constructora conconcreto sa

CONSTRUCTORA CONCONCRETO S.A.
Construction Companies — Colombia
BUY / COP 2,005 per share
September 11, 2014
A COMPLETE EXPOSURE TO THE COMING INFRASTRUCURE BOOM IN COLOMBIA
Real Estate Business, more than doubling GLA by 2018. Conconcreto’s story goes beyond
benefiting from the boom we are anticipating for construction in Colombia. The company has made
a major bet on finding profitability through its growing real estate business, something that currently
is paying off (55% of 2Q14’s EBITDA came from this business), but yet has plenty of room for growth.
Considering the projects being developed and others planned, which include mainly shopping
centers, offices and hotels, the company will grow its Gross Leasable Area (GLA) to 615,961 square
meters by 2018, from 280,821 in 2013, allowing it to double the current Net Operating Income of
this business unit (COP 62 billion estimated for 2014), growing to COP 123 billion for 2018.
On the other hand, Conconcreto’s current ~US$1 billion backlog is equivalent to 3.2x 2013’s
revenues, a figure way higher than the industry’s 1.5x backlog/sales average, a fact that brings some
certainty over short-term revenues and sets a strong base for further growth in the mid-term when
the megaprojects that comprise the 4G program take off.
Finally, although 2014’s forward EV/EBITDA multiples of Colombian construction companies
exhibit some premium over the global average in the sector, probably as a signal that the market is
pricing in the interesting potential for construction in the country, Conconcreto shows a slight
discount within Colombian companies (Conconcreto’s 2014 forward EV/EBITDA: 12.4x vs. 14.9x of
local peers’ average). Besides, the current P/E (considering last twelve months’ net income) and P/
BV multiples suggest that the company is underpriced amongst comparable companies around the
world, as Conconcreto’s 12.1x P/E is 49.0% below the 23.7x average of the market; while its 1.3x P/V
multiple is 40.7% inferior than the industry’s 2.2x.
CONCONC
Closing Price (COP)
1,470
Expected Return
36.4%
Total Expected Return (+Div.)
38.2%
Shares outstanding (mm)
907.4
Beta
1.35
Free Float
31%
Market Cap. (US$ mm)
687
52wk range (COP)
1,505 - 1,535
30d Average traded (US$ mm)
0.31
Financial Information and Multiples
2012
2013 2014E 2015E 2016E
ROE
8.6%
6.3%
5.9%
8.5%
9.7%
ROA
5.4%
4.2%
3.8%
5.5%
6.1%
P/E
24.1x
20.0x
22.1x
14.7x
12.2x
P / BV
1.3x
1.2x
1.3x
1.2x
1.1x
EV / EBITDA
9.7x
11.2x
12.4x
9.2x
7.8x
2.1%
1.7%
1.5%
1.8%
2.7%
Div. Yield
Conconcreto vs. Colcap Index
120.00
115.00
110.00
105.00
100.00
95.00
90.00
85.00
80.00
75.00
Conconcreto
9-2-14
8-2-14
7-2-14
6-2-14
5-2-14
4-2-14
3-2-14
2-2-14
1-2-14
12-2-13
11-2-13
9-2-13
10-2-13
8-2-13
7-2-13
6-2-13
5-2-13
4-2-13
70.00
3-2-13
4G program, the real game changer. Despite the positive perspectives for commercial and
residential construction, we believe that it will be the beginning of the Fourth Generation of
Concessions Program (4G) the element that will bring an unprecedented boom for infrastructure
construction in Colombia. Fortunately, we can say now that this program is becoming a reality as
there are six major projects granted and three more that should be in the coming months under the
so-called first wave of projects, which considers investments of COP 10.2 trillion (US$5.3 billion), and
will start its construction phase in about a year from now. There is a second wave of COP 17.3 trillion
(US$9.0 billion) that is supposed to be awarded before year’s end, and the remaining of the COP 47
trillion (US$24.4 billion) that comprise the whole program is planned to end bidding processes in
2015. Although there could be some delays in granting processes and probably we won’t have all the
projects executed in the time initially planned, there will be a boom for construction that has never
taken place in Colombia. And, independently on who wins the concessions of these projects, the
main construction companies will definitely have their share in the execution of them due to the size
of the program and the incapability of some constructors to develop all the works on their own.
Conconcreto is currently bidding for the 3 remaining projects within the “first wave” and 4 of the
second. That is why, considering important peaks in construction activity in Colombia in the years
2016 and 2017, we are estimating an 11.8% CAGR in the company’s EBITDA for the 2014—2020
period. And, under this scenario, the company should be doubling 2013’s EBITDA and Revenues by
2018.
Ticker (BVC)
2-2-13
Conconcreto, an active player in the ongoing positive dynamic for construction in Colombia.
Colombia is currently going through a great momentum in construction, which is being mainly
boosted by housing and commercial developments. Subsidies on interest rates, the VIPA program
(homes for savers), the 100 thousand free homes, and all the different public initiatives to encourage
people to have their own home, have derived in a huge wave of new residential projects that have
boosted construction activity in Colombia. The most recent data available shows construction GDP
growing by 12% in 2013 and 17.2% Y/Y in 1Q14. But it does not stops there. All public housing
programs in course are planned to be extended. In fact, the government aims to build 1.2 million
homes in the next four years. Meanwhile, building permits have grown 8.0% Y/Y over the last twelve
months (as of June 2014), signaling that the positive dynamic should remain in the short term.
