value and opportunity

I looked at Bilfinger for the first time in August 2014, after the price dropped almost 50% from its peak some months before. I resisted again in November 2014.

Again as a reminder my comment from the first post:

– some of the many acquisitions could lead to further write downs, especially if a new CEO comes in and goes for the “kitchen sink” approach
– especially the energy business has some structural problems
– fundamentally the company is cheap but not super cheap
– often, when the bad news start to hit, the really bad news only comes out later like for instance Royal Imtech, which was in a very similar business. I don’t think that we will see actual fraud issues at Bilfinger, but who knows ?

So now the new CEO came in on June 1st. And surprise surprise, the 6th profit warning within a year if I have counted correctly.

The only surprise was that they actually decided to sell the power business. Similar to Vossloh, the Q2 report will most likely be a typical an “accounting massacre”. That is from the Adhoc announcement:

A comprehensive review of all projects in the Power business segment with the support of external consultants revealed further substantial losses. This is in addition to ongoing burdens from a lack of capacity utilization. Overall, the company expects an adjusted EBITA of up to minus €100 mill ion in this segment for financial year 2015 (previous year: plus €8 million). The results will be presented as discontinued operations. A majority of this loss will impact the first half of the year. A substantial goodwill impairment in the Power business segment will also be taken into account in the financial statements as of June 30, 2015 which, overall, will lead to a significantly negative net profit in the first half of the year. In addition to the operational losses, one time expenses for the reduction of fixed costs will be incurred over the course of the year, measures to improve project management and execution have already been introduced.

So for anyone wanting to buy Bilfinger because it trades below book value be warned: Book value will be significantly lower after Q2. Bilfinger had more Intangibles & Goodwill than equity at the end of 2014. The Power segment had 361 mn Goodwill at year-end, one should assume a significant part of that will be written off.

Additionally, in the “industrial segment”, some pain still lies ahead. This is from the annual report:

The oil and gas sector accounts for about 40 percent of our out-put volume in the business segment. The strong decline in the price of crude oil which began last summer is therefore a considerable risk factor for this business segment.

Some people asked my already some time ago if it is now time to buy Bilfinger. I honestly don’t know. For me the problem is that I am not very good with turn arounds and that I have no idea how to value the company. And assuming any kind of “mean reversion” is pretty useless as the future Bilfinger will look very different than the past one. For me buying Bilfinger would rather be something like a “rebound speculation” but this is smething I don’t do (anymore).

If Vossloh is any guide, the low point in the stock price came a couple of months after the “6 month accounting blood bath”:

Another lesson of the Bilfinger case is clearly: Whenever a company decides to change its business significantly and uses a lot of acquisitions to achieve this, then one should be extremely carefull. Those shifts in strategy are very risky and investors should both, increase their required risk premiums and not rely on past profitability numbers. And stay away from companies that are run by former politicians.