Strong foundations, raise to Add Heijmans NV
Wednesday 9 February 2005
Flashnote
Heijmans N.V.
Add
(from Hold)
Absolute performance
Underweight
Strong foundations, raise to Add
Market relative to region
We expect Heijmans to benefit from the improving Dutch construction market. We raise our 2005F estimates for the group by 14% and lift our target price to €32 (from €28). The 2006F PE of 7.3x is undemanding given the 13% free cash yield. Add.
Equities
Cash
Bonds
O
U
N
Asset allocation
Construction & Building Materials
Key forecasts
Netherlands FY02A
FY03A
FY04F
FY05F
FY06F
Revenue (€m)
2415
2604
2629
2665
EBITDA (€m)
157.2
126.0
155.1
171.0
Reported net profit (€m)
83.1
53.2
64.3
72.3%
78.8%
Normalised net profit (€m)
89.2
61.4
72.5
80.5%
87.0%
Normalised EPS (€)
3.98
2.72
3.20
3.55%
3.84%
Dividend per share (€)
1.48
1.22
1.22
1.29%
1.40%
Market capitalisation
Dividend yield (%)
5.27
4.34
4.34
4.58
5.00
€610.33m
Normalised PE (x)
7.07
10.3
8.78
7.91
7.32
EV/EBITDA (x)
6.46
8.44
6.72
5.77
5.22
Avg (12mth) daily volume
EV/invested capital (x)
0.98
0.95
0.94
0.89
0.84
-11.1
-19.9
-19.4
-23.9
-23.3
ROIC - WACC (%) Source: Company data, ABN AMRO forecasts
2718 180.9%
year to Dec, fully diluted
Price
€28.10 Target price
€32.00
%
€1.20m Reuters
HEIJ.AS Bloomberg
HEIJ NA
Residential construction leads the Dutch market recovery…
Price performance
We see increasing evidence that the Dutch construction market is recovering,
Price (€)
24.8
21.3
20.7
mainly on the back of the residential construction market. Residential represents
Absolute %
13.5
31.7
35.9
over 40% of total output and we expect it to grow by 3.5% in 2005. The rise in
Rel market %
11.2
22.7
22.6
6.7
16.1
3.5
building permits should trigger the increase in new-build homes. Overall, we expect the total Dutch construction market should grow by some 2% vs –1.0% in 2004F. ...and is the biggest earnings driver for Heijmans We estimate Heijmans generates an estimated 50% of its sales and 65% of its EBITA in Dutch residential construction. Its land bank and excellent property development division should enable the group to grow organically by 5% in
(1M)
Rel sector % Source: Bloomberg Feb 02
We raise our 2005F estimates by 14%, 2004-06F EPS CAGR 14.2% Our previous estimates were based on a more conservative market outlook.
Feb 03
Feb 04
32 28 24 20 16 12 8
residential. The EBITA should outpace the top line by 1.7x, driven by the operating leverage in its property development division.
(3M) (12M)
HEIJ.AS Amsterdam Exchanges Indx
Source: Bloomberg 52-week range: 28.34-17.51 Bloomberg European Market: 129.47 Europe Building: 178.65
Hence, we raise our forecasts by 14% in 2005F and by 17% in 2006F. The main risk to our estimates is the unsold commercial real estate on the balance sheet. New target price of €32 (14% upside) We lift our target price to €32 and rate the shares an Add. You only pay a 7.3x 2006F PE and a 5.2x EV/EBITDA for 14% average EPS growth and 13% free cash yield. The undervaluation of Heijmans vs its European peer group is still significant at 65% on a PE basis, while the conclusion of the fraud case could bring M&A interest back to the Netherlands.
Important disclosures and analyst certifications regarding companies that are the subject of this report can be found in the Disclaimer Appendix Priced at close of business 7 February 2005. Use of %& indicates that the line item has changed by at least 10%.
Gustav Mahlerlaan 10, 1082 PP Amsterdam, Netherlands
Analyst Thijs Hovers ABN AMRO Bank NV +31 20 383 6788 [email protected]
www.abnamroresearch.com
H E I JM A N S
N . V.
Dutch construction is back in favour We expect Heijmans to benefit from the improving Dutch construction market. We forecast an average 14.5% EPS growth in the next three years. The shares still trade at a 65% PE discount to European peers.
Dutch construction takes the lead in Europe Compared to other European countries, the Dutch market seems the new place to be. We expect growth to accelerate in the Dutch construction industry over the next three years. This is good news for Heijmans, as the group generates around 85% of
Growth in the Netherlands and Belgium looks promising
its sales in the Netherlands, 11% in Belgium and the remaining in the UK and Germany. Table 1 shows the growth potential for the Netherlands vs some other major European markets. The Belgian market also looks promising, which is positive for Heijmans as well. Its lossmaking Belgium operations were reorganised in 2004F. Table 1 : Construction market growth per country
Netherlands Germany UK Belgium
2002F
2003F
2004F
2005F
2006F
2007F 04-07F CAGR
-2.2%
-3.8%
0.0%
2.3%
2.4%
3.0%
2.6%
-5.8%
-3.2%
-1.7%
-0.8%
-0.3%
0.9%
-0.1%
4.2%
4.5%
3.5%
2.5%
1.9%
0.9%
1.8%
-4.8%
-3.4%
4.5%
9.8%
2.6%
1.8%
4.7%
Ireland
2.9%
5.5%
8.7%
0.5%
-4.9%
-4.9%
-3.1%
Average
-1.1%
-0.1%
3.0%
2.9%
0.3%
0.3%
1.2%
Source: Euroconstruct, ABN AMRO forecasts
Residential construction drives the Dutch market After two years of negative growth, we expect the Dutch market to be on the rise again. In table 2, we present the forecasts by Euroconsult, the EIB, as well as our own estimates for the Netherlands. Table 2 : Forecasts - Dutch construction market 2003
2002
2003
2004F
2005F
2006F
2007F
Euroconstruct Residential
28,291
-2.5%
-2.2%
2.8%
3.0%
1.2%
2.5%
Non-residential
18,434
-4.0%
-7.3%
-2.2%
2.0%
4.9%
4.4%
Infra
15,149
0.9%
-2.5%
-2.6%
1.2%
1.6%
2.2%
-2.2%
-3.8%
0.0%
2.3%
2.4%
3.0%
Total market growth EIB Residential
-2.0%
6.5%
1.1%
2.5%
Non-residential
-1.7%
-8.6%
-4.7%
0.0%
1.4%
6.4%
0.2%
1.1%
Infra
-1.2%
4.3%
-1.3%
1.3%
Total market growth
-1.0%
-5%
-1%
2%
Maintenance
ABN AMRO Residential
3.0%
3.5%
2.8%
2.5%
Non-residential
-2.5%
0.0%
2.3%
3.0%
Infra
-2.8%
1.0%
1.8%
2.3%
0.0%
2.3%
2.4%
2.6%
Total market growth Source: Euroconstruct, EIB, ABN AMRO forecasts
In line with the Euroconstruct and EIB forecasts, we expect that residential construction will be the main growth driver for the Dutch market in 2005F. For the years beyond, we expect growth to remain sound as well. In 2002 and 2003, the
Residential will be the main growth driver in the Netherlands
residential market contracted, mainly due to the bad economic climate, which affected the consumers’ confidence strongly. Demand for expensive housing in H E I JM A N S
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particular was under strong pressure. We have already seen a pick-up in 2004 and expect this trend to continue in 2005. The main reasons for our positive stance towards residential construction are: ■
The Netherlands has a structural shortage of new quality homes. Over the last few years, the issuing of building permits has been structurally below the annual demand for new housing, mainly due to sluggish governmental decision processes. We estimate the annual demand of new-build homes is around 90k per annum. At the same time. the issued number of permits dropped from 108k in 1994 to an estimated 70k in 2004.
