Quick check: Astaldi SpA (ISIN IT0003261069)

Astaldi SPA was now mentioned by at least 2 commentators as an interesting stock, so let’s look at this Italian stock.

Looking at the “Normal” fundamentals, it seems clear why:

P/E 7.1 (2012)
P/B 1.0
P/S 0.2
EV/EBITDA 6.2
dvd. yield 3.1%

So at the first look, a single digit P/E and P/B of 1.0 look attractive.

On top of that, Astaldi has increased earnings each year in the last 10 years at an impressive rate:

EPS DIV ROE
31.12.2003 0.23 0.05 10.0%
31.12.2004 0.27 0.07 12.1%
30.12.2005 0.28 0.08 13.1%
29.12.2006 0.31 0.09 11.2%
31.12.2007 0.39 0.09 12.9%
31.12.2008 0.43 0.10 13.2%
31.12.2009 0.57 0.10 16.0%
31.12.2010 0.64 0.13 15.8%
30.12.2011 0.73 0.15 16.0%
31.12.2012 0.76 0.17 15.2%

Well, what is not to like ? Even my Boss Score says that they are attractive, indicating ~100% upside.

First, Astaldi is primarily a construction company. As a construction company, a large part of the balance sheet is either “work in progress” or “receivables”. The problem with that is that you never really know how at what stage profit will booked and if this is really earned or if there is some nasty surprise at the end. To illustrate this point, look at this table from page 179 of the 2012 annual report:

2012 2011 Change 2012 2011 2011+2012 In % of sales
– Revenue from sales and services 879,025.00 292,875.00 1,171,900.00 26%
– Plant maintenance services 12,544.00   12,544.00 0%
– Concessions construction and management phase 95,740.00 91,186.00 186,926.00 4%
– Changes in contract work in progress 1,330,781.00 1,881,223.00 3,212,004.00 70%
– Final inventories of assets and plant under construction 7,209.00 0.00 7,209.00 0%
Total 2,325,299.00 2,265,284.00 4,590,583.00

So this table shows that around 70% of Astaldi’s sales were unfinished projects accounted for as “percentage of completion”. This is the respective passage of their accounting principles (page 285):

Long-term contracts
Contract work in progress is recognised in accordance with the percentage of completion method, calculated by applying the cost to cost criterion.
285. This measurement reflects the best estimate of works performed at the reporting date. Assumptions, underlying measurements, are periodically updated. Any income statement effects deriving therefrom are accounted for in the year in which such update is made.

This is a big problem for me. I don’t know if their “best estimate” is cautious or aggressive. I have no evidence that they are doing anything wrong, but for my personal investment style, I do not like companies with a large share of “percentage of completion” business because that introduces a lot of uncertainty into the stated results.

The second problem I see here is the high amount of (gross) debt funding. Astaldi had around 1.25 bn EUR gross financial debt at the end of 2012. For construction companies, a combination of external debt with long term projects can be quite dangerous. Normally, one would expect that most of the projects would be funded via prepayments but Astaldi only manages to get around 400 mn EUR in prepayments.

The big risk here is that one big busted project or problems with one subsidiary can trigger loan covenants and then there is “game over” or at least a large dilutive capital increase.

Loan covenants:

Let’s look shortly at their loan covenants (page 223):

Covenants and negative pledges
The levels of financial covenants operating on all the committed loans the Group has taken out with banks are listed below:
(The present document is a translation from the Italian original, which remains the definitive version)
– Ratio between net financial position and equity attributable to owners of the parent: less than or equal to 1.60x at year end and 1.75x at half year end;
– Ratio between net financial position and gross operating profit: less than or equal to 3.50x at year end and 3.75x at half year end.

Lets do a quick calculation of the ratios in 2012 (based on their own “net financial debt calculations on page 32):

YE 2012: Net financial deb 812 mn, Equity 468 mn –> this would be already 1.73 times, so clearly above the threshold. Only if they include some “non current financial receivables” in an amount of 186 mn, the come down to 622/486 = 1.27 times.