Considering the aforementioned, we expect Conconcreto, with a ~30% or US$305 million of its
backlog represented by housing construction, to continue benefiting from the different initiatives
that are stimulating demand for new homes in the country. In the meantime, the company continues
consolidating its position as a developer of industrial complexes, shopping centers, offices, hotels,
warehouses and storage facilities.
Stock data
1-2-13
We are initiating coverage of Constructora Conconcreto with a BUY recommendation and a 2015YE
Target Price of COP 2,005, equivalent to a 36.4% upside potential. Our recommendation is based
on the wide exposure that the company offers to road, commercial, industrial and residential
construction in Colombia, activities that we consider will outperform the economy in the next five
to ten years.
COLCAP
Source: Bloomberg
Alejandro Isaza Z
Construction Equity Analyst
ai@serfinco.com.co
(574) 4443522 Ext. 6642
Jose F. Restrepo, CFA
Equity Strategist
jr@serfinco.com.co
(574) 3106510
1
Negatives
Positives
Diversified source of revenues in construction: residential,  Imminent delays in granting processes of the projects that
comprise the Fourth Generation of Concessions Program (4G).
industrial, commercial and road infrastructure developments.
The company is set to double its GLA and NOI of its real estate  Doubts surrounding the funding of the projects and the real
necessity of some of them, would diminish the potential impact
business by 2018.
of the 4G program.
2014’s forward EV/EBITDA exhibits discounts amongst construction
companies in Colombia, while current P/BV and P/E show  Political risks: possible changes in policies and regulations.
important discounts compared to global peers.
Table 1. Income Statement
COP million
2012
2013
Table 2. Balance Sheet
2014 E
2015 E
Revenues
597,379
616,595
752,901
876,780
1,004,866
COGS
439,265
458,612
575,071
642,040
728,511
158,114
157,983
177,830
234,739
276,354
Gross profit
COP million
2012
2013
2014 E
2015 E
2016 E
Cash and equivalents
254,359
32,712
32,236
56,940
110,597
Accounts receivable
263,214
289,677
312,701
364,151
417,349
Inventories
23,196
34,016
32,289
36,049
40,905
2016 E
SG&A
73,131
74,396
94,479
110,552
126,847
PP&E
108,333
105,459
104,103
104,026
104,891
EBIT
84,983
83,587
83,351
124,187
149,507
Intangibles
269,075
594,122
623,277
657,278
696,436
121,159
124,139
123,903
165,968
193,087
Other assets
423,019
490,122
491,162
491,680
492,215
(19,456)
(2,843)
(2,985)
(3,134)
(3,291)
Total Assets
1,341,195
1,546,108
1,595,769
1,710,124
1,862,392
65,526
80,744
80,366
121,053
146,216
EBITDA
Non-operating Income
Earnings before taxes
Taxes
Net Income
15,164
20,134
20,040
30,185
36,460
50,362
60,610
60,326
90,867
109,756
211,764
206,203
235,722
248,628
283,216
Accounts payable
Debt
63,820
148,934
110,320
123,167
139,755
Other liabilities
151,623
184,984
207,545
241,626
276,865
Total liabilities
427,207
540,121
553,587
613,421
699,836
913,989
1,005,987
1,042,182
1,096,703
1,162,556
Shareholders' Equity
Source: Conconcreto Serfinco S.A.
Source: Conconcreto and Serfinco S.A.
Figure 1. GLA Projection (2010—2018E)
Figure 2. Revenues and EBITDA Projections
COP Million
615,961
515,222
1,128,393
1,200,000
1,004,866
542,129
1,000,000
467,910
876,780
752,901
800,000
373,911
1,048,444
616,595
280,821
600,000
203,032
400,000
157,778
105,108
200,000
123,903
124,139
165,968
213,308
193,087
245,766
-
2010
2011
2012
2013
2014E
2015E
2016E
2017E
2018E
2,013
GLA (Square Meters)
2014 E
Revenues
Source: Conconcreto
2015 E
2016 E
2017 E
2018 E
EBITDA (COP million)
Source: Conconcreto and Serfinco S.A.
Table 4. Stock Data and Multiples
Table 3. Financial Ratios
2012
2013
2014 E
2015 E
2016 E
Net debt / EBITDA
-0.35x
1.40x
1.64x
1.15x
0.89x
EBITDA / Interests
8.9X
11.1X
9.8X
10.3X
9.6X
EV / Sales
2.0X
2.2X
2.0X
1.7X
1.5X
Equity / Assets
36.3%
30.1%
30.6%
28.3%
24.8%
P/BV
Gross margin
26.5%
25.6%
23.6%
26.8%
27.5%
Dividend
EBIT margin
14.2%
13.6%
11.1%
14.2%
14.9%
Payout Ratio
50%
33%
40%
40%
40%
EBITDA margin
20.3%
20.1%
16.5%
18.9%
19.2%
Dividend Yield
2.1%
1.7%
1.5%
1.8%
2.7%
Net margin
8.4%
9.8%
8.0%
10.4%
10.9%
ROE
8.6%
6.3%
5.9%
8.5%
9.7%
ROA
5.4%
4.2%
3.8%
5.5%
6.1%
Source: Conconcreto and Serfinco S.A.