■
In response to the aforementioned situation, Dutch Minister Dekker (VROM), announced its intention to significantly increase the number of new-build homes to 90k per annum. The government is willing to invest €650m between 2005 and
The Dutch government is willing to invest €650m in residential construction
2010 to stimulate the local government to build new homes, especially in the larger cities. We expect the focus to be on increasing the supply of (social) housing within cities, instead of high quality housing in VINEX locations. Chart 1 already shows that the housing permits have started to recover in the last few months. ■
Finally, we expect the demand side to remain fairly healthy. We do not foresee a strong rise in long-term interest rates, while we forecast the unemployment rate declining gradually. Furthermore, the number of households continues to grow by around 60k per annum.
Chart 1 : Housing permits recover
Chart 2 : Construction outperforms GDP
50%
14% 12%
40%
10%
30%
8% 6%
20%
4%
10%
2%
0%
0%
-10%
-2% -4%
-20%
-6%
-30% Dec-95
Dec-97
Dec-99
Dec-01
Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 92 92 93 94 95 95 96 97 98 98 99 00 01 01 02 03 04
Dec-03
Construction: Housing permits
GDP Construction
GDP
Construction: permits for corporate investments & constructors
Employment
Unit Labour Cost
Source: Datastream, ABN AMRO
Source: Datastream, ABN AMRO
€80bn for infrastructure in 2010-20 Since 2002 the infra market has rapidly deteriorated. We only expect a modest pickup in 2005, as new infra expenditure should slide due to the completion of some large projects. However, we expect an increasing amount of renovation work. In the
Improving relationship with government should speed up project approvals
near future, several larger road maintenance projects should be awarded. Also the improving relationship between (local) governments and contractors in the postfraud period should trigger the acceleration of local projects. We expect a modest increase in government funds for new road and railway infrastructure as from 2006F. Dutch Minister of transportation Carla Peijs announced his intention to increase significantly the planned infrastructure investment in 201020, from €65bn to €80m. Some 38% of the budget will be spent on highways, 25% for local governments, 23% for the railways and the remaining for waterways. Until 2009, the budget is already fixed and will remain roughly flat for the next few years. However, Minister Peijs hinted at opportunities to increase the number of Public Private Initiatives, which should result in increasing activity over the next few years and raise the opportunity of bringing future projects into the present. H E I JM A N S
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Non-residential: Outdated offices are gradually scrapped from the market We believe the end of the recession in the non-residential construction sector is in sight. The modest economic recovery and the slowly increasing investment activity
End of recession in nonresidential is in sight
should once again stimulate private non-residential construction activity in the years to come. This outlook is, among others, based on an increasing volume of building permits in 2004. We expect total new non-residential construction to bottom out in 2005. After a period of three years in which output dropped by 25% to €8.5bn, next year a stabilisation at the 2004 volume level is projected. We expect the increasing demand for high quality office buildings, with up-to-date electromechanical infrastructure, will drive the older offices out of the market. This also drives renovation and modernisation (R&M) of non-residential buildings to return to a positive growth track in 2005 (3.9%). A further recovery is foreseen in R&M investment in 2006 and 2007. Finally, real estate investments by public sectors should rise as the budgets in the public sector have been spared. All in all, we estimate a 2% rise in Dutch residential construction for 2005F, against our earlier cautious forecast of 0.5-1.0%. As the Dutch market is now entering a new period of growth, we expect the earnings visibility of the Dutch constructors to improve considerably.
Financial: 2005F estimates raised by 14% Our more bullish expectations on the Dutch construction market have a major
Table 3 : Normalised EPS
impact on our earnings forecast for Heijmans; we raise our 2005F estimates by 14% and 2006F by 17%. For 2005F we estimate an EPS recurring rise of 34% to €3.55. The main drivers are (see also chart 3): ■
Strong growth in residential construction activities is the big earnings trigger. We
Old
New
%
2004F
2.98
2.98
0%
2005F
3.12
3.55
14%
2006F
3.27
3.84
17%
Source: ABN AMRO forecasts
forecast 5% top-line growth in residential construction. This forecast is below Heijmans’ internal target to increase the number of sold homes by an average 6.5% to 4,500 in 2008. EBIT should grow at a much higher rate in 2005F, due to the leverage potential in project development (discussed in more detail below).
Chart 3 : Net profit development, 2005F Normalised net prof it 2004 Non recurring restruct uring Inf ra Completion large project s Divest ment Opst allan Resident ial & Project dev. Int ernational Int erest Net profit 2005 60
65
70
75
80
85
Source: ABN AMRO forecasts
■
Non-recurring charges to restructure the infrastructure division in 2004 should have a €4m pre-tax positive impact.
■
A recovery of the International operations (estimated 19% of sales) from around
Earnings improvement in Belgium should be the swing factor for 2005
€1m to €7m (EBITA). The main driver should be the Belgium operation.
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Euroconstruct forecasts indicate that the Belgium market should grow by 9.8% in 2005F, mainly caused by a strong uptick in public investments. ■
A further reduction of the overhead from €17.8 to €15.8 should be realistic, especially taking into account the continuous streamlining of the operations in recent years.
■
We expect the divestment of Opstallan (€2m EBITA contribution in 2004F) and some earnings decline in Infra (caused by the completion of large profitable projects) to impact the results negatively.
