Royal Imtech: Short Covering After Negative Analyst Report Proves Unfounded

| About: Royal Imtech (IMTEF)

On November 21, 2012, Royal Imtech NV (OTC:IMTEF), a Dutch-based European technical services provider in the fields of electrical solutions, ICT and mechanical solutions with 29,000 employees and annual revenue of more than 5.1 billion euro, reaffirmed its targets and guidance after an ABN Amro analyst had published a surprisingly negative report on the company a day earlier.

"René van der Bruggen, CEO Imtech: 'Imtech is on track for further growth, despite difficult market conditions in a number of countries and markets. Excluding a one-time provision of 50 million euro million for a reorganization of the building activities in the Benelux, in Spain and a limited reorganization of our maritime activities, Imtech maintains its statement for further EBITA growth in 2012 compared to 2011 through a combination of organic growth and acquisitions. The order book Q3 2012 increased by 12% to 6.4 billion euro (Q3 2011: 5.7 billion euro).'

'The financial position of Imtech is stable. The financial ratio remains within the covenants agreed with lenders, which is the average net interest-bearing debt divided by the EBITDA. The agreed rate is 3.0; in the first half of 2012 this ratio was 1.9. The working capital to revenue target remains unchanged between 6% and 6.5% at year-end (2011: 5.6%).'

'Imtech's long-term strategic growth plan remains unchanged. This growth plan foresees revenue of 8 billion euro in 2015 with an operational EBITA margin of between 6% and 7%. This growth will be divided more or less equally between organic growth and growth through acquisitions. Imtech has sufficient financial means at its disposal to finance this growth. We are fully confident about the future."

Imtech provides information technology (NYSE:IT) services in the fields of electrical engineering and mechanical engineering. It offers consulting, systems design, implementation, maintenance, and management services among others. Imtech serves the construction, industry, marine, and telecommunications industries in Europe from more than 300 offices. Key international markets include Belgium, Germany, Luxembourg, Spain, and the UK. It is also active in Eastern Europe. Top competitors are Cap Gemini (CGEMY.PK), Atos (AEXAY.PK), and IBM Global Services (NYSE:IBM). Shares are listed on NYSE.Euronext Amsterdam, where Imtech is included in the Midkap Index. Imtech shares are also included in the Dow Jones STOXX 600 index.

EPS and dividend information for FY 2009, 2010, and 2011:

Since the company's establishment in 1993, Imtech has seen strong continuous growth with on average 22% annual growth in EBITA and 14% annually in terms of revenue. Imtech's growth strategy for the period 2008-2012 outlined revenue of EUR 5 billion with an operational EBITA margin of 6%. This objective was already reached in 2010, and in November 2010, Imtech announced its new growth strategy for 2011-2015. This involves: EUR 8 billion revenue with an operational EBITA margin between 6% and 7%. This growth is expected to be divided proportionally between organic growth and expansion through acquisitions.

The new growth strategy for the period 2011-2015 was summed up as follows:

  • Realization of more added value
  • Strengthening of position in existing European buildings, industry and traffic & infrastructure markets
  • Gaining of position in new European countries (buildings, industry, traffic & infrastructure)
  • Expansion of activities in Europe and in the global marine market
  • Following key customers beyond Europe, among others into the emerging markets
  • Strong growth of green technology in the energy & environment market
  • Growth in specific technology domains: data centers, waste water and care & cure
  • International growth of traffic technology and in IT niches

Main drivers behind these objectives are solid growth potential, leading market positions, recurring business, and finally the company's strong financial position.

Today, December 13, 2012, ABN Amro chose to backtrack on its earlier report. This was most likely caused by recent reports in Dutch financial news outlets that Imtech had been in contact with the Dutch regulator [AFM] about stock manipulation resulting from the November 20, 2012 report. It was even suggested that short-side hedge funds were somehow involved in pointing the analyst 'in the desired direction' before publication took place.