Outstanding Shares
EPS (COP)
Book Value (COP)
2012
2013
2014 E
2015 E
2016 E
900
907
907
907
907
56
67
66
100
121
1,015
1,109
1,149
1,209
1,281
1.3x
1.2x
1.3x
1.2x
1.1x
28
22
27
40
48
ROIC
5.8%
5.2%
4.9%
6.9%
7.8%
P/E
24.1x
20.0x
22.1x
14.7x
12.2x
EV/EBITDA
9.7x
11.2x
12.4x
9.2x
7.8x
Source: Conconcreto and Serfinco S.A.
2
Table of Contents
1) Conconcreto: A Complete Exposure to the Coming Infrastructure Boom in Colombia…………………..……….…..(Page 4)
i) An active player in the ongoing positive dynamic for construction in Colombia………………………………….…..(Page 4)
ii) 4G program, the real game changer. ………………………..………….………………………………………………………………..(Page 5)
iiI) Real Estate Business, more than doubling GLA by 2018. ………………………………………………………………….…..(Page 7)
iv) Current ~US$1 billion backlog garantees 3.2x of 2013’s revenues.……………………….……………………….….…..(Page 8)
v) How Conconcreto’s market multiples stand against peers? ……………………………..……….………………….….…..(Page 9)
2) Negatives and Risks…………………………………………………………………………….………………..…………………………………..(Page 10)
3) Valuation………………………….…………………………………………………………………...…………………………………………..….….(Page 11)
4) Financial Statements…………………………………………………………………………………….………………………….………………..(Page 13)
6) Company Profile………………………………………………………………………………………………………………….……………………..(Page 15)
i) Management Team………………………………………………………………………………………………………………….…………….(Page 16)
ii) Directors and Board of Directors……………………………………………….………………………………………………………….(Page 17)
7) Recommendation …………….…………………………………………………………………………………………………...………………….(Page 18)
3
A COMPLETE EXPOSURE TO THE COMING INFRASTRUCURE BOOM IN COLOMBIA
We are initiating coverage of Constructora Conconcreto with a BUY recommendation and a 2015YE Target Price of
COP 2,005, equivalent to a 36.4% upside potential. Our recommendation is based on the wide exposure that the
company offers to road, commercial, industrial and residential construction in Colombia, activities that we
consider will outperform the economy in the next five to ten years.
Conconcreto, an active player in the ongoing positive dynamic for construction in Colombia
Colombia is currently going through a great momentum in construction, which is being mainly boosted by housing
and commercial developments. Subsidies on interest rates, the VIPA program (homes for savers), the 100 thousand
free homes, and all the different public initiatives to encourage people to have their own home, have derived in a
huge wave of new residential projects that have boosted construction activity in Colombia. The most recent data
available shows construction GDP growing by 12% in 2013 and 17.2% Y/Y in 1Q14.
But it does not stops there. All public housing programs in course are planned to be extended. In fact, the
government aims to build 1.2 million homes in the next four years. Meanwhile, building permits have grown 8.0% Y/Y
over the last twelve months (as of June 2014), loans for homes grew by 29.3% Y/Y in 1H14 and the number of homes
financed rose by 16.4% during the same period, signaling that there is a positive trend an that the dynamic for
construction should remain in the short term.
Figure 3. Evolution of Home Credits Disbursements and Home Units Financed (Quarterly from 1Q05 to 2Q14)
COP million
Home units
1,600,000
1,400,000
18,000
1,200,000
1,000,000
12,000
800,000
600,000
6,000
400,000
200,000
Home cedits dibursments (left axis)
2Q14
1Q14
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
2Q11
1Q11
4Q10
3Q10
2Q10
1Q10
4Q09
3Q09
2Q09
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
4Q06
3Q06
2Q06
1Q06
4Q05
3Q05
2Q05
0
1Q05
0
Home units financed (right axis)
Source: Department of National Statistics (DANE); Serfinco S.A.
Figure 4. Evolution of building permits in Colombia (square meters from Jan 2009 to April 2014)
25,000,000
4,000,000
3,500,000
20,000,000
3,000,000
2,500,000
15,000,000
2,000,000
10,000,000
1,500,000
1,000,000
5,000,000
500,000
2009
2010
LTM Building Permits (Left Axis)
2011
2012
2013
Apr
Jan
Oct
Jul
Apr
Jan
Oct
Jul
Apr
Jan
Oct
Jul
Apr
Jan
Oct
Jul
Apr
Jan
Oct
Jul
Apr
0
Jan
0
2014
Monthly Building Permits Aproved (Right Axis)
Source: Department of National Statistics (DANE); Serfinco S.A.
4
Considering the aforementioned, we expect Conconcreto, with a ~30% or US$305 million of its backlog represented
by housing construction, to continue benefiting from the different initiatives that are stimulating demand for new
homes in the country. In the meantime, the company continues consolidating its position as a developer of industrial
complexes, shopping centers, offices, hotels, warehouses and storage facilities.
4G program, the real game changer.
But, despite the positive perspectives for commercial and residential construction, we believe that it will be the
beginning of the Fourth Generation of Concessions Program (4G) the element that will bring an unprecedented
boom for infrastructure construction in Colombia. Fortunately, we can say now that this program is becoming a
reality as there are six major projects granted and three more that should be in the coming months under the socalled first wave of projects, which considers investments of COP 10.2 trillion (US$5.3 billion), and will start its
construction phase in about a year from now. There is a second wave of COP 17.3 trillion (US$9.0 billion) that are
supposed to be awarded before year’s end, and remaining of the COP 47 trillion (US$24.4 billion) that comprise the
whole program is planned to end bidding processes in 2015.