Residential construction represents 65% of EBITA, high leverage potential We estimate that Dutch residential property development and construction represents around 50% of total sales and an estimated 65% of EBITA (table 4). We expect it to be Heijmans’ main growth driver in the coming years. Furthermore, growth rates above our conservative forecast should have a significant positive impact on our estimates. In 2004F, Heijmans has been able to grow much faster than the market, as it builds 17% more houses from 2,990 to 3,500. In our view, Heijmans has been able to realise such high-growth rates due to its property development skills and its land bank. The current book value is around €290m and the development potential is around seven years (45,000 homes). Furthermore, Heijmans’ property development skills have been strengthened considerably after the acquisition of Proper Stok in 2002 (€150m sales). Table 4 : Project development is an important earnings growth driver 2004F
2005F Base case
Scenario 2
Scenario 3
Sales project development
691
725
760
794
Growth (%)
7%
5%
10%
15%
Gross margin
0.171
0.171
0.171
0.171
Gross profit
118.1
124.0
130.0
136.0
350
350
353.5
360.5
0
1%
3%
0.13
0.13
0.1326
0.1352
0
2%
4%
45.5
45.5
46.9
48.8
Number of employees Growth (%) Costs per employee Growth (%) Total employee costs Depreciation EBITA EBITA margin
3
3
3
3
69.59
75.49
80.02
84.06
10.1%
10.4%
10.5%
10.6%
Growth (%)
8.5
15.0
20.8
Leverage (x)
1.7
1.5
1.4
Group EBITA enhancement (%)
4.8
8.6
11.9
Source: ABN AMRO forecasts
As can be seen in table 4, we expect the project development division EBITA to grow by 9% versus the 5% top line, driven by the high operating leverage potential of the division. Basically, we assume that a 5% rise in activity requires no expansion
Project development growth is a major earnings driver for the group
in staff. Should the top line grow faster at 10%, only 1% more personnel is required. Even higher growth rates than our 5% assumption have a significant impact on our group estimates; should project development sales (which is only 28% of the total) grow by 10%, Heijmans’ EBITA is enhanced by 8.6%.
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Below, we present our detailed P&L for Heijmans. We forecast a pre-fines normalised EPS growth of 34%, from €2.66 to €3.55. On average, the normalised EPS should grow by 14.2% over the next three years. Table 5 : P&L Heijmans (pre-IFRS) 2002
2003
%
2004F
%
912.0
743.0
1,532.0 1,510.0
2005F
%
-19
705.9
-1
1578.0
-2
2006F
%
-5
712.9
4
1641.1
181.0
0
2007F
%
1
727.2
4
1673.9
2
741.7
2
2
1699.0
142.0
-22
1
143.4
1
144.9
1
Sales Infrastructure Non- and residential construction
185.0
Trade and industry International Intercompany result
181.0
273.0
475.0
74
522.5
10
533.0
2
543.6
2
554.5
2
-487.0
-305.3
-37
-358.5
17
-363.5
1
-370.6
2
-376.8
2
2,415.0 2,603.7
Total
8 2,628.8
1 2,665.5
1 2,717.5
2 2,763.2
2
2
EBITA Infrastructure Non- and residential construction Trade and industry
39.3
31.0
-21
32.0
3
34.9
9
35.8
2
36.6
101.7
94.0
-8
99.0
5
108.3
9
110.8
2
112.8
2
6.1
0.0
-100
7.0
5.5
-21
6.0
9
6.2
3
8.5
3.0
-65
1.0
-67
6.9
593
8.2
18
9.4
16
-27.6
-13.5
-51
-16.6
23
-15.8
-5
-13.8
-13
-13.8
0
Fines
0.0
-15.0
-30.0
100
0.0
-100
0.0
Total
128.0
99.5
-22
92.4
-7
139.9
51
147.0
5
151.2
3
-6.1
-8.2
33
-8.2
0
-8.2
0
-8.2
0
-8.2
0
Total EBITA
121.9
91.3
-25
84.2
-8
131.7
56
138.8
5
143.0
3
Interest
-12.7
-11.8
-7
-13.4
13
-11.9
-11
-10.7
-10
-10.7
0
Tax
-33.5
-25.7
-23
-39.9
55
-47.0
18
-50.5
8
-52.1
3
Net profit after goodwill
75.7
53.8
-29
30.9
-43
72.8
136
77.6
6
80.3
3
Prefered dividend
-4.6
-6.8
49
-6.8
0
-6.8
0
-6.8
0
-6.8
0
EPS after gw
3.70
2.37
-36
1.35
-43
3.22
139
3.51
9
3.64
4
EPS fully diluted (before gw)
3.98
2.72
-32
1.70
0
3.55
109
3.84
8
3.97
3
Normalised EPS (pre-fines)
3.98
3.03
-24
2.66
-12
3.55
34
3.84
8
3.97
3
International Overhead
Goodwill
0.0
Source: ABN AMRO forecasts
Growth could be further boosted by acquisitions. Heijmans has already indicated it wants to improve its position in the value chain. In our view, a move towards
Increased focus on acquisitions
technical installation is a logical step. It would enable high added-value services, long-term maintenance contracts and a further expansion of the multidisciplinary business model. With a gearing of 71% and 13% free cash yield, Heijmans has plenty of financing room. Unsold commercial property is the main risk to earnings The main risk to our estimates is the 58,000m sq commercial property on the balance sheet, with still high vacancy rates. The estimated book value is around €130m. We believe there may be the risk of additional provisions in 2005 to cover the annual costs of €8m in 2006 and even a possible writedown (€15m-20m) as a consequence of possible lower rents. On the other hand, the improving trend in the market to focus on new high-quality office space is encouraging for Heijmans. Construction fraud case: The genie is out of the bottle With the announcement of the infrastructure fines by the Dutch Competition Authority, followed by the provisions taken by BAM and Heijmans to cover all the expected fines, the fraud case is nearing its end. Consequently, the negative overhang on the Dutch market gradually disappears, as the bottom-line impact for the construction companies is visible. From an investment point of view, we argue the focus will gradually shift to earnings potential again. The recent rerating of the
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Table 6 : Provisions for fines (€m) Date 19 Dec 03
Heijmans
BAM
15
27.4
24 Jan 05
30
40
Total
45
67.4
Source: ABN AMRO forecasts
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construction stocks (BAM shares +6.3% and Heijmans +3.3% since announcement on 27 January 2005) illustrates this process is in motion. In our view, it could bring international consolidation interest back to the Netherlands, especially since the market fundamentals are improving and the growth prospects are one of the most favourable in Europe. Consequently, we argue if the valuation of the Dutch construction stocks do not adjust further in line with its European peers, takeover bids may arise. (for valuation comparison, see next section).
