Wednesday 11 December 2013

Analysis of Hochtief

A German construction company

Company: Hochtief

Business: A German construction company (90% of sales are made outside of Germany though) with a focus on develop, build and operate. They are pushing especially four areas: Transportation Infrastructure (roads, bridges and tunnels), Energy Infrastructure (production of power plants (any by the sound of it) and the distribution net for that power), Social and Urban Infrastructure (houses, apartments, schools, commercial buildings, other public buildings are being built and operated) and finally Contract Mining (they are building the entire mines and the infrastructure around it in Australia and Asia as well as maintaining it.

Active: They are active all over the world and they are divided into three divisions with America, Asia Pacific and Europe.

P/E: 29.1

contrarian values of P/E, P/B, ROE as well as dividend
I have previously taken a look at two construction companies. One of them mainly active on the Swedish and Nordic market NCC (~1/5 the size of Hochtief) and the second one had stretched out from Sweden onto European as well as North and South America namely Skanska (~half the size of Hochtief).

The P/E of Hochtief is very high with 29.1 which is almost double Skanska and four times NCC and the P/B is 1.7 which is also a bit too high for me. Of course this leads to that Graham would have no interest in an investment. The earnings to sales is crazy low with 1% which is the worst of the three of them and the ROE is at only 6% (NCC had 21%, Skanska 15%) which is extremely bad! The book to debt is also nothing to brag about since it is at a ratio of 0.2 which is almost half of what NCC and Skanska have. Hochtief has however had an excellent growth with yearly 6% since the last five years which is much better than both NCC and Skanska. The motivated P/E then becomes around 19 to 21 which means that the company is overvalued on the market today. They pay a silly dividend of 1.7% which represents almost 50% of their earnings so they should be able to keep it at least at that level and maybe even increase it.

Conclusion: It seems as if Hochtief kept pushing their expansion and have significantly increased their revenue over the last five years but it has probably cost them their sales margin. It will be interesting to see if they will manage to push that up 1 or 2% in the next years if construction once again takes off with infrastructure projects in the US as well as in Europe. I do however find that this company is overvalued today and I therefore see no interest in making an investment.

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