On May 8, Bill Simpson wrote an analysis of AECOM Technology Corporation (NYSE:ACM). On May 10, ACM began trading at $21.72, after pricing its initial public offering of 35,150,000 shares at $20.00 per share. The stock closed yesterday at $22.30.
The text of Mr. Simpson's original writeup follows:
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Aecom Technology Corporation plans on offering 35.2 million shares at a range of $18-$20. Insiders are selling 15.3 million shares in the deal. Morgan Stanley, Merrill Lynch and UBS are lead managing the deal, Goldman Sachs, Credit Suisse, and DA Davidson are co-managing. Post-ipo, ACM will have 92.4 million shares outstanding for a market cap of $1.76 billion on a $19 pricing. approximately 1/2 the IPO proceeds will be used to repay debt, 1/5 to fund employee stock plan and the rest for general corporate purposes.
Note that ACM is paying off essentially all debt on offering. For a company that has made numerous acquisitions the past decade, a clean balance sheet gives them a nice competitive advantage.
ACM's own retirement and trust plan will own 20% of ACM post-IPO. This is a bit unusual and is a result of Aecom beginning life as an independent entity from an employee buyout in 1990.
From the prospectus:
We are a leading global provider of professional technical and management support services to government and commercial clients on all seven continents. We provide planning, consulting, architectural and engineering design, and program and construction management services for a broad range of projects, including highways, airports, bridges, mass transit systems, government and commercial buildings, water and wastewater facilities and power transmission and distribution. We also provide facilities management, training, logistics and other support services, primarily for agencies of the United States government.
A government engineering and construction contractor focusing on general building, transportational and environmental markets. Quite similar in project scope to 2006 IPO KBR (NYSE:KBR). ACM is large; in fact they're the largest general architectural and engineering design firm in the world. ACM has grown via acquisitions with over 30 acquisitions over the past 10 years. Interestingly, while ACM absorbs these acquisitions under the ACM 'umbrella', nearly all of them continue to operate under their original names and keep much of their organizational structures intact. The result is that ACM operates subsidiaries all under different names.
ACM operates under two business segments: Professional Technical Services and Management Support Services. Professional Technical Services is ACM's higher margin growth driver in which they've a worldwide leadership role in their target markets. Management Support Services is ACM's low margin employee intensive government fulfillment segment.
Professional Technical Services
81% of revenues. This is the business driving segment. Planning, consulting, architectural and engineering design, and program and construction management services to government, institutional and commercial clients worldwide. Current projects include 2012 London Olympics, Pentagon Renovation, JFK airport in New York, and a Russian Independent Power Project. Private sector accounts for 45% of revenue, public sector 55%. Public sector breakdown is 31% US state and local, 11% direct US federal and 13% non-US government.
A quick look at ACM's core Professional Technical Services end markets:
Transportation - ACM's prime growth driver includes design and construction management of airports, seaports, bridges, tunnels, railway lines and highways. Domestically this is a direct play on the aging US infrastructure.
General Building - Includes the construction of commercial buildings, office complexes, schools, hotels and correctional facilities.
Water, Wastewater and Environmental - Projects include water treatment facilities, water distribution systems, desalination plants, solid waste disposal systems, environmental impact studies, remediation of hazardous materials and pollution control.
Energy/Power - Revitalizing energy and power transmission and distribution systems in the United States.
Management Support Services
19% of revenues. Facilities management and maintenance, training, logistics, consulting, technical assistance and systems integration services, primarily for agencies of the U.S. government. Clients include Department of Defense, Department of Energy and the Department of Homeland Security. Projects include managing and maintaining Camp Arifjan Army Base in Kuwait, Fort Polk Training Center and operating for the Department of State an international civilian police force.
ACM 25 largest worldwide projects accounted for 14% of 2006 revenues. ACM operates in 60 countries worldwide. Backlog was $3.1 billion as of 3/31/07. Overall a little over 60% of revenues are derived from government contracts.
$3 a share in cash post-IPO. This takes into account the small amount of debt on the books after offering. What impresses me here is the lack of debt on the books post-IPO. I fully expect ACM to use the clean balance sheet and cash on hand to aggressively acquire smaller operations first year public.
Dividends - ACM does not plan on paying dividends.
4 X's book value on a $19 pricing.
ACM's fiscal year ends 9/30 annually. FY '07 will end 9/30/07.
Revenues appear on track to grow 24% to $4.2 billion for the year. Much of this growth is due to acquisitions. Gross margins are in the 26% range.
Operating margins are 3.3%. Note that ACM has much stronger gross margins then similarly sized recent government contractor ipos SAIC (SAI) and KBR. While this is in part due to nearly 40% of ACM's revenues being derived from non-government sources, it also appears to be in part an accounting function of employee costs. The operating margins of the three are the apples to apples comparison. Based on recent quarters, operating margins of the three look like this:
Note that SAI has a much lower employee intensive business then ACM/KBR. KBR is a closer pure comparable to ACM.
Net margins for FY '07 look to be in the 2% range. Earnings per share look to be in the $0.90 range. On a pricing of $19, ACM would be trading 21 X's FY '07 earnings.
A quick glance at ACM/KBR
KBR - $3.7 billion market cap, trading 0.4 X's revenues, 2 X's book value and 19 X's FY '07 earnings. Note KBR is expecting a significant revenue decrease in FY '08 due to splitting of Iraq contracts.
ACM - $1.76 billion on a $19 pricing. Would be trading 0.4 X's revenues, 4 X's book value and 21 X's FY '07 earnings. Difference here is that ACM is growing revenues to the tune of 24% in FY '07. ACM fueled with IPO cash and a clean balance sheet should be able to grow revenues double digits in FY '08 through acquisitions as well.
ACM is much strong then KBR simply due to their ability to grow revenues (and the bottom line) going forward.
Conclusion - ACM has a very nice revenue mix from government contracts and private contracts. They rank #1 or #2 in US companies in engineering and consulting services for the following sectors: Mass Transit and Rail; Airports; Marine and Ports; Highways; Bridges; Educational Facilities; Government Offices; Correctional Facilities; Sewage & Solid Waste. That is one impressive list. Factor in the clean balance sheet post-IPO and the strong cash position and this is an easy recommend in range.
Note - With 35 million shares (15 million from insiders) in the offering this is a bulky deal. It is also a low margin business. While ACM has enough going for it to make this a very easy 'recommend' in range, I'm less constructive the higher the pricing/open. This is not the type of company or offering you want to pay way up for, however ACM IPO does offer a nice mid-term risk reward opportunity in pricing range.