Valuation: High free cash yield, trading at discount to Europe Based on our current estimates, the ratios look appealing, especially the free cash yield of 10.1% this year, rising to 12.9% in 2006F. Table 7 : Valuation ratios 2004F
2005F
2006F
2007F
16.2
7.9
7.3
6.9
EV/EBITDA
8.2
5.9
5.1
4.5
EV/ Sales
0.4
0.4
0.3
0.3
4.4%
4.6%
5.1%
5.2%
PE
Dividend yield Free cash flow (€m) Free cash yield
48
63
81
85
7.7%
10.1%
12.9%
13.7%
Source: ABN AMRO forecasts
Historically, the shares now trade in line (EV/EBITDA) and below (PE) the average levels. Keep in mind, that the current multiples are based on depressed downturn earnings, implying that the shares should actually trade above historical levels. Chart 4 : Average and historical PE and EV/EBITDA 16 14 12 10 8 6 4 2 0 1997
1997
1998 PE
1999 EV/ EBITDA
2000
2001 P/E average
2002
2003
2004F
2005F
EV/EBITDA average
Source: ABN AMRO forecasts
Compared to the European peer group, the Dutch companies Heijmans and BAM look very attractively valued. The average PE lies 65% above Heijmans’ 7.2x 2006F. On an EV/EBITDA, Heijmans seems correctly valued. However, adjusting for the
Heijmans trades at a 65% PE discount to European peers
estimated €150m in hidden value (market value minus book value) of an Heijmans’ land bank, the 2006F EV/EBITDA is around 4.0x.
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Table 8 : International construction peer group 2005F EV/ 2006F EV/ EBITDA
2005F PE
2006F PE
EBITDA
2004F
2005F
EV/Sales
EV/Sales
EV/Sales
2006F Market cap
ACS
7.3
6.7
11.5
10.4
0.7
0.7
0.6
Bouygues
4.2
3.9
13.5
12.2
0.6
0.5
0.5
6674 9676
Hochtief AG
1.4
1.4
27.8
22.1
0.1
0.1
0.1
1656
Skanska
6.1
5.7
14.3
13.0
0.2
0.2
0.2
35653
Vinci
5.5
5.3
11.7
11.5
0.6
0.6
0.6
8834
BAM
2.3
1.9
7.5
7.2
0.1
0.1
0.1
820
Heijmans
5.5
5.1
7.8
7.3
0.4
0.4
0.3
624
Average
4.6
4.3
13.4
11.9
0.4
0.4
0.3
Source: JCF Quant, ABN AMRO forecasts
Based on our increased estimates and the improving earnings visibility due to the improving market circumstances, we find the valuation gap between Heijmans and
Target price raised to €32 from €28
its European peers is unjustified. We decided to raise our target price from €28 to €32, leaving 14% upside. This target reflects 9.0x 2005F earnings, which is in line with Heijmans’ historic average PE. We find this is more than justified as we are still at the bottom of the cycle. Furthermore, the target price brings Heijmans’ valuation more in line with its peer group.
Risks to target price The main risk is disappointing market growth. Furthermore, new incidents concerning price fixing should be taken as negative. Finally, a higher-than-expected provision for the real estate would also be disappointing.
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DISCLOSURES
Recommendation structure Absolute performance recommendation: The target price and absolute recommendation are based on implied upside/downside for the stock. A Buy/Sell implies upside/downside of 15% or more; an Add/Reduce implies upside/downside of 5-15%; and a Hold implies less than 5% upside/downside. Sector relative to market: The sector view relative to the market is the responsibility of the strategy team. Overweight (OW)/Underweight (UW) implies upside/downside of 10% or more and Neutral (N) implies less than 10% upside/downside. Asset allocation: The asset allocation is the responsibility of the economics team. The recommended weight (Over, Neutral and Under) for equities, cash and bonds is based on a number of metrics and does not relate to a particular size change in one variable. Target price: The target price is the level the stock should currently trade at if the market were to accept the analyst's view of the stock and if the necessary catalysts were in place to effect this change in perception within the performance horizon. In this way, therefore, the target price abstracts from the need to take a view on the market or sector. If it is felt that the catalysts are not fully in place to effect a re-rating of the stock to its warranted value, the target price will differ from 'fair' value. Performance parameters and horizon: Given the volatility of share prices and our predisposition not to change recommendations frequently, these performance parameters should be interpreted flexibly. Performance in this context only reflects capital appreciation and the horizon is 6-12 months.
Distribution of recommendations
Recommendation distribution (as at 8 Feb 2005)
The table opposite shows the distribution of ABN AMRO's recommendations. The first column displays the distribution of recommendations globally and the second column shows the distribution for the region. Numbers in brackets show the percentage for each category where ABN AMRO has an investment banking relationship. In all cases the numbers include both absolute and sector relative recommendations.
Buy
421 (21)
173 (41)
Add
363 (28)
185 (42)
Hold
402 (18)
208 (29)
Reduce
175 (12)
88 (17)
66 (11)
32 (19)
1427 (20)
686 (34)
Global total (IB%) Europe total (IB%)
Sell Total (IB%)
Stock performance, recommendation history and analyst coverage (as at 8 Feb 2005)
Heijmans N.V.
Thijs Hovers started covering this stock on 23 Aug 04
H E I JM A N S
N . V.
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F E BR U A R Y
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DISCLAIMER APPENDIX Copyright 2005 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO"). All rights reserved. This material was prepared by the ABN AMRO affiliate named on the cover or inside cover page. It is provided for informational purposes only and does not constitute an offer to sell or a solicitation to buy any security or other financial instrument. While based on information believed to be reliable, no guarantee is given that it is accurate or complete. While we endeavour to update on a reasonable basis the information and opinions contained herein, there may be regulatory, compliance or other reasons that prevent us from doing so. The opinions, forecasts, assumptions, estimates, derived valuations and target price(s) contained in this material are as of the date indicated and are subject to change at any time without prior notice. 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Recipients who do not fall within the description of persons under Regulation 49(5) of the Securities and Futures (Licensing and Conduct of Business) Regulations or Regulations 34 and 35 of the Financial Advisers Regulations should seek the advice of their independent financial advisor prior to taking any investment decision based on this document or for any necessary explanation of its contents. United Kingdom: All research is distributed by ABN AMRO Bank NV, London Branch, which is authorised by De Nederlandsche Bank and by the Financial Services Authority; and regulated by the Financial Services Authority for the conduct of UK business. The investments and services contained herein are not available to private customers in the United Kingdom. United States: Distribution of this document in the United States or to US persons is intended to be solely to major institutional investors as defined in Rule 15a6(a)(2) under the US Securities Act of 1934. All US persons that receive this document by their acceptance thereof represent and agree that they are a major institutional investor and understand the risks involved in executing transactions in securities. Any US recipient of this document wanting additional information or to effect any transaction in any security or financial instrument mentioned herein, must do so by contacting a registered representative of ABN AMRO Incorporated, Park Avenue Plaza, 55 East 52nd Street, New York, N.Y. 10055, US, tel + 1 212 409 1000, fax +1 212 409 5222. - Material means all research information contained in any form including but not limited to hard copy, electronic form, presentations, e-mail, SMS or WAP.