Although there could be some delays in granting processes and probably we won’t have all the projects executed in
the time initially planned, there will be a boom for construction that has never taken place in Colombia. And,
independently on who wins the concessions of these projects, the main construction companies will definitely have
their share in the execution of them due to the size of the program and the incapability of some constructors to
develop all the works on their own. Conconcreto is currently bidding for the 3 remaining projects within the “first
wave” and 4 of the second. That is why, considering important peaks in construction activity in Colombia in the years
2016 and 2017, we are estimating a 11.8% CAGR in the company’s EBITDA for the 2014—2020 period. And, under
this scenario, the company should be doubling 2013’s EBITDA and Revenues by 2018.
Figure 5. 4G Road Concessions Map
Source: ANI (National Infrastructure Agency)
The map above shows the magnitude of the whole 4G program. There will be COP 47 trillion (US$24.4 billion)
invested, split in more than 40 projects in 24 states, including the construction and modernization of over 8,000
kilometers of roads, 1,370 kilometers in double lane highways, 159 tunnels and 1,355 viaducts.
5
Although the company prequalified in 4 out of the 9 concessions that comprise the first wave of projects of the 4G
Program, it withdrew 1 bidding processes and will channel efforts in the 3 projects remaining: Rio Magdalena 2 (US$687
million investment), Conexion Norte (US$493 million investment) and Mulaló—Lonoguerrero (US$588 million
investment), which are expected to be granted in the next couple of weeks.
Table 5. 4G Concessions Program - First Wave
Project
Honda Puerto Salgar Girardot
Pacífico 1
Pacífico 2
Pacífico 3
Cartagena Barranquilla
Perimetral del Oriente
Conexión Norte
Rio Magdalena 2
Mulaló Loboguerrero
Total
4G Concessions Program - First Wave
Capex (COP billion) Capex (US$ million)
KMs
Status
854
443
84
Awarded
1,745
904
46
Awarded
876
454
95
Awarded
1,258
652
231
Awarded
959
497
147
Awarded
1,076
558
153
Awarded
951
493
146 Bids scheduled for 9/10
1,325
687
150 Bids scheduled for 9/18
1,135
588
84 Bids scheduled for October
10,179
5,274
1,136
Source: ANI (National Infrastructure Agency)
After ending all bidding process of the first wave, the National Agency of Infrastructure (ANI) is determined to
immediately resume the second wave of projects, which account approximately for US$9.0 billion in investments, and are
expected to be granted by the end of 2014 (we do not rule out possible delays). In this second wave, Conconcreto and its
French partner Vinci prequalified in 4 of the 12 projects, which, if granted, would represent a ~US$3.8 billion investment
(50% Conconcreto and 50% Vinci). However, as these projects require a 20% equity contribution from the consortiums
that are granted the concessions, we consider that Conconcreto’s capacity would not allow it to participate in more than
2 of these projects, as the company is also betting on 4 Public-Private-Partnerships (PPP), which altogether represent
investments of around US$3.3 billion, as follows: US$673 million in the Regiotram’s South corridor, US$778 million in
Regiotram’s west corridor, a US$1 billion port (no details disclosed), and US$880 million in a road project (classified).
Table 6. 4G Concessions Program - Second Wave
4G Concessions Program - Second Wave
Project
Capex (COP billion) Capex (US$ million)
Neiva – Girardot
1,330
689
Pasto -Rumichaca*
1,610
834
Villavicencio - Yopal
1,840
953
Puerta de Hierro - Carreto
440
228
Santana - Mocoa - Neiva
1,590
824
Santander de Quilichao - Popayan
1,210
627
Bogotá - Villavicencio (Bogotá - El Tablón)*
2,040
1,057
Autopistas al Mar 2
1,590
824
Autopista al Rio Magdalena 1*
2,140
1,109
Autopistas al Mar 1*
1,500
777
Bucaramanga - Barrancabermeja - Yondó
1,610
834
Transversal del Sisga
430
223
Total
17,330
8,979
KMs
191
80
260
173
422
76
34
139
156
176
167
137
2,011
*Projects in which Concocreto Prequalified
Source: ANI (National Infrastructure Agency)
For 2015, the ANI aims to complete the granting processes of the 20 to 25 projects remaining under the 4G Program. 16
of them are private initiatives (do not require public resources) and comprise US$6.0 billion investments. The other 9
public initiatives (US$4.2 billion investment) are currently being structured and should be opened for prequalification by
1Q15.
6
We have described the investments that will be destined to road infrastructure in the next five to six years. However,
the entire plan to update Colombia’s infrastructure goes further, as there are several railroad, port and airport
projects that demand investments of over COP 8.8 trillion (US$4.2 billion) through 2020.
Figure 6. Railroad Concessions Map
Figure 7. Port and Airport Concessions Map
Source: ANI (National Infrastructure Agency); Serfinco S.A.
Considering Conconcreto’s ~2.5% average market share in Construction of civil engineering works during the last 5
years, plus the company’s bet on 7 of the remaining 4G projects opened, we think the company will play a primary
role in the execution of the projects that will transform Colombia’s infrastructure and represent around US$29 billion
in investments over the next five to six years.
Real Estate Business, more than doubling GLA by 2018.
