STRABAG confirmed at BUY, TP EUR 40.5 - Further margin improvement envisaged in 2020

STRABAGs preliminary FY 19 figures contained in-line output, a higher than assumed order backlog (implying good order intake in 4Q) as well as a more confident wording on profitability, suggesting that the EBIT margin should be better than the 3.3% so far assumed by us. With regards to FY 20e, we see upside to the groups output indication of more than EUR 16 bn (RCBe ca. EUR 16.5 bn) but acknowledge that the 1H base still includes the DeTe facility management contract and the usual uncertainty around weather conditions. More importantly, we appreciate the EBIT margin guidance of at least 3.5%. Admittedly the yearly profitability improvements are small, but we think that given substantial cost inflation this lends credibility to the management track record and the efforts to improve risk/project management. Moreover, it also suggests a good underlying margin profile of the existing backlog. Bottom line, our positive stance on the investment case remains intact. Construction market fundamentals remain sound and given its size STRABAG offers good diversification. Further margin improvement should translate into earnings growth and even on our unaggressive estimates the stocks valuation is attractive. The story is rounded out by a strong balance sheet determined by a decent net cash position and an equity ratio that allows for a compelling and growing dividend (yield >4.5%).