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TÉCNICAS REUNIDAS: 9M’20 RESULTS AND T.P. CUT (ANÁLISIS BANCO SABADELL)

3Q'20 vs 3Q'19 Results
Sales: € 700.5 M (-42.2% vs. -29.8% BS(e) and -26.2% consensus);
EBITDA: € 10.8 M (-59.6% vs. -23.6% BS(e));
EBIT: € 0.3 M (-98.1% vs. -43.7% BS(e) and -10.1% consensus);
Net Profit: € -4.4 M (€ 10.7 M in 9M'19 vs. € 2.3 M BS(e) and € 5.8 M consensus);
9M'20 vs 9M'19 Results
Sales: € 2.809 Bn (-18.1% vs. -13.7% BS(e) and -12.4% consensus);
EBITDA: € 66.9 M (-8.5% vs. +4.7% BS(e));
EBIT: € 33.4 M (-22.7% vs. -2.8% BS(e) and +9.5% consensus);
Net Profit: € 7.3 M (-69.7% vs. -41.9% BS(e) and -27.4% consensus);
Poor results even below expectations in 3Q’20 sales (-42.2% vs. -29.8% BS(e) and -26.2% consensus) due to a slower pace of project execution in Middle East due to Covid-19. Thus, the EBIT accounted as of 9M’20 came in far below expectations (€ 33.4 M vs. € 42 M BS(e) and € 47.3 M consensus), as did its net cash position (€ 113 M vs. € 150 M expected and € 154 M as of the 1H’20).
In any case, the company has adjusted EBIT for one-off restructuring costs and Covid-19 impacts (protection equipment, social distancing and sanitation works for construction sites and corporate offices, repatriation flights and discontinued activity due to quarantine measures in construction sites and even lockdowns imposed by Govts; and many other stranded costs ) that TRE quantifies at € 54.1 M (12% of market cap) as of 9M’20 (with € 10 M corresponding to the restructuring process and € 44 M to Covid-19). Thus, the adjusted EBIT figure as of 9M’20 would stand at € 87.5 M, with the margin EBIT on sales coming in at 3.1%, even above our long-term estimates and those of the consensus (2.8% and 2.5%, respectively), but which we cannot assume in 2021, as there is not enough visibility for us to assess if these one-off impacts will be the last. In fact, for 4Q’20, TRE has forecast € 18 M in costs linked to Covid-19 (4% of market cap; to levels of € 62.1 M)
Thus, assuming that the situation does not worsen, TRE expects to obtain € 3.5 Bn of sales, with an adjusted EBIT margin of 3%, vs. ex-Covid our long-term estimate of 2.8% and vs. the consensus estimate of 2.5% based on sales volumes above € 4 Bn.
On the positive side, the backlog came in very much in line with expectations (€ 9.2 Bn vs. €~9 Bn expected; ~2.5x sales). TRE reiterates that there was no cancellation of projects.
While it is true that in adjusted terms the margin reported by TRE is high (standing above our estimates and those of the consensus), we believe that the market will demand that the company deliver results before assuming margin improvement unrelated to Covid-19.
Following this set of results we will cut our T.P. by -34% to € 12.46/sh. (+53% upside). 50% of the cut is based on our estimate revision (-20% and -36% in sales/EBITDA’20, respectively, -17%/-17% in 2021 and -1%/+5% in recurrence from 2024 on). The rest of the cut would be explained by the cut to our net cash estimate from € 381 M to € 102 M (vs. € 192 M consensus) due to lower client payments and other adjustments to on-balance provisions.
Despite the stock’s sharp correction (-35% vs. IBEX since Feb’20 highs, right when the impact from Covid-19 began to be seen) and the fact that our numbers show significant upside, we think the stock will not have any clear drivers until there begins to be recovery in payments received from clients. At the same time, we also believe that if there is no additional deterioration from this point on, the stock should not fall in absolute terms (today it is falling -7%), as in order to justify the current share price we would have to assume recurrently that margins will stagnate at the currently level. As for the balance sheet, we do not foresee any capital increases to get through this challenging time, as the company has good access to the debt market. BUY. T.P. € 12.46/sh. (+53% upside).