But Conconcreto’s story goes beyond benefiting from the boom we are anticipating for construction in Colombia. The
company has made a major bet on finding profitability through its growing real estate business, something that
currently is paying off (55% of 2Q14’s EBITDA came from this business), but yet has plenty of room for growth.
The company’s real estate estate business consists on designing, building, leasing and operating offices, warehouses,
distribution centers, convenience stores, hotels, administrative centers and shopping centers. The Gross Leasable
Area (GLA) of the business grew from 105,108 square meters in 2010 to 280,821 square meters in 2013.
In shopping centers, Conconctreto has developed a model that takes advantage of the growing consumption
capacity of intermediate cities in Colombia, which generally have populations of less than 500.000 inhabitants, and
have been characterized by having informal habits of shopping. Therefore, big shopping centers come usually a total
new experience for people in these cities, creating new areas for entertainment and leisure that have been largely
welcomed by the people.
The company operates currently 11 shopping centers, 5 of them under the company’s brand Gran Plaza, with over
294,000 in GLA, where 173,000 correspond to Conconcreto’s interest. The current backlog in shopping centers
exceeds US$300 million, including the expansion of 2 current centers and the develop of two new projects in the
south of Bogotá.
7
In industrial facilities, Conconcreto has 78,124 square meters leased to strong industrial companies, such us Unilever,
Familia and Frito-Lay. Similarly, the company has over 16,000 square meters leased to recognized retailers in Colombia, like
Carulla, Farmatodo and Corona.
In hotels, Conconcreto and its allies aim to grow their current 454 rooms to 819 by 2016. It is worth nothing that the
company has a key alliance in the hotels operated by Movich, were pilots of the airline Avianca guarantee a daily occupancy
of around 90 rooms.
The company is also investing in growing its GLA through its business centers’ brand Buró (one finished and two under
construction), warehouses (Bodegas San Fernando) and its self-storage facilities (U-storage)
Considering the projects being developed and others planned, which include mainly shopping centers, offices and hotels, the
company will grow its Gross Leasable Area (GLA) to 615,961 square meters by 2018, from 280,821 in 2013, allowing it to
double the current Net Operating Income of this business unit (COP 62 billion estimated for 2014), growing to COP 123
billion for 2018.
Figure 8. Gross Leasable Area -GLA- Projection (2010—2018E)
615,961
515,222
542,129
467,910
373,911
280,821
203,032
157,778
105,108
2010
2011
2012
2013
2014E
2015E
2016E
2017E
2018E
GLA (Square Meters)
Source: Conconcreto; Serfinco S.A.
Conconcreto’s current ~US$1 billion backlog guarantees 3.2x of 2013’s revenues.
Taking aside all the megaprojects that Conconcreto is bidding for, the company’s current backlog of COP 1.95 trillion
(US$1.06 billion) sums 3.2 years of 2013’s revenues, a figure way higher than the industry’s 1.5x backlog/sales
average, something that brings certainty over short-term revenues and sets a strong base for further growth in the
mid-term when the megaprojects that comprise the 4G program take off. Considering that Conconcreto has not been
part of any of the 6 4G projects granted so far, the chances of being awarded any of the 7 bidding processes where it
is competing have increased considerably, as some of the companies have reached the limits of their operating and
financial capacity.
Figure 9. Conconcreto’s Backlog Composition as of June 2014 (US$ Million)
Source: Conconcreto
8
Figure 9. Backlog Execution (2014—2019E)
Source: Conconcreto
How Conconcreto’s market multiples stand against peers?
Although 2014’s forward EV/EBITDA multiples of Colombian construction companies exhibit some premium over the global
average in the sector, probably as a signal that the market is pricing in the interesting potential for construction in the
country, Conconcreto shows a slight discount within Colombian companies (Conconcreto’s 2014 forward EV/EBITDA: 12.5x
vs. 14.9x of local peers’ average). Besides, the current P/E (considering last twelve months’ net income) and P/BV multiples
suggest that the company is underpriced amongst comparable companies around the world, as Conconcreto’s 12.1x P/E is
49.0% below the 23.7x average of the market; while its 1.3x P/BV multiple is 40.7% inferior than the industry’s 2.2x.
Table 7. Multiple Comparisons
Company
Jacobs Engineering Group Inc
SNC-Lavalin Group Inc
Impulsora del Desarrollo y Empleo
Country
USA
Canada
Mexico
Market 2014YE Fwd
Cap
EV/EBITDA
P/BV*
P/E*
ROA*
ROE*
Backlog /
Sales
Backlog /
Market
Cap
Spain
USA
7,187
7,900
9,005
3,671
3,765
9.6x
9.0x
21.5x
8.6x
9.2x
1.6x
4.1x
nm
1.3x
1.7x
20.3x
nm
nm
nm
15.3x
4.7%
2.6%
3.9%
4.7%
3.5%
8.2%
7.0%
-7.5%
9.8%
11.4%
1.4x
1.2x
1.7x
2.3x
0.4x
1.0x
0.5x
0.2x
Graña y Montero SAA
Mills Estruturas
Granite Construction Incorporated
Empresas ICA, S.A.B. de C.V.
Tutor Perini Corporation
Aecon Group Inc.