Regulatory disclosures Subject companies: HEIJ.AS, bam Mentioned companies: HEIJ.AS, bam _________________________________________________________________________________________________________________________________ The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other subject matter as appropriate; and, (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts. _________________________________________________________________________________________________________________________________ For a discussion of the valuation methodologies used to derive our price targets and the risks that could impede their achievement, please refer to our latest published research on those stocks at www.abnamroresearch.com. Disclosures regarding companies covered by ABN AMRO group can be found on ABN AMRO's research website at www.abnamroresearch.com. Should you require additional information please contact the relevant ABN AMRO research team or the author(s) of this report.
H E I JM A N S
N . V.
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Flashnote
Heijmans N.V.
Add
(from Hold)
Absolute performance
Underweight
Strong foundations, raise to Add
Market relative to region
We expect Heijmans to benefit from the improving Dutch construction market. We raise our 2005F estimates for the group by 14% and lift our target price to €32 (from €28). The 2006F PE of 7.3x is undemanding given the 13% free cash yield. Add.
Equities
Cash
Bonds
O
U
N
Asset allocation
Construction & Building Materials
Key forecasts
Netherlands FY02A
FY03A
FY04F
FY05F
FY06F
Revenue (€m)
2415
2604
2629
2665
EBITDA (€m)
157.2
126.0
155.1
171.0
Reported net profit (€m)
83.1
53.2
64.3
72.3%
78.8%
Normalised net profit (€m)
89.2
61.4
72.5
80.5%
87.0%
Normalised EPS (€)
3.98
2.72
3.20
3.55%
3.84%
Dividend per share (€)
1.48
1.22
1.22
1.29%
1.40%
Market capitalisation
Dividend yield (%)
5.27
4.34
4.34
4.58
5.00
€610.33m
Normalised PE (x)
7.07
10.3
8.78
7.91
7.32
EV/EBITDA (x)
6.46
8.44
6.72
5.77
5.22
Avg (12mth) daily volume
EV/invested capital (x)
0.98
0.95
0.94
0.89
0.84
-11.1
-19.9
-19.4
-23.9
-23.3
ROIC - WACC (%) Source: Company data, ABN AMRO forecasts
2718 180.9%
year to Dec, fully diluted
Price
€28.10 Target price
€32.00
%
€1.20m Reuters
HEIJ.AS Bloomberg
HEIJ NA
Residential construction leads the Dutch market recovery…
Price performance
We see increasing evidence that the Dutch construction market is recovering,
Price (€)
24.8
21.3
20.7
mainly on the back of the residential construction market. Residential represents
Absolute %
13.5
31.7
35.9
over 40% of total output and we expect it to grow by 3.5% in 2005. The rise in
Rel market %
11.2
22.7
22.6
6.7
16.1
3.5
building permits should trigger the increase in new-build homes. Overall, we expect the total Dutch construction market should grow by some 2% vs –1.0% in 2004F. ...and is the biggest earnings driver for Heijmans We estimate Heijmans generates an estimated 50% of its sales and 65% of its EBITA in Dutch residential construction. Its land bank and excellent property development division should enable the group to grow organically by 5% in
(1M)
Rel sector % Source: Bloomberg Feb 02
We raise our 2005F estimates by 14%, 2004-06F EPS CAGR 14.2% Our previous estimates were based on a more conservative market outlook.
Feb 03
Feb 04
32 28 24 20 16 12 8
residential. The EBITA should outpace the top line by 1.7x, driven by the operating leverage in its property development division.
(3M) (12M)
HEIJ.AS Amsterdam Exchanges Indx
Source: Bloomberg 52-week range: 28.34-17.51 Bloomberg European Market: 129.47 Europe Building: 178.65
Hence, we raise our forecasts by 14% in 2005F and by 17% in 2006F. The main risk to our estimates is the unsold commercial real estate on the balance sheet. New target price of €32 (14% upside) We lift our target price to €32 and rate the shares an Add. You only pay a 7.3x 2006F PE and a 5.2x EV/EBITDA for 14% average EPS growth and 13% free cash yield. The undervaluation of Heijmans vs its European peer group is still significant at 65% on a PE basis, while the conclusion of the fraud case could bring M&A interest back to the Netherlands.
Important disclosures and analyst certifications regarding companies that are the subject of this report can be found in the Disclaimer Appendix Priced at close of business 7 February 2005. Use of %& indicates that the line item has changed by at least 10%.
Gustav Mahlerlaan 10, 1082 PP Amsterdam, Netherlands
Analyst Thijs Hovers ABN AMRO Bank NV +31 20 383 6788 [email protected]
www.abnamroresearch.com
H E I JM A N S
N . V.
Dutch construction is back in favour We expect Heijmans to benefit from the improving Dutch construction market. We forecast an average 14.5% EPS growth in the next three years. The shares still trade at a 65% PE discount to European peers.
Dutch construction takes the lead in Europe Compared to other European countries, the Dutch market seems the new place to be. We expect growth to accelerate in the Dutch construction industry over the next three years. This is good news for Heijmans, as the group generates around 85% of
Growth in the Netherlands and Belgium looks promising
its sales in the Netherlands, 11% in Belgium and the remaining in the UK and Germany. Table 1 shows the growth potential for the Netherlands vs some other major European markets. The Belgian market also looks promising, which is positive for Heijmans as well. Its lossmaking Belgium operations were reorganised in 2004F. Table 1 : Construction market growth per country
Netherlands Germany UK Belgium
2002F
2003F
2004F
2005F
2006F
2007F 04-07F CAGR
-2.2%
-3.8%
0.0%
2.3%
2.4%
3.0%
2.6%
-5.8%
-3.2%
-1.7%
-0.8%
-0.3%
0.9%
-0.1%
4.2%
4.5%
3.5%
2.5%
1.9%
0.9%
1.8%
-4.8%
-3.4%
4.5%
9.8%
2.6%
1.8%
4.7%
Ireland
2.9%
5.5%
8.7%
0.5%
-4.9%
-4.9%
-3.1%
Average
-1.1%
-0.1%
3.0%
2.9%
0.3%
0.3%
1.2%
Source: Euroconstruct, ABN AMRO forecasts
Residential construction drives the Dutch market After two years of negative growth, we expect the Dutch market to be on the rise again. In table 2, we present the forecasts by Euroconsult, the EIB, as well as our own estimates for the Netherlands. Table 2 : Forecasts - Dutch construction market 2003
2002
2003
2004F
2005F
2006F
2007F
Euroconstruct Residential
28,291
-2.5%
-2.2%
2.8%
3.0%
1.2%
2.5%
Non-residential
18,434
-4.0%
-7.3%
-2.2%
2.0%
4.9%
4.4%
Infra
15,149
0.9%
-2.5%
-2.6%
1.2%
1.6%
2.2%
-2.2%
-3.8%
0.0%
2.3%
2.4%
3.0%
Total market growth EIB Residential
-2.0%
6.5%
1.1%
2.5%
Non-residential
-1.7%
-8.6%
-4.7%
0.0%
1.4%
6.4%
0.2%
1.1%
Infra
-1.2%
4.3%
-1.3%
1.3%
Total market growth
-1.0%
-5%
-1%
2%
Maintenance
ABN AMRO Residential
3.0%
3.5%
2.8%
2.5%
Non-residential
-2.5%
0.0%
2.3%
3.0%
Infra
-2.8%
1.0%
1.8%
2.3%
0.0%
2.3%
2.4%
2.6%
Total market growth Source: Euroconstruct, EIB, ABN AMRO forecasts
In line with the Euroconstruct and EIB forecasts, we expect that residential construction will be the main growth driver for the Dutch market in 2005F. For the years beyond, we expect growth to remain sound as well. In 2002 and 2003, the
Residential will be the main growth driver in the Netherlands
residential market contracted, mainly due to the bad economic climate, which affected the consumers’ confidence strongly. Demand for expensive housing in H E I JM A N S
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H E I JM A N S
N . V.
