- The fall in the contracting of public works will weigh in 2019
- The payment of dividends will once again be a key factor in some cases
The construction companies are the main protagonists this week on the Spanish stock market. After having marked a markedly bullish annual start, it is time to see if there is material in your 2018 results to extend the comeback. For now, they have the blessing of analysts. Although as in any rule, here is an exception: better not go near OHL.
The international expansion of the Spanish construction companies business and its diversification into other areas such as energy and water management they become the most outstanding value by analysts who closely follow the business and the evolution of the sector in the stock market. However, the slowdown that a less buoyant global economy could bring about for the development of new works becomes the concern that experts they hope to solve with the forecasts that the companies will give a glimpse of in the next few days.
These doubts are condensed in a recent report by Crédito y Caución, one of the insurance branches of the Catalana Occidente group, under the title ‘The unstable foundations of construction’. Its analysts draw “a poor performance” with an increase of just 3% in business this year for a sector that has “a strong cyclical nature linked to the economic growth of each country.” Warning to sailors in times of fear of recession seasoned with “strong competition” and “tight margins”.
THE WEIGHT OF INTERNATIONAL BUSINESS
The expansion they expect will come, they say, from the “rebound in the real estate market” and not so much in public construction and civil engineering that feed the accounts of large groups, which are those that are listed on the stock market. In this sense, they warn that this activity “will remain low due to the commitment to reducing the fiscal deficit”Of the states. A statement to which, however, Ángel Pérez Llamazares, Income 4 Bank sector analyst, removes weight due to the strong geographical diversification that Spanish construction companies have already achieved for their income, item in which Spain stays below 50% in recent years.
The insurer warns that those with business in UK, as is the case of Ferrovial, will have to deal with “the shortage of qualified workers” due to the limitation of the free movement of people, as well as the foreseeable increase in border charges, since “More than 60% of construction materials are imported from the European Union”. However, its upward potential according to the consensus collected by Thomson Reuters is 8% and of the analysts that follow it, 20 advise to buy and only four, to keep.
For analysts Bankinter, the key at Ferrovial is to “know the definitive perimeter and the price of the transaction” for the sale of certain businesses in its British services area, marked as one of the strategic lines of its restructuring. For those from Sabadell, it is the favorite of the group for reasons such as “a lower risk of interest rate hikes” due to the lower debt on your balance sheet.
Another that has risen strongly since the beginning of the year and is part of the Ibex 35 is ACS. For the Renta 4 expert, his main guarantee of continuity is in its commitment to the US and Australia, where “it is getting projects with good margins and is positioning itself as a preferred player for future awards.” Beyond wait for the Abertis lace to close, the recent sale of Hispasat makes the market think that the restructuring has been completed and that the dividends it will receive from its new subsidiary will help improve its financial strength. So much so that Bankinter considers it “preferred contractor to the infrastructure plan which is intended to be undertaken in the coming years in the United States for the renovation of the country’s deficient network of highways, railways, ports and airports ”.
Without abandoning the selective of the Spanish stock market, Acciona It looks to be their consensus potential has been exhausted after the 14% that has already risen since the beginning of the year. Analysts are waiting to see how their latest movements end up fitting in, among which the sale of thermosolar and Trasnmediterránea or their intention to stand up to the Renfe monopoly on high-speed trains in Spain. Pérez Llamazares considers that in the open fight with the Generalitat of Catalonia for the privatization of ATLL he has his great Achilles heel, while in his latest contracts in Dubai and his “attractive margins” in water and services is where he finds the most potential. Above the construction business itself.
THE TECHNOLOGICAL REVOLUTION IS COMING (AFTERNOON)
From the consulting firm Oliver Wyman point to another key challenge for the sector in the coming months and years beyond the weakness of the economy: “The revolution in progress” of its digitization. With some delay compared to other sectors, they consider that this process of change “will produce a more complex competitive environment, but, at the same time, more dynamic.” At this point you have a key role is the implementation of BIM tools (Building Information Modeling), whose objective is to serve as the central axis of construction and building projects to promote improvements throughout the work value chain and thus achieve savings between 15% and 20%.
“A key component for the success of companies in the sector will be their digitization, especially BIM tools”
This system seems to be a train for the consulting firm’s experts not to lose sight of in a context in which “cost efficiency and differentiation can be a great opportunity or a threat”. Changing customer expectations, a favorable legislative framework, the growing concern for the environment, the launch of large infrastructure projects worldwide and the scrupulous scrutiny of any cost overruns have become levers towards this turnaround that Alejandro Gaffner, a partner of the consulting firm, defines it as “a key component for success in the coming years.”
One of the companies that has accelerated the most in this matter in recent times is Sacyr. In spite of the eternal internal struggle of its shareholders, the company has managed to recover cruising speed in contracting projects and – pending final figures this Thursday, February 28 – a portfolio of awards worth 2,824 million euros is expected, focused on Latin America, with 41% of the total. Also, this has been the year of entry of the company into the promising US market.
The Thomson Reuters consensus indicates a purchase for the one chaired by Manuel Manrique and, in addition, gives it a stock market potential of 24% from its current price. “It’s cheap”they bluntly state in the Sabadell. The keys will be in the margins, which in South American economies tend to be narrower than in other markets, such as the US, where throughout 2018 it has closed projects for 347 million euros, according to Bankinter calculations.
DOUBTS IN FCC AND HEALTH CORD TO OHL
Something lagging behind in conquering the foreign market has remained FCC, despite the turnaround that the company has caused landing of Carlos Slim as the first shareholder. The Income 4 expert considers that “It is not the best time to enter” waiting for doubts to be resolved as if this year will be the return of the dividend for its shareholders. Will be the first to solve unknowns, as it publishes annual figures at the close of the session on Wednesday, February 27, one day before its colleagues in the sector.
Sabadell analysts advise being attentive to any clue about the final destination of Aqualia, its water management subsidiary, in a context of increased activity of mergers and acquisitions that could well “accelerate its international expansion.” Just in case, the market consensus opts more for selling (3) than for buying (2) and the upside potential is practically exhausted to 12.9 euros where its target price is.
“It is not the best time to join FCC, we must be attentive to any clue about the final destination of Aqualia and the return of the dividend”
Despite these cautions, nothing compares to OHL. It is the black sheep of the sector for the experts. At Bankinter It is the only one with a sales recommendation and no place in its expanded model portfolio on the Spanish stock market, where the rest of those analyzed are present. The market agrees that the fundamentals still do not present the strength and visibility to justify purchases. Pérez Llamazares the concrete in which he foresees that they will continue to be produced “Operating losses due to new provisions” that imply that “also in 2019 cash will continue to be burned.”
In any case, analysts agree that better-than-expected results for OHL could mean a short-term respite to fatten the 20% rebound that the company has signed up in two months after having collapsed throughout 2018. However, a change of script would require “several consecutive quarters” of generation of net safe and arrival of projects that compensate the company of its last failed works, especially in Mexico.