Analytical Report – Mirbud - 3Q22 Results Overview - WSE:MRB
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Building back better
According to our forecasts, Poland’s economy is set to flip into recession in 2023, which, besides all the negative aspects, will bring relief for construction companies’ cost base. This means preserving or slightly increasing profitability in 2023 on a y/y basis: now we expect Mirbud’s gross margin to inch slightly higher, from 7.78% in 2022E to 7.93% in 2023E. This is likely to happen due to stabilization or lowering in some costs items. According to PUDS data (Polish Union of Steel Distributers), the price of rebar fell by 22% over the last three months (most of 4Q22 data included). This means a further decrease of this cost group after 3Q22 where, according to Cognor data, steel rebar prices declined by 19% q/q. Results for 3Q22 were supported by revaluation of road contracts with the general directorate (GDDKiA) and the ending of low profitability contracts for warehouse construction for Panattoni. All in all, we increase the EBITDA forecast by 23.8% for 2022E, by 26.9% for 2023E and by 27.2% for the 2024E period to PLN 182.9m (down 2.7% y/y) in 2022E, PLN 184.9m (up 1.1% y/y) in 2023E and PLN 186.1m (up 0.6% y/y) in 2024E. We increase our Fair Value by 43.4% to PLN 5.06, which provides 13.2% upside and an upgrade of our recommendation from HOLD to BUY.
3Q22 results overview and 4Q22 results preview
Our main takeaway after the 3Q22 call with the management was that profitability is likely to be preserved in the latter part of 2022 and early 2023, with a possible upward trajectory in 2H23. We however err on the side of caution and expect the gross profit margin to fall from 8.67% in 3Q22 to 7% in 4Q22. Overall we forecast EBITDA in 4Q22E at PLN 43.8m, -14.8% y/y and -33.7% q/q. We expect the revenue level to arrive at PLN 801.8m, -6.6% y/y and -15.8% q/q. The gross profit line is expected to come in at PLN 56.2m, -21.1% y/y and -31.9% q/q. The bottom line is likely to arrive at PLN 25.8m, -26.6% y/y and -46.5% q/q.
Backlog still strong
Mirbud is systematically building a portfolio of orders. At the end of 3Q22, Mirbud had orders worth PLN 5.25 bn. For the company it is crucial that the value of the portfolio should stay over PLN 5 bn in each period. The main part of orders (75%) for now is road investments, 12% public buildings, 11% production and warehouse construction and approx. 2% residential buildings.
Higher multiple warranted
Mirbud trades at a 2022E EV/EBITDA of 3.1x, which constitutes a 37.3% discount to international peers and a 52.6% discount to the most prominent Polish construction company, which is Budimex. Budimex is recognized due to its high dividend payout track record; however, we still feel the premium to Mirbud should be smaller due to Mirbud’s continued inking of new contracts which we believe will allow the company to increase margins going forward.
3Q22 results overview/4Q22 results preview
Our main take away after the 3Q22 call with the management was that the profitability is likely to be preserved in the year end of 2022 and early 2023 with possible upward trajectory in 2H23. We however err on the side of caution and expect the gross profit margin to fall from 8.67% in 3Q22 to 7% in 4Q22. Overall we forecast EBITDA in 4Q22E at PLN 43.8m, -14.8% y/y and -33.7% q/q. We expect the revenue level to arrive at PLN 801.8m, -6.6% y/y and -15.8% q/q. The gross profit line is expected to come in at PLN 56.2m, -21.1% y/y and -31.9% q/q. The bottom line is likely to arrive at PLN 25.8m, -26.6% y/y and -46.5% q/q.
Changes in forecast
Valuation
Our valuation approach for construction companies uses two methods: the discounted cash flow (DCF) and the dividend discount model (DDM). We calculate our Fair Value for Mirbud by taking the average of the two results. The two methods are aligned, as they are both based on the same financial model. The model assumes cashflow projections over a 10-year period for the firm based on our forecasts for the construction market, GDP in Poland as well as other parameters including volume growth, product mix changes, changes in the financing model, efficiency gains, production cost increases, capital expenditures and working capital needs. Our dividend projections are a derivative of the earnings forecasts in our financial model. Payout levels are determined by corporate policy in the short-term (15%) and then drift towards a target payout ratio of 50% in the long-term. The DDM is also a useful tool for understanding P/E multiples [P/E = (D/E)/(k-g)], with differences explained by a combination of earnings growth and dividend payout. Both our DCF and DDM models have terminal values with a growth rate of 1%. Our assumptions for cost-of-equity were established by using a variable risk-free rate (equal to the 12-month forward interest rate) and adding a 5.5% equity risk premium each year. The 12-month forward interest rates were derived from the yield curve of the 2022-2031 period. We also consistently use a beta of one (1) so as not to distort the WACC and the comparability of our valuations.
Relative valuation
Mirbud trades at a 2022E EV/EBITDA of 3.1x, which constitutes a 37.5% discount to international peers and a 38.2% discount to the most prominent Polish construction company, which is Budimex. Budimex is recognized due to its high dividend payout track record; however, we still feel the premium to Mirbud should be smaller due to Mirbud’s continued inking of new contracts which we believe will allow the company to increase margins going forward.
ESG Section
Environment
Mirbud takes environmental concerns very seriously. The company has implemented several measures to control its dust emissions and to prevent it producing excessive waste. The company is enhancing its environmental policy by reducing its use of natural resources. Furthermore, the company has endeavoured to optimise its use of resources by focusing on recycling, waste control and water circulation.
Governance
Mirbud maintains transparent and continuous communications with its employees and shareholders. Regular meetings are held between employees and managers to provide updates and consolidate the company’s strategy. It publishes quarterly and annual reports in a timely manner.
Risks to fair value
Demand volatility
With its asset-heavy business model, Mirbud is fully exposed to local demand for construction services. Weak demand may lead to sharp declines in profitability. Unfavourable trend in prices of materials and services Adverse trends such as rising raw material costs or inflation of transport service costs may hamper the company’s profitability.
Potential rise in competition
Given the company’s superior profitability, arising from complex solutions and a growing scale of operations, several local competitors might attempt to copy Mirbud’s business model, which could potentially increase competition in the company’s most important segments.
Workforce shortages
A shortage of skilled labour in the construction industry could result in Mirbud having insufficient employees to operate its business. There are no shortages at the moment, which would likely allow the company to lower its cost base and cost of third parties in quarters ahead.
Rise in receivables
The biggest threat to Mirbud would be a rapid increase in receivables stemming from construction contracts, which would cast a shadow over the profitability of the executed contracts.
Economy slowdown
Estimates for the Polish economy point to lower growth rates going forward. As a result, some investments could be suspended, which would raise questions about the level of Mirbud’s future backlog. Decreasing EU funds are likely to accentuate the problem.
Financials
Analyst: Robert Maj robert.maj@ipopema.pl + 48 22 236 92 90
GPW’s Analytical Coverage Support Programme 3.0