particular was under strong pressure. We have already seen a pick-up in 2004 and expect this trend to continue in 2005. The main reasons for our positive stance towards residential construction are: ■
The Netherlands has a structural shortage of new quality homes. Over the last few years, the issuing of building permits has been structurally below the annual demand for new housing, mainly due to sluggish governmental decision processes. We estimate the annual demand of new-build homes is around 90k per annum. At the same time. the issued number of permits dropped from 108k in 1994 to an estimated 70k in 2004.
■
In response to the aforementioned situation, Dutch Minister Dekker (VROM), announced its intention to significantly increase the number of new-build homes to 90k per annum. The government is willing to invest €650m between 2005 and
The Dutch government is willing to invest €650m in residential construction
2010 to stimulate the local government to build new homes, especially in the larger cities. We expect the focus to be on increasing the supply of (social) housing within cities, instead of high quality housing in VINEX locations. Chart 1 already shows that the housing permits have started to recover in the last few months. ■
Finally, we expect the demand side to remain fairly healthy. We do not foresee a strong rise in long-term interest rates, while we forecast the unemployment rate declining gradually. Furthermore, the number of households continues to grow by around 60k per annum.
Chart 1 : Housing permits recover
Chart 2 : Construction outperforms GDP
50%
14% 12%
40%
10%
30%
8% 6%
20%
4%
10%
2%
0%
0%
-10%
-2% -4%
-20%
-6%
-30% Dec-95
Dec-97
Dec-99
Dec-01
Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 92 92 93 94 95 95 96 97 98 98 99 00 01 01 02 03 04
Dec-03
Construction: Housing permits
GDP Construction
GDP
Construction: permits for corporate investments & constructors
Employment
Unit Labour Cost
Source: Datastream, ABN AMRO
Source: Datastream, ABN AMRO
€80bn for infrastructure in 2010-20 Since 2002 the infra market has rapidly deteriorated. We only expect a modest pickup in 2005, as new infra expenditure should slide due to the completion of some large projects. However, we expect an increasing amount of renovation work. In the
Improving relationship with government should speed up project approvals
near future, several larger road maintenance projects should be awarded. Also the improving relationship between (local) governments and contractors in the postfraud period should trigger the acceleration of local projects. We expect a modest increase in government funds for new road and railway infrastructure as from 2006F. Dutch Minister of transportation Carla Peijs announced his intention to increase significantly the planned infrastructure investment in 201020, from €65bn to €80m. Some 38% of the budget will be spent on highways, 25% for local governments, 23% for the railways and the remaining for waterways. Until 2009, the budget is already fixed and will remain roughly flat for the next few years. However, Minister Peijs hinted at opportunities to increase the number of Public Private Initiatives, which should result in increasing activity over the next few years and raise the opportunity of bringing future projects into the present. H E I JM A N S
N . V.
9
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H E I JM A N S
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Non-residential: Outdated offices are gradually scrapped from the market We believe the end of the recession in the non-residential construction sector is in sight. The modest economic recovery and the slowly increasing investment activity
End of recession in nonresidential is in sight
should once again stimulate private non-residential construction activity in the years to come. This outlook is, among others, based on an increasing volume of building permits in 2004. We expect total new non-residential construction to bottom out in 2005. After a period of three years in which output dropped by 25% to €8.5bn, next year a stabilisation at the 2004 volume level is projected. We expect the increasing demand for high quality office buildings, with up-to-date electromechanical infrastructure, will drive the older offices out of the market. This also drives renovation and modernisation (R&M) of non-residential buildings to return to a positive growth track in 2005 (3.9%). A further recovery is foreseen in R&M investment in 2006 and 2007. Finally, real estate investments by public sectors should rise as the budgets in the public sector have been spared. All in all, we estimate a 2% rise in Dutch residential construction for 2005F, against our earlier cautious forecast of 0.5-1.0%. As the Dutch market is now entering a new period of growth, we expect the earnings visibility of the Dutch constructors to improve considerably.
Financial: 2005F estimates raised by 14% Our more bullish expectations on the Dutch construction market have a major
Table 3 : Normalised EPS
impact on our earnings forecast for Heijmans; we raise our 2005F estimates by 14% and 2006F by 17%. For 2005F we estimate an EPS recurring rise of 34% to €3.55. The main drivers are (see also chart 3): ■
Strong growth in residential construction activities is the big earnings trigger. We
Old
New
%
2004F
2.98
2.98
0%
2005F
3.12
3.55
14%
2006F
3.27
3.84
17%
Source: ABN AMRO forecasts
forecast 5% top-line growth in residential construction. This forecast is below Heijmans’ internal target to increase the number of sold homes by an average 6.5% to 4,500 in 2008. EBIT should grow at a much higher rate in 2005F, due to the leverage potential in project development (discussed in more detail below).
Chart 3 : Net profit development, 2005F Normalised net prof it 2004 Non recurring restruct uring Inf ra Completion large project s Divest ment Opst allan Resident ial & Project dev. Int ernational Int erest Net profit 2005 60
65
70
75
80
85
Source: ABN AMRO forecasts
■
Non-recurring charges to restructure the infrastructure division in 2004 should have a €4m pre-tax positive impact.
■
A recovery of the International operations (estimated 19% of sales) from around
Earnings improvement in Belgium should be the swing factor for 2005
€1m to €7m (EBITA). The main driver should be the Belgium operation.
