OHLA – Reevaluating - Positioning.
All,
Please find our updated analysis here.
We have updated our OHLA model to reflect progress in the last 12 months. With the first €206m tranche of the SSNs falling due in March 2025, we expect OHLA to undertake a refinance in H124. Our equity valuation is lower in light of the rapid rise in rates and risk premia. We have decided to exit the equity in view of the continued underperformance. We still ascribe value to the construction business. OHLA’s order book fell from €6.6bn to €6bn from Q222 to Q223, but it still represents nearly two years of revenue. Construction activity in the EU will be marginally softer in 2024, but we expect growth in the US. Despite this, EBITDA margins are moving up towards the 4% we have modelled. At these levels, we project that FCF will once more cover interest, albeit <2x. We also expect disposal proceeds to continue coming in, including the sale of Canalejas, and the sale of the services business.
Investment Rationale:
- We hold c. 6% of NAV in the SSNs, and 1.8% in the equity. On updating our model, we have reduced our target for equity. However, we still see OHLA being able to refinance its bonds in 2025 and 2026. The coupon will be in the 10% area. Management has consistently said it will refinance the bonds in the market, so we do not expect an amend and extend operation, but this could yet be required.
- We expect that the company will refinance in Q124, and the bonds will be redeemed at par, giving us a 15% return over six months (annualised 32%). The equity has underperformed and we see a risk of a cash raise diluting us. We will exit the equity now. The current price is 0.38c. The overall return will be 90bp return on NAV.
- In the event no refinance takes place, we have a potential loss of 23% over the same period, equating to around 140bp of NAV. We would expect the bonds to trade down to 70c/€ (where they traded before the previous restructuring).
- We have significantly cut our equity price target due to the significant rise in risk premia and risk-free rates. We have also reduced the growth rates into the future. Our DCF model points to an intrinsic value of 42c for the equity.
- We will update our view when the Q3 numbers are published (in November, no date has been published yet). The Q3 results will give an insight into how the traditionally busier summer months have been and how the order book is shaping up for 2024. There are continued concerns over the health of European and US construction have held back spending on post-COVID recovery. The Ukraine war continues to hurt activity.
Litigation remains an issue but a manageable one:
- The major litigation in Qatar and Kuwait hasn’t progressed. The headline figures are large, but awards are usually a fraction of the amounts claimed.
- We expect the various pieces of arbitration/litigation to balance each other out, but the timing of settlements could lead to outflows.
- The Anserif litigation was completed in H123. We had assumed €100m would come in (but had not built it into our cash flow), the final figure was €37m.
Asset sales are still planned but progress is slow:
- OHLA has €226m in potential asset sale proceeds but we are not factoring them into our analysis yet. With €200m in bond redemptions coming in March 2025, OHLA will be keen to get cash in.
- The 50% share of the Canalejas project in Madrid is worth €200m to OHLA. However, OHLA’s partner has sought arbitration over disagreements on how the asset is being managed. We think this is a negotiating tactic over potentially buying out OHLA. We will update our analysis after the Q3 call. For now, we assume that OHLA will not receive proceeds anytime soon.
- CHUM (Montreal), OHLA failed to get a sale of its 25% stake in CHUM over the line in 2022. The asset is still for sale but there has been no update since. CHUM is a concession asset (a Montreal hospital). We will seek an update at the next investor call.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055