Mostostal Zabrze Group: A Year of Success and Promising Prospects for Sustainable Profitability
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This year, the Mostostal Zabrze Group has had a very successful year, which is due to many contracts, but especially two of them, i.e. concluded with BASF Schwarzheide for the prefabrication and assembly of a chemical installation and the construction of a waste incineration plant for POSCO Engineering & Construction. The first one was completed in 3Q23, and the second one should be completed in 2Q24, as planned.
The question therefore arises whether this year's results will be repeated in subsequent years? This question is worth answering in several parts. In the industrial and general construction industry, Mostostal Zabrze largely uses the services of subcontractors. This means that a lower level of revenue does not necessarily mean unused capacity and related costs.
The amount of profits is determined not only by the amount of revenue, but also by the amount of margin and, which is particularly important in the construction and engineering industry, good contract management and, as a result, minimization of unplanned costs. In this respect, Mostostal Zabrze declares emphasis on cooperation with proven and reputable contractors and on specialized work, where the guarantee of investment success is more important for the client than the price. As a result, the company promises to maintain profitability even with lower turnover.
The biggest unknown may seem to be the number and size of contracts that can be obtained in the field of general construction. Theoretically, this is justified in the face of reports from many construction companies about intensifying competition. In fact, the company's contract portfolio includes few contracts in the field of general construction, and it is dominated by waste incineration plants, data centers, battery factories, hospitals and specialized works for the steel industry.
These areas were also indicated as key in the presented strategy. In these categories, there is less competition because the selection of the contractor is preceded by detailed technological arrangements and proven contractors are usually preferred. Moreover, significant investments are being announced in all types of facilities, and management says it is engaged in a number of negotiations that bode well. However, they are not yet at the stage that allows their visibility in the backlog, but they constitute the basis for assurances that its value will increase significantly in the coming quarters.
Valuation and recommendation
In the report published in June, we provided the target price of the Mostostal Zabrze Group, even though we lowered our earnings forecasts. This is the result of several factors: the power source, the decline in discount rates, the impact on the comparative valuation of the forecast for 2024 and deep share redemptions. The value of the shares based on the DCF model is PLN 6.2 (valid at the Silesian Stadium - PLN 3.80), and is then valued in comparison to other companies - PLN 6.5. This gives PLN 5.80, which means maintaining the buy recommendation for Mostostal Zabrze shares.