H E I JM A N S
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Euroconstruct forecasts indicate that the Belgium market should grow by 9.8% in 2005F, mainly caused by a strong uptick in public investments. ■
A further reduction of the overhead from €17.8 to €15.8 should be realistic, especially taking into account the continuous streamlining of the operations in recent years.
■
We expect the divestment of Opstallan (€2m EBITA contribution in 2004F) and some earnings decline in Infra (caused by the completion of large profitable projects) to impact the results negatively.
Residential construction represents 65% of EBITA, high leverage potential We estimate that Dutch residential property development and construction represents around 50% of total sales and an estimated 65% of EBITA (table 4). We expect it to be Heijmans’ main growth driver in the coming years. Furthermore, growth rates above our conservative forecast should have a significant positive impact on our estimates. In 2004F, Heijmans has been able to grow much faster than the market, as it builds 17% more houses from 2,990 to 3,500. In our view, Heijmans has been able to realise such high-growth rates due to its property development skills and its land bank. The current book value is around €290m and the development potential is around seven years (45,000 homes). Furthermore, Heijmans’ property development skills have been strengthened considerably after the acquisition of Proper Stok in 2002 (€150m sales). Table 4 : Project development is an important earnings growth driver 2004F
2005F Base case
Scenario 2
Scenario 3
Sales project development
691
725
760
794
Growth (%)
7%
5%
10%
15%
Gross margin
0.171
0.171
0.171
0.171
Gross profit
118.1
124.0
130.0
136.0
350
350
353.5
360.5
0
1%
3%
0.13
0.13
0.1326
0.1352
0
2%
4%
45.5
45.5
46.9
48.8
Number of employees Growth (%) Costs per employee Growth (%) Total employee costs Depreciation EBITA EBITA margin
3
3
3
3
69.59
75.49
80.02
84.06
10.1%
10.4%
10.5%
10.6%
Growth (%)
8.5
15.0
20.8
Leverage (x)
1.7
1.5
1.4
Group EBITA enhancement (%)
4.8
8.6
11.9
Source: ABN AMRO forecasts
As can be seen in table 4, we expect the project development division EBITA to grow by 9% versus the 5% top line, driven by the high operating leverage potential of the division. Basically, we assume that a 5% rise in activity requires no expansion
Project development growth is a major earnings driver for the group
in staff. Should the top line grow faster at 10%, only 1% more personnel is required. Even higher growth rates than our 5% assumption have a significant impact on our group estimates; should project development sales (which is only 28% of the total) grow by 10%, Heijmans’ EBITA is enhanced by 8.6%.
H E I JM A N S
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Below, we present our detailed P&L for Heijmans. We forecast a pre-fines normalised EPS growth of 34%, from €2.66 to €3.55. On average, the normalised EPS should grow by 14.2% over the next three years. Table 5 : P&L Heijmans (pre-IFRS) 2002
2003
%
2004F
%
912.0
743.0
1,532.0 1,510.0
2005F
%
-19
705.9
-1
1578.0
-2
2006F
%
-5
712.9
4
1641.1
181.0
0
2007F
%
1
727.2
4
1673.9
2
741.7
2
2
1699.0
142.0
-22
1
143.4
1
144.9
1
Sales Infrastructure Non- and residential construction
185.0
Trade and industry International Intercompany result
181.0
273.0
475.0
74
522.5
10
533.0
2
543.6
2
554.5
2
-487.0
-305.3
-37
-358.5
17
-363.5
1
-370.6
2
-376.8
2
2,415.0 2,603.7
Total
8 2,628.8
1 2,665.5
1 2,717.5
2 2,763.2
2
2
EBITA Infrastructure Non- and residential construction Trade and industry
39.3
31.0
-21
32.0
3
34.9
9
35.8
2
36.6
101.7
94.0
-8
99.0
5
108.3
9
110.8
2
112.8
2
6.1
0.0
-100
7.0
5.5
-21
6.0
9
6.2
3
8.5
3.0
-65
1.0
-67
6.9
593
8.2
18
9.4
16
-27.6
-13.5
-51
-16.6
23
-15.8
-5
-13.8
-13
-13.8
0
Fines
0.0
-15.0
-30.0
100
0.0
-100
0.0
Total
128.0
99.5
-22
92.4
-7
139.9
51
147.0
5
151.2
3
-6.1
-8.2
33
-8.2
0
-8.2
0
-8.2
0
-8.2
0
Total EBITA
121.9
91.3
-25
84.2
-8
131.7
56
138.8
5
143.0
3
Interest
-12.7
-11.8
-7
-13.4
13
-11.9
-11
-10.7
-10
-10.7
0
Tax
-33.5
-25.7
-23
-39.9
55
-47.0
18
-50.5
8
-52.1
3
Net profit after goodwill
75.7
53.8
-29
30.9
-43
72.8
136
77.6
6
80.3
3
Prefered dividend
-4.6
-6.8
49
-6.8
0
-6.8
0
-6.8
0
-6.8
0
EPS after gw
3.70
2.37
-36
1.35
-43
3.22
139
3.51
9
3.64
4
EPS fully diluted (before gw)
3.98
2.72
-32
1.70
0
3.55
109
3.84
8
3.97
3
Normalised EPS (pre-fines)
3.98
3.03
-24
2.66
-12
3.55
34
3.84
8
3.97
3
International Overhead
Goodwill
0.0
Source: ABN AMRO forecasts
Growth could be further boosted by acquisitions. Heijmans has already indicated it wants to improve its position in the value chain. In our view, a move towards
Increased focus on acquisitions
technical installation is a logical step. It would enable high added-value services, long-term maintenance contracts and a further expansion of the multidisciplinary business model. With a gearing of 71% and 13% free cash yield, Heijmans has plenty of financing room. Unsold commercial property is the main risk to earnings The main risk to our estimates is the 58,000m sq commercial property on the balance sheet, with still high vacancy rates. The estimated book value is around €130m. We believe there may be the risk of additional provisions in 2005 to cover the annual costs of €8m in 2006 and even a possible writedown (€15m-20m) as a consequence of possible lower rents. On the other hand, the improving trend in the market to focus on new high-quality office space is encouraging for Heijmans. Construction fraud case: The genie is out of the bottle With the announcement of the infrastructure fines by the Dutch Competition Authority, followed by the provisions taken by BAM and Heijmans to cover all the expected fines, the fraud case is nearing its end. Consequently, the negative overhang on the Dutch market gradually disappears, as the bottom-line impact for the construction companies is visible. From an investment point of view, we argue the focus will gradually shift to earnings potential again. The recent rerating of the
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Table 6 : Provisions for fines (€m) Date 19 Dec 03
Heijmans
BAM
15
27.4
24 Jan 05
30
40
Total
45
67.4
Source: ABN AMRO forecasts
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construction stocks (BAM shares +6.3% and Heijmans +3.3% since announcement on 27 January 2005) illustrates this process is in motion. In our view, it could bring international consolidation interest back to the Netherlands, especially since the market fundamentals are improving and the growth prospects are one of the most favourable in Europe. Consequently, we argue if the valuation of the Dutch construction stocks do not adjust further in line with its European peers, takeover bids may arise. (for valuation comparison, see next section).