Odinsa
Besalco
Peru
Brazil
USA
Mexico
USA
Canada
Colombia
Chile
2,172
1,252
1,380
1,134
1,449
818
797
375
7.2x
7.8x
7.9x
10.2x
7.2x
7.0x
15.6x
14.6x
2.2x
3.5x
1.8x
0.8x
1.1x
1.6x
2.1x
1.3x
18.2x
20.3x
nm
85.8x
14.3x
35.8x
16.4x
69.7x
6.1%
9.9%
0.6%
1.9%
4.1%
1.7%
3.1%
1.3%
15.8%
15.2%
-3.2%
6.1%
8.2%
4.6%
13.1%
1.7%
1.8x
1.1x
0.9x
1.7x
0.8x
1.0x
1.4x
0.6x
0.6x
0.5x
0.2x
0.4x
1.7x
0.4x
Construcciones El Cóndor
Salfacorp
Average (Market Cap weighted)
Conconcreto
Colombia
Chile
491
337
41,731
717
14.2x
10.3x
11.8x
12.4x
1.5x
0.6x
2.2x
1.3x
18.0x
7.6x
23.7x
12.1x
3.3%
2.8%
1.3%
2.4%
8.0%
9.4%
5.2%
6.3%
5.4x
0.6x
1.5x
3.2x
0.5x
0.3x
0.6x
0.7x
Obrascon Huarte Lain
AECOM Technology Corporation
Colombia
*Using last twelve months data, as of June 2014
Source: Capital IQ; Serfinco S.A.
Net/Net: We have identified Conconcreto as an ideal vehicle to bet on the great potential exhibited by all the
activities that comprise the construction sector in Colombia: housing, commercial, industrial and road
infrastructure. That is why, following a 36.4% upside potential and a 2015YE Target Price of COP 2,005, we assign a
BUY recommendation to Conconcreto.
9
Investment Risks and Negatives
Delays in the execution of the infrastructure programs
We have given special relevance to all the projects under the Fourth Generation program in Colombia, therefore,
delays in granting processes and in the execution of the projects will naturally distort the estimated impact we had
anticipated in our valuation model.
Poor
economic performance
As our model assumptions consider a positive dynamic for the economy in the coming years, an opposite reality will
definitely affect the performance of the construction activity, changing the bases on which our projections are made,
thus affecting the value we found in the company.
Changes in current monetary policies and credit stimulus
In the last couple of years we have seen banks’ loans growing at a very solid pace, showing double-digit growth rates
continuously. Part of that momentum is explained by an expansionary policy of the Colombian Central Bank, and
several stimulus from the government that have boosted growth in the bank’s mortgage portfolio. Considering that
the central bank began a “contractionary” monetary policy, rising rates monthly since April 2014 (from 3.25% to 4.5%
in September), if we contemplate a scenario with further policy rate increases and a cut in the governments’ stimulus
on credit for homes, the residential construction activity could be negatively impacted, as the fundamentals that
predict a positive dynamic in housing construction may disappear.
Risks related to funding operations of real estate portfolio
We have told you about how aggressively the company is growing its real estate portfolio, increasing the Gross
Leasable Area (GLA) at a 51% CAGR over the last five years. Despite the success experienced renting the different
properties, there is an associated risk related to the implied leverage in all the projects, as, according to the company,
30% of the amount investment comes form equity and 70% from debt.
Considering the size of the company's real estate portfolio (one of the two largest in Colombia), in an event of an
economic slowdown, growing unemployment, lower income and consumption capacity, commerce activity would be
directly impacted and rent prices could start to be pressured, while threats of shop closures may arise. Thus, as
shopping centers represent around 50% of the total GLA, a scenario with low occupancy rates could create cash flow
restrictions as leases covering the operations would absorb it. What’s more, in an even worse scenario, the company
would be forced to take cash from other activities to fund the payments due to the entities granting the operating
leases.
10
Valuation and Recommendation
Revenues
Revenues were projected considering the following main elements: 1) The execution of the company’s current backlog,
which brings some certainty on short-term revenues; 2) the revenues coming from the company's current concessions
(Devimed, CCFC, Carreteras Nacionales del Meta, Cartagena Convention Center and CAS Mobiliario) until their expiration
date; 3) revenues from the real estate business based on the GLA guidance disclosed by the company ; 4) a projection of the
construction GDP based on a multiplier factor over the total GDP; and 5) a declining market share over the construction GDP,
as other new actors enter to compete in the market.
Figure 10. Revenues Projection (US$ million)
COP Million
1,400,000
1,173,900
1,200,000
1,044,483
1,000,000
909,596
72%
74%
74%
776,586
800,000
1,091,830
74%
Total 616,595
600,000
75%
76%
400,000
19%
17%
200,000
19%
20%
21%
2016 E
2017 E
2018 E
17%
2013
2014 E
2015 E
Works, fees, mantainance and transport
Real Estate Bussiness
Other
Source: Conconcreto and Serfinco S.A.
Valuation
Our valuation is based on a Sum of Parts methodology, which includes a discounted Cash Flow Model for the construction
business of the company and current concessions, plus the estimated value of its real estate business.
Table 8. Valuation Summary
Sum of Parts Valuation
Construction Businnes
Real Estate Business
Concesssions
Cash and Marketable securities
Financial Obligations
Equity Value
Shares Outstanding (mm)
2015 E
2015 E
COP million
869,880
1,001,846
139,340
56,940
-248,628
1,819,377
907
COP per share
959
1,105
154
63
-274
2,005
COP
2,005
1,470
36.4%
Target Price
Current price
Upside Potential
Source: Serfinco S.A.
