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Summary

  • Profit warning on July 7, 2014 in relation to one-time item, initial civil engineering project losses estimate €75 million.
  • Drop in share price to multi-year low in anticipation of publication half-year results, results came in better than expected.
  • Half-year results published August 21, 2014: final project losses €68 million instead of €75. Company's total results still break-even (€3.9 million) for H1 2014.

Koninklijke BAM Groep NV (OTC:KBAGF) is a European construction group, uniting operating companies in 5 home markets, and headquartered in the Netherlands. The company has its primary listing on Euronext Amsterdam, and is US OTC listed. BAM is active in the sectors construction and mechanical and electrical services, civil engineering, property and public private partnerships.

The Group ranks among the largest companies in Europe, with top market positions in the Netherlands, Belgium, the UK, Ireland and Germany, and a widespread regional network. The Group also undertakes specialist construction and civil engineering projects in niche markets worldwide through BAM International.

With around 25,000 employees, BAM is responsible for the implementation of thousands of projects every year. Some are spectacular due to their size or technical complexity, but many others are more modest construction contracts.

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Koninklijke BAM Groep NV hit a 1 and 5-year low recently after a profit warning on July 7th 2014 relating to expected project losses totaling an expected €75 million (x 1.34 = $100.5 million), due to deterioration of a large civil engineering project in Germany, which is one of the handful of loss making projects reported last year.

The problems on the German project are due to adverse ground conditions, with technical solutions subsequently implemented to keep the project on schedule, but which are more costly than initially anticipated. Furthermore there were unexpected problems at a midsized UK civil engineering project which was bid for in 2012, due to a combination of adverse ground conditions and bad weather.

Following the July 7th press release, the Dutch Investors' Association [VEB] send a letter to the BAM Group requesting additional information in relation to the profit warning, which the company provided to the VEB on July 15th. The response letter can be found here.

On August 21st 2014, the company published its H1 2014 results, which came in slightly better than expected under the circumstances, with a satisfactory breakeven result before tax for the first half of this year. Revenue of €3,382 million was up by €150 million (5%) compared to H1 2013. This was mainly attributable to the property sector, due to divestment of commercial properties.

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The result at Civil engineering was sharply lower as indicated due to the combined final losses of €68 million on the two projects, coming in €7 million lower than the €75 million initially announced on July 7th. The €68 million loss was mostly offset by strong results on some other projects. There was a positive result in property in the first half of 2014 after a loss in first half of 2013.

The total result of the sectors was €3.9 million, down from €11.3 million last year.

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Looking at the results by geography, the losses in the UK and Germany during H1 were mostly related to the two projects mentioned. There was also a loss in the Netherlands, mostly due to construction and M&E services activities. There were strong results in Belgium and at BAM International.

Total restructuring costs were €4.5 million versus €1 million same period last year. Finally, total order book closed at €10.7 billion, up from €10 billion at the end of H2 2013, driven by the operational sectors in the Netherlands and UK. The company gave a conservative FY 2014 outlook of approximately €20 million.

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BAM has decided firm action is needed to improve the company's operational and financial performance going forward, and is currently formulating a full action plan which should be completed by early October. This will include a cost reduction programme resulting in annual savings of at least €100 million, to be realised within the next 16 months. Working capital improvement of at least €300 million is targeted within the same time frame as the cost reduction.

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To facilitate this process BAM CEO Nico de Vries will hand over the chair of the Executive Board to Rob van Wingerden from October 1st 2014, retiring after a career of 38 years with BAM on April 1st 2015, so that his successor can take full responsibility for the various programs to take the company forward.

Van Wingerden (53) joined the Group in 1988 and worked in various management roles in the Netherlands and abroad, gaining knowledge and experience of BAM's operating companies and the wider construction sector. He has been a board member since 2008. With effect from October 1st, the Executive Board will be composed of Rob van Wingerden (chairman), Thessa Menssen (CFO) and Erik J. Bax (COO).

After an extremely challenging couple of years, now seems an opportune time to evaluate BAM on its merits and deficiencies. For companies like BAM economic stagnation, years of tightening of government and private spending has been killing, and the current multi-year low share price is a good reflection of that fact.

However, for the first time in years, BAM's home market is showing economic growth that actually outpaces the region. The Dutch government is talking about some budget relief for 2015 after several years of budget cuts. Consumers are buying new houses at the fastest pace in years, due to lower prices and historically low interest rates.

BAM Group is currently valued by the market at approximately €475 million, 0.51 times the company's book value of €933 million.

BAM Group pays a yearly dividend (cash or shares option) in April, with a current forward yield of 2.8% based on the last announced dividend of €0.05. It should be noted that the dividend was substantially higher during previous years, and should again creep higher once the company progresses on its cost reduction program and a return to normalized earnings. With a history dating back to 1869, this particular company has seen its fair share of adversity, continuing to weather the storms and building for the future undeterred.

Editor's Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.

Source: Calm After The Storm: Royal BAM Group Offers Value At The Bottom Of The Well
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