Valuation: High free cash yield, trading at discount to Europe Based on our current estimates, the ratios look appealing, especially the free cash yield of 10.1% this year, rising to 12.9% in 2006F. Table 7 : Valuation ratios 2004F
2005F
2006F
2007F
16.2
7.9
7.3
6.9
EV/EBITDA
8.2
5.9
5.1
4.5
EV/ Sales
0.4
0.4
0.3
0.3
4.4%
4.6%
5.1%
5.2%
PE
Dividend yield Free cash flow (€m) Free cash yield
48
63
81
85
7.7%
10.1%
12.9%
13.7%
Source: ABN AMRO forecasts
Historically, the shares now trade in line (EV/EBITDA) and below (PE) the average levels. Keep in mind, that the current multiples are based on depressed downturn earnings, implying that the shares should actually trade above historical levels. Chart 4 : Average and historical PE and EV/EBITDA 16 14 12 10 8 6 4 2 0 1997
1997
1998 PE
1999 EV/ EBITDA
2000
2001 P/E average
2002
2003
2004F
2005F
EV/EBITDA average
Source: ABN AMRO forecasts
Compared to the European peer group, the Dutch companies Heijmans and BAM look very attractively valued. The average PE lies 65% above Heijmans’ 7.2x 2006F. On an EV/EBITDA, Heijmans seems correctly valued. However, adjusting for the
Heijmans trades at a 65% PE discount to European peers
estimated €150m in hidden value (market value minus book value) of an Heijmans’ land bank, the 2006F EV/EBITDA is around 4.0x.
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Table 8 : International construction peer group 2005F EV/ 2006F EV/ EBITDA
2005F PE
2006F PE
EBITDA
2004F
2005F
EV/Sales
EV/Sales
EV/Sales
2006F Market cap
ACS
7.3
6.7
11.5
10.4
0.7
0.7
0.6
Bouygues
4.2
3.9
13.5
12.2
0.6
0.5
0.5
6674 9676
Hochtief AG
1.4
1.4
27.8
22.1
0.1
0.1
0.1
1656
Skanska
6.1
5.7
14.3
13.0
0.2
0.2
0.2
35653
Vinci
5.5
5.3
11.7
11.5
0.6
0.6
0.6
8834
BAM
2.3
1.9
7.5
7.2
0.1
0.1
0.1
820
Heijmans
5.5
5.1
7.8
7.3
0.4
0.4
0.3
624
Average
4.6
4.3
13.4
11.9
0.4
0.4
0.3
Source: JCF Quant, ABN AMRO forecasts
Based on our increased estimates and the improving earnings visibility due to the improving market circumstances, we find the valuation gap between Heijmans and
Target price raised to €32 from €28
its European peers is unjustified. We decided to raise our target price from €28 to €32, leaving 14% upside. This target reflects 9.0x 2005F earnings, which is in line with Heijmans’ historic average PE. We find this is more than justified as we are still at the bottom of the cycle. Furthermore, the target price brings Heijmans’ valuation more in line with its peer group.
Risks to target price The main risk is disappointing market growth. Furthermore, new incidents concerning price fixing should be taken as negative. Finally, a higher-than-expected provision for the real estate would also be disappointing.
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DISCLOSURES
Recommendation structure Absolute performance recommendation: The target price and absolute recommendation are based on implied upside/downside for the stock. A Buy/Sell implies upside/downside of 15% or more; an Add/Reduce implies upside/downside of 5-15%; and a Hold implies less than 5% upside/downside. Sector relative to market: The sector view relative to the market is the responsibility of the strategy team. Overweight (OW)/Underweight (UW) implies upside/downside of 10% or more and Neutral (N) implies less than 10% upside/downside. Asset allocation: The asset allocation is the responsibility of the economics team. The recommended weight (Over, Neutral and Under) for equities, cash and bonds is based on a number of metrics and does not relate to a particular size change in one variable. Target price: The target price is the level the stock should currently trade at if the market were to accept the analyst's view of the stock and if the necessary catalysts were in place to effect this change in perception within the performance horizon. In this way, therefore, the target price abstracts from the need to take a view on the market or sector. If it is felt that the catalysts are not fully in place to effect a re-rating of the stock to its warranted value, the target price will differ from 'fair' value. Performance parameters and horizon: Given the volatility of share prices and our predisposition not to change recommendations frequently, these performance parameters should be interpreted flexibly. Performance in this context only reflects capital appreciation and the horizon is 6-12 months.
Distribution of recommendations
Recommendation distribution (as at 8 Feb 2005)
The table opposite shows the distribution of ABN AMRO's recommendations. The first column displays the distribution of recommendations globally and the second column shows the distribution for the region. Numbers in brackets show the percentage for each category where ABN AMRO has an investment banking relationship. In all cases the numbers include both absolute and sector relative recommendations.
Buy
421 (21)
173 (41)
Add
363 (28)
185 (42)
Hold
402 (18)
208 (29)
Reduce
175 (12)
88 (17)
66 (11)
32 (19)
1427 (20)
686 (34)
Global total (IB%) Europe total (IB%)
Sell Total (IB%)
Stock performance, recommendation history and analyst coverage (as at 8 Feb 2005)
Heijmans N.V.
Thijs Hovers started covering this stock on 23 Aug 04
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All US persons that receive this document by their acceptance thereof represent and agree that they are a major institutional investor and understand the risks involved in executing transactions in securities. Any US recipient of this document wanting additional information or to effect any transaction in any security or financial instrument mentioned herein, must do so by contacting a registered representative of ABN AMRO Incorporated, Park Avenue Plaza, 55 East 52nd Street, New York, N.Y. 10055, US, tel + 1 212 409 1000, fax +1 212 409 5222. - Material means all research information contained in any form including but not limited to hard copy, electronic form, presentations, e-mail, SMS or WAP.
Regulatory disclosures Subject companies: HEIJ.AS, bam Mentioned companies: HEIJ.AS, bam _________________________________________________________________________________________________________________________________ The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other subject matter as appropriate; and, (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts. _________________________________________________________________________________________________________________________________ For a discussion of the valuation methodologies used to derive our price targets and the risks that could impede their achievement, please refer to our latest published research on those stocks at www.abnamroresearch.com. Disclosures regarding companies covered by ABN AMRO group can be found on ABN AMRO's research website at www.abnamroresearch.com. Should you require additional information please contact the relevant ABN AMRO research team or the author(s) of this report.
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