11
Cost of Capital
Construction business: We used a 10.67% WACC to discount the Free Cash Flow obtained after projecting 10 years
of the company’s construction business. For calculating this WACC, we considered a 4.16% risk-free rate plus a 2.38%
Country Risk and 4.62% as market premium.
Concessions: To discount the revenues obtained from the current five concessions that the company has, we used
a 9.0% rate.
Real Estate Business: For founding the value of the real estate business, we projected the Net Operating Income
coming from this unit and then discounted it at an assumed Cap Rate of 8.79% for 2015 and 9.00% for 2016.
Table 9. Cost of Capital Calculation for the Construction Business
Construction Business' WACC
E/E+D (Equity)
D/E+D (Debt)
Risk Free Rate
Country Risk
Market Premium
Unlevered Beta
Levered Beta
Ke U$
Long Term Deval.
Ke (Cost of Equity)
Kd (Cost of Debt)
Tax rate
Kd (1 - T)
WACC
2015 E
64.1%
35.9%
2.66%
1.3%
4.6%
1.09
1.35
10.2%
3.3%
13.8%
7.8%
34%
5.1%
10.67%
Present Value DCF
Terminal Value
Operating Value
2015 E
282,180
587,699
869,880
Source: Serfinco S.A.
Table 10. Assumed Cap Rate and Value Estimation for the Real Estate Business
Real Estate Businnees (COP Million)
Net Operating Income (NOI) Projected
Assumed Cap Rate
Estimated value of the real estate bussines
2015 E
82,666
8.79%
1,001,846
2016 E
93,693
9.00%
1,083,462
2017 E
102,929
9.00%
1,301,081
2018 E
123,603
9.00%
1,332,202
1,104
1,194
1,434
1,468
Value per share (COP)
Source: Serfinco S.A.
Table 11. Assumed Disccount Rate and Value Estimation for the Concessions
Concessions (COP Million)
2015 E
Net Present Value of Cash Flow from Concessions (2015E - 2026E)
Discount Rate Assumed
139,340
9.0%
Value Per share (COP)
154
Source: Serfinco S.A.
12
Financial Statements
Table 12. Income Statement in COP Million (2011 — 2017E)
COP Million
Total Revenues
2011
447,730
2012
597,379
2013
616,595
2014 E
752,901
2015 E
876,780
2016 E
1,004,866
2017 E
1,048,444
Cost of Goods Sold
361,772
439,265
458,612
575,071
642,040
728,511
748,192
Gross Profit
85,958
158,114
157,983
177,830
234,739
276,354
300,252
Operating Expenses
61,060
73,131
74,396
94,479
110,552
126,847
132,586
EBIT
EBITDA
24,899
53,653
84,983
121,159
83,587
124,139
83,351
123,903
124,187
165,968
149,507
193,087
167,666
213,308
Non-operating Income
17,192
17,364
18,883
19,827
20,818
21,859
22,952
Financial Income
Income from recoveries
Gain on sale of assets
Other non-operating income
4,091
9,543
2,290
1,269
6,507
5,834
2,672
2,352
6,470
4,400
6,365
1,648
512
8,960
5,132
2,387
837
10,435
5,977
2,780
1,774
11,959
6,850
3,186
3,504
12,478
7,147
3,324
Non-Operating Expenses
Interests securitization funding
Gastos financieros trust assets
commissions expense
6,167
4
29
36,821
8,059
7,271
4,365
21,725
8,378
426
143
22,812
9,270
556
151
23,952
9,778
718
158
25,150
11,138
816
166
26,407
13,476
887
174
4,923
1,211
13,669
3,457
11,224
1,554
12,667
2,819
16,042
3,283
20,190
3,762
22,783
3,925
Earings Before Taxes
35,924
65,526
80,744
80,366
121,053
146,216
164,210
Total Taxes
11,856
15,164
20,134
20,040
30,185
36,460
40,947
Net Income
24,068
50,362
60,610
60,326
90,867
109,756
123,263
Cash Dividend
Dividend in shares
Total Dividend
Shares Outstanding
Payout Ratio
3,558
8,471
12,029
356
50%
18,007
7,174
25,181
900
50.0%
20,000
24,130
36,347
43,902
49,305
20,000
907
33%
24,130
907
40%
36,347
907
40%
43,902
907
40%
49,305
907
40%
Gross Margin
EBIT Margin
EBITDA Margin
Net Margin
19.2%
5.6%
12.0%
5.4%
26.5%
14.2%
20.3%
8.4%
25.6%
13.6%
20.1%
9.8%
23.6%
11.1%
16.5%
8.0%
26.8%
14.2%
18.9%
10.4%
27.5%
14.9%
19.2%
10.9%
28.6%
16.0%
20.3%
11.8%
Other financial expenses
General non-operating Expenses
Source: Conconcreto and Serfinco S.A.
