grounds. Again, if the unpredictable were to occur – for instance, a massive loss on one of the company’s largest projects – earnings projections would have to be adjusted and valuation would follow, but it is difficult with the information at hand to gauge this beyond saying the company’s experience, history, and contract structures would appear to preclude anything dramatically extraordinary.
Probability Weighted Return: Because this is likely to be considered a small-cap and has no real peer in Italy (IPG IM is more construction-focused and SPM IM is over 10x the size and more an energy play though it owns a large competing E&C), this may have a low probability of reaching the valuation accorded to US peers. It also seems like a low probability that the company will all of a sudden become undisciplined and get caught on a loss-making project, and so for lack of more specificity, the return should be judged using a €4.50 fair value, i.e. 35%. Of course, the a still-realistic upside case of even €5 is much higher and cannot be ignored (50% upside).
Risks: Beyond the factors mentioned above, it is clear that the current valuation of the entire sector assumes the multi-year capex up-cycle continuing. Drivers such as long-term energy prices, metal prices, chemical prices, etc. may change notwithstanding current predictions, especially if economically-sensitive demand were to decrease. Supply is less a concern though within sub-segments, this must be monitored (e.g. see the experience of certain E&Cs post 2002/3 as the
Project execution, especially as it relates to MT’s two largest projects, is the key micro risk. A problematic project would also have an impact on the company’s reputation, likely leading to a lower level of contract wins in the future. In addition, if the sub-segment of polyethylene and polypropylene were to slow, MT would be hit disproportionately relative to peers (a macro risk, really). Note, most of MT's contracts are lump-sum (with some being considered "converted" lump sum, which is cost-plus until 60%, i.e. where procurement ends, is completed - and then they become fixed-price).
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