In my opnion, their financial position looks clearly stretched. Maybe this is the reason why they had to issue a quite expensive 100 mn EUR convertible bond early this year. Issuing convertible bonds is ALWAYS a big warning sign that a company cannot fund its operations with “normal” debt.

For me, this is already a BIG RED FLAG. In my opinion, there is no margin of safety in a company with such a high debt load and such tight situation in terms of covenants.

Other more superficial observations after reading thorough the last annual report:

. unfocused concession portfolio (car parks, motorway, airports, hydroelectric plant, hospitals)
– comprehensive income in the last 4 years was always lower than stated eps

SIAS in comparison, my Italian “infrastructure” stock is a much easier story. Less debt, no “percentage of completion”, clear focus on motorway concessions.

Summary:

Despite the nominally cheap valuation, I don’t really like Astaldi. The high amount of “percentage of completion” assets combined with a rather large debt load make the stock quite risky in my eyes. If things work out well, there is clearly upside, however if one project goes wrong, the company will be in big trouble. So no real “Margin of safety” here in my opinion.

And no, I don’t think that concession business has a bright future. As an Italian company one has a clear competitive disadvantage with higher funding costs and in my opinion it is impossible to run so many different types of concessions in different countries really effectively. I am afraid that they will overpay and/or get the stuff the specialists don’t want.

11 comments

  • andrew :

    hmmm..ever looked at BEC.MI?

    No, but it looks quite interesting….Do you have more info ?

    • Well, they are a manufacturer of high quality speakers, mostly for professional use. Typical story of manufacturing high quality goods in Italy for export to rest of world. They pay a good dividend, even one year they tried a dividend reinvestment plan, something I have not seen in any other Italian companies..it was the CFO’s idea. Started as a family company, but the founder died earlier this year..Has around 100 employees with 10% involved in R&D. Exposed to price of neodymium as a raw material, but that has been dropping..low debt..distribution centres in USA and Brazil..1Q2013: Revenue +18.7%, Earnings +107%

    • Since my comment about BEC.MI here the price has increased from 3.95 to 4.50..I feel like I am running my own private boiler room..

  • So Astaldi not a good investment at all, or not a good investment at this price?

    • andrew,

      the honest answer is: I do not know. But for me it is not worth exploring deeper because I cannot accept the potential downside. Investors with different investment styles /risk appetite might consider it a good investment. However, for me a solid unlevered balance sheet is a “must”.

      MMI

  • Thank you mmi. I have a different, maybe too rosy view:
    – convertible debt is for expansion (4.5% interest, 7.3996 connversion price)
    – trust in owner operator with decades of experience
    – execution of business plan http://www.astaldi.com/uploads/files/pdf_presentazioni/2012/2012%2011%2013%20Business%20Plan%20Milano.pdf
    – cheap investment in infrastructure compared to closed fonds
    – 2.5% position due to construction riks

  • Thank you very much for your elaborate analysis.
    You probably found the “foul fruits” I didn’t – and gave a good lesson in reading annual reports.

    • to be honest: I don’t think taht analysis is very elaborate. As I said, Astaldi could be a good inevstment, but for me it is not really investible.

      • If you should ever plan to write an posting about the importance and information power of the cash flow statement, Astaldi might be a good example.
        I did hold the share despite your warnings. It went OK, but not as glorious as other italian shares. But after reading the annual number for 2013 these days I got panic and sold. The number sound nice, with small increase in revenue and earnings and an order book for several years in the future.
        http://www.astaldi.com/uploads/files/pdf_comunicati_stampa/2014/2014%2003%2028%20ASTALDI%20PRESS%20RELEASE%20FY2013Results.pdf

        The debt level continues to rise, and even the very short cash flow statement hided at the final page tells the reason: The Operative Cash Flow dwindled in 2013 to less then 10 Mio€, while the Cash Flow for investments was over 150 Mio€. In 2011 and 2012 the Free Cash Flow was already deep in the red, so its year three i a row.
        The promblem was not adressed as a problem in that paper neither in the power point presentation made for the press conference. So the company do not see or tries to hide the problem – not good either.

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