Next week, one of the best companies in Peru is set to come to Americans via an IPO of American Depository Shares. The company will be selling 16.28 million ADS, representing 81.40 million shares of common stock (with each ADS representing 5 shares). The shares are expected to price between $19.70 and $23.30 each. (Prospectus)
Grana y Montero (GRAM) is the largest engineering and construction company in Peru. The company is also the largest publicly traded engineering and construction company in Latin America, with its shares available on the Lima Stock Exchange since 1997. With a huge backlog and acquisitions in other strong Latin American markets, Grana y Montero has set itself and investors up for future gains.
Over the last 80 years, Grana y Montero has worked on some of the largest projects in Peru and Latin America. The company helped with construction of the Lima International Airport, a large Peru LNG plant, and currently is helping Barrick Gold (ABX) with a gold mine in the Dominican Republic.
The company's strengths:
- A leader in fast growing markets
- A long standing track record and reputation for operational excellence
- Complementary lines of business which generate more stable cash flows and create additional business opportunities across our segments
- High growth and profitability with strong financial position
- Robust backlog and significant additional potential products
- A proven ability to create and grow business organically and through acquisitions
- Highly experienced management, talented engineers and skilled workforce, with shared core corporate values
Growth strategy going forward
- To be the contractor of choice for large-scale and complex projects in Peru and other key markets
- To further expand our infrastructure-related businesses to increase activity across our business segments and generate more stable cash flows
- To maintain highly capitalized balance sheet
- To selectively pursue international opportunities, focusing on Chile and Colombia
- To continue fostering its core corporate values throughout the oganization
Recent acquisitions have increased Grana y Montero's strong backlog. Here is a look at several of the deals:
- 2011: Acquired interest in Compania Americana de Multiservices, a Chilean company with projects in Chile, Peru, Colombia, and Brazil.
- 2012: Acquired a controlling interest in Vial y Vives, a Chile mining company.
The Peruvian company's goal is to continue acquiring companies with strong presences in Colombia and Chile, two areas where it believes growth will be substantial going forward. The acquisitions have helped the company diversify its revenue. In 2010, Peru made up 95.2% of total revenue. That number has now shrank to 82.8% in fiscal 2012. Chile made up 12.5% of 2012 revenue, while Colombia saw the other 4.7%. Those two countries are likely to increase their share of the company's revenue as the acquisitions are further developed.
In 2012, Grana y Montero posted revenue of $2.02 billion. Net profit for the year was $141.5 million. Since 2010, revenue has increased at a compound annual growth rate of 44.6%. In the first quarter of 2012, revenue hit $489.8 million. Profit for the quarter was $32.2 million.
Grana y Montero operates under the following business segments:
· Engineering and construction
· Technical services
· Real estate
Here is the segment breakdown for 2012 revenue:
The company's infrastructure segment sees strong reoccurring revenue from sources like toll roads, waste water plants, and oil fields. In real estate, Grana y Montero is the largest apartment developer in Peru. The segment is set to grow with 11 affordable housing projects, five housing projects, and five office buildings on the way. The company's technical services unit is the second largest IT service company in Peru.
At the end of 2012, Grana y Montero had a backlog of $4.2 billion. This was an increase of 67% from the previous year. The huge backlog also represents 2.2 times 2012 revenue. The majority of the backlog (79.3%) comes from the private sector. The company was also in negotiations for two contract extensions, which could increase the backlog further.
One of the strong reasons to buy shares of Grana y Montero is Peru's growing GDP and sizable infrastructure deficit. According to the IPO prospectus, Peru has been South America's fastest growing economy (GDP). Also, according to the International Monetary Fund, the Peru economy is expected to grow 6.3% in 2013 and another 6.1% in 2014.
The company has laid out a plan for the use of IPO proceeds as follows:
- 60%: investments in infrastructure segment
- 10%: purchase land in real estate segment
- 20%: acquisitions
- 10%: general corporate
Grana y Montero will also pay a dividend going forward. The payout will be 30 to 40% of net profit from the previous year.
Investors looking for a way to cash in on Peru will enjoy this IPO. It offers diversification across several business segments. Another way to play the strength of Peru's GDP and growing infrastructure is the iShares All Peru Capped ETF (EPU). The ETF holds 26 companies based in Peru. The largest holding is Credicorp at 22%, while Southern Copper also represents 15%. Grana y Montero is the further largest holding of the ETF with 5% of the fund's assets. A successful IPO could boost the price of this ETF going forward.
This is one of the most exciting international IPOs I have seen in a while. Peru is growing its GDP at record levels and investors are looking for ways to cash in. Grana y Montero offers exposure to infrastructure, IT, oil, toll roads, mining, and mass transit. In fact, in the first quarter, Grana y Montero saw revenue gains of 4.5%, 20.3%, and 9.0% from toll roads, mass transit, and water treatment, respectively. This is a great way to invest in Peru and also enjoy additional revenue from growing Latin American countries like Colombia and Chile.