13
Table 13. Balance Sheet in COP Million (2011 — 2017E)
COP Million
Cash
Short-term investments
Debtors
Inventories
Intangibles
Deferred assets
Total Current Assets
2011
2,793
20,345
134,843
14,831
140
1,425
174,377
2012
7,386
246,973
247,513
20,907
64,813
797
588,389
2013
13,761
18,950
286,266
31,557
37,591
610
388,737
2014 E
10,270
21,967
296,084
30,172
39,436
1,382
399,311
2015 E
11,959
44,980
344,800
33,686
41,587
1,609
478,623
2016 E
13,706
96,891
395,171
38,223
44,065
1,845
589,900
2017 E
14,301
183,315
412,308
39,256
46,721
1,925
697,825
Long Term Investments
Debtors
Inventories
PPE
Intangibles
Deferred assets
Other Assets
Appraisals
Total Long Term Assets
Total Assets
31,400
15,402
171
101,670
169,122
1,048
23,005
341,818
516,195
199,958
15,701
2,288
108,333
204,263
2,079
3,300
216,884
752,806
1,341,195
215,882
3,411
2,459
105,459
556,531
1,494
3,300
268,836
1,157,371
1,546,108
215,882
16,617
2,117
104,103
583,841
1,763
3,300
268,836
1,196,459
1,595,769
215,882
19,351
2,363
104,026
615,690
2,053
3,300
268,836
1,231,501
1,710,124
215,882
22,178
2,682
104,891
652,371
2,353
3,300
268,836
1,272,492
1,862,392
215,882
23,140
2,754
105,686
691,688
2,455
3,300
268,836
1,313,741
2,011,566
34,201
16,482
21,409
4,839
30,437
24,263
33,866
2,313
25,540
28,943
35,033
3,165
31,570
31,419
40,766
8,138
33,298
35,078
45,513
9,477
37,930
39,803
51,643
10,861
45,892
40,878
53,038
11,332
5,097
-
6,551
2,854
8,229
1,115
8,958
1,653
10,432
1,925
11,956
2,206
12,475
2,302
32,102
4,836
34,523
6,364
62,479
11,129
57,928
8,132
67,459
9,470
77,314
10,854
80,667
11,324
Total Current Liabilities
118,966
141,171
175,633
188,564
212,652
242,567
257,908
Long Term Debt
Accounts Payable
Labor debt
Monetary Correction
Payments received in advance
Total Long Term Liabilities
Total Liabilities
135,406
266
338
136,010
254,976
181,327
5,691
341
409
98,268
286,036
427,207
180,663
84,957
213
409
98,246
364,488
540,121
204,152
38,135
420
409
121,908
365,023
553,587
215,330
42,576
489
409
141,966
400,769
613,421
245,285
48,310
560
409
162,705
457,269
699,836
296,775
49,615
584
409
169,761
517,144
775,052
Shareholders' Equity
Shareholders' Equity + Liabilities
261,219
516,195
913,989
1,341,195
1,005,987
1,546,108
1,042,182
1,595,769
1,096,703
1,710,124
1,162,556
1,862,392
1,236,514
2,011,566
Short Term Debt
Suppliers
Accounts Payable
Taxes Payable
Labor debt
Provisions
Payments received in advance
Other
Source: Conconcreto and Serfinco S.A.
14
Company Profile
From: www.conconcreto.com
Established in Medellín in 1961, Conconcreto is a leader company in the development of infrastructure and building
construction projects in Colombia. It has a long-term rent portfolio in concession businesses, shopping malls,
distribution centers and rented mini storage units, besides investments in related companies whose focal point is
the development of innovative construction processes and the use of metallic structures, prefabricated concrete
and expanded polystyrene structures.
Figure 11. Conconcreto’s Business Structure, Brands and Affiliates
Source: Conconcreto; Serfinco S.A.
Figure 12. Conconcreto’s Construction Experience
Source: Conconcreto
15
Management Team
From: www.conconcreto.com
Figure 13. Management Team and Structure
Source: Conconcreto.
Juan Luis Aristizábal – CEO
Mr. Aristizábal is a Computer Engineer from EAFIT, with a Marketing Diploma at the same university. He holds also a Master’s
degree in Computer Science from Iowa State University and a Diploma in Strategic Management from the Javeriana
University. He has worked in Multicontacto, Propiedad S.A., and Conmercol and has been the CEO of Constructora
Conconcreto since 2000.
Board of Directors
José Mario Aristizábal Correa (President)
Mr. Aristizábal is a Civil Engineer from the Escuela de Ingeniería y Minas of the National University. He was the president of
Constructora Conconcreto for 32 years (1963-1995) and is now the president of the Board of Directors. He was also the
president of Proantioquia and of the Latin American Business Council (Colombian Chapter). He has also been a full member
of the boards of directors of Andi, Camacol, of the Antioquia Engineering School, and of Prodeminas, among others.
Nicanor Restrepo Santamaría (Independent)
Mr. Restrepo graduated from the Escuela de Ingeniería y Minas of the National University. He was an executive at important
companies as the Caja Agraria, Coltejer, and the Corporación Financiera Nacional. He was the president of Suramericana de
Seguros for 16 years, and also the president of the Grupo Empresarial Antioqueño (GEA). He is currently pursuing PhD
studies in Psychology at the University of Paris, in France.
Nora Cecilia Aristizábal López
Architect, currently serves as General Manager of "Contexto Urbano" a prestigious Architectural and Urban Design company.
Graduated from the Universidad Pontificia Bolivariana, helds a Urban Masters in Design, Massachusetts Institute of
Technology (MIT), Cambridge, USA, Settlements Urban Design in Developing Countries, as well as several specialized
courses such as Management of Design, Universidad de los Andes, collective Leadership, Gustavo Mutiz, "Quality
commitment, action," Psicomarketing; Open Spaces in Urban Settlements, MIT, permanent Cycle conference of the Housing
and Urban Setlement design programs, MIT, Landscape Architecture, Cambridge, USA, Interior Design, Boston USA. It
includes