ABN Amro: "In our previous report, the mismatch between revenue growth and receivables and payables growth on group level was the motivation to investigate the German situation...
• Repeating the DSO / DPO and cash P & L analysis does not change our view That Imtech has little or no control on its receivables collection, while we fear there are risks Increasing payables That will unwind. For both trade receivables and trade payables, we do not forecast an increase / decrease to historical highs / lows.
• The simultaneous movement in adverse directions or receivables and payables will cause a working capital squeeze, All which we believe Imtech is unable-to finance. This event would result in a covenant breach in 2014. After repeating our analysis on group level, we stick to our Assumptions and estimates.
• As a result, we repeat our SELL rating and target price of EUR 15.

Imtech was again not amused, the smoke and steam coming from the company boardroom now even more apparent. Normal it's not done for companies to react to analyst reports, but today the company took the unusual step to come out with a lengthy, and detailed, rebuttal which basically states that ABN Amro, unlike other analysts, is wrong about their assumptions and especially about the numbers they used.

Imtech reaction to revised analyst report of ABN Amro dated today December 13, 2012:

"ABN Amro has today published a revision of its previous analyst report on Royal Imtech N.V. (IM-AE, technical services provider in and outside Europe), which was published on 20 November. It is not the practice of Imtech to respond to individual analyst reports. Imtech as a stock listed company respects emphatically the view of analysts. However, in this exceptional case and in the interest of all shareholders, other investors and media Imtech feels urged to give some guidance to this new report.

Making a correction on an analyst report within three weeks' time is in itself a remarkable 'turnaround', which is exceptional. Imtech's reaction is as follows:

  1. Since half year 2010, the market was already informed about changing working capital requirements in the business, in particular in the cluster Germany & Eastern Europe, and this continued to be at a relative high level afterwards.
  2. The original report of 20 November 2012 of ABN Amro was based on 13 assumptions that formed the basis for an attempt to separate the balance sheet for the cluster Germany & Eastern Europe from the Group, leading to a weak and meaningless framework. All of these assumptions are now removed in the revised report as published today.
  3. Instead of focusing on the situation in Germany & Eastern Europe the report is now focusing on the group as a whole. ABN Amro is still using extraordinary - compared to general market practice - definitions for DSO (days sales outstanding) and DPO (days payables outstanding). Although ABN Amro now lowers DSO to 128 (was 140) and DPO to 105 (was 212), the non-market compliant definition still leads to assumptions that are too high. Based on general market definitions, Imtech's DSO is 83 and DPO is 94 for 2011."

Meanwhile the competition is busy picking on ABN Amro's corps, and coming out in support of Imtech. SNS Securities has set a buy target price of 29 Euros for Imtech. Compare that to the sell and 15 Euro target of ABN Amro. SNS Sec: "Imtech's communication certainly has room for improvement, but we are Convinced that the focus of investors has shifted too much to less operational items. We are Convinced of Imtech's business model. Buy."

Theodoor Gilissen is even speaking of a chance to buy on the cheap: "The initial short positions taken in the market are in part being bought back as we speak. Recently mentioned accounting problems of 5 million Euro in a relatively small subsidiary have proven to be incorrect and not material. We assume slowly returning investor confidence in the company after completion of the reported developments. We maintain our Buy rating and see the recent decline in share price due to mentioned developments as providing an attractive window of opportunity to buy shares."

With ratings from other major Dutch banks like Rabobank and ING in agreement with SNS and Theodoor Gilissen, it seems the market is providing value and dividend investors alike a nice opportunity at present for investment in a financially strong and growing company, with a current P/E of 8.75 and a healthy 4% SCRIP dividend based on the current share price of 17.5 Euro. The effect of the incorrect analyst report was substantial, but management is doing everything that's expected and required to get the ship back on course and investors refocused on the underlying business. Don't forget to do your own due diligence!

Disclosure: I am long OTC:IMTEF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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