Budimex should do well during the cooling of the construction market, according to analysts at BDM Brokerage. According to them, the company will also have more opportunities to pay dividends than its policy stipulates, although it may take the route of significantly dynamizing FB Serwis’s growth.
As a general contractor with a large portfolio, [the company] should be a beneficiary of the cooling of the construction market. We also note that a strong cash position generates an additional interest contribution to net income in the current environment and allows the company to compete in the largest tenders without restrictions, according to the report.
The company’s backlog after Q3 2022 was PLN 12.5 billion (vs. PLN 11.8 billion after Q2 2022). In addition, Budimex had more than PLN 3 billion of further orders in the most favorable bids, the vast majority of which have already been converted into final contracts in Q4 2022.
We expect that even including the withdrawal by the General Directorate for National Roads and Motorways from the contract for one of the S19 sections (lack of an environmental decision), the portfolio after Q4 2022 could be higher q/q and comparable y/y, when it was PLN 13 billion after Q4 2021. This implies a strong level of contracting (especially in H2 2022) with high contract valuations, the report indicated.
As management previously reported, the company feels secure with its portfolio until the end of 2023, and the new contracts provide a foundation for 2024-2025. This should allow it to wait out the turmoil in the disposition of EU funds (the upcoming parliamentary elections are starting to put pressure on the real mobilization of funds). While road infrastructure has secured funding largely from the national budget, the situation is weaker in rail infrastructure, where EU funding is needed (for the time being, PKP announces tenders, but does not finalize them due to uncertainty in funding). At the same time, the company manages to win large orders from “new” areas, such as the military and hydraulic engineering, where competition is not strong, according to the BDM report.
We expect that declining pressure from energy carriers and a slowdown in the construction area should be reflected in falling prices of raw materials/materials and less pressure from subcontractors (the first signs of slowing wage growth in construction). We assume that 2022 will mark its peak with a record high rising construction price index (November’s y/y reading was lower than the previous month for the first time in almost 2 years), the report reads.
The outline development of such a scenario in Q4 2022 and the materialization of the company’s backlog replenishment prompts analysts to raise previous forecasts for 2023.
We note that after Q3 2022, the company had a loss provision balance of PLN 842 million (the balance increased by PLN 327 million in 2022 alone, which was mainly dictated by the extreme uncertainty in H1 2022), which accounted for 6.8% of the value of the backlog (with an average of 2.8% for the previous 5 years and 4% for 10 years). Due to good contracting in H2 2022 and normalization in the subcontractor market, we also expect a very strong Q4 2022 in terms of cash generation. We believe that the company will now have a much better opportunity to distribute funds to shareholders than the 100% payout of standalone profit stipulated in the policy. As an alternative, we consider a significant acceleration of FB Serwis’s growth (which also currently has a relatively large cash surplus), the report concluded.
Source: BDM Brokerage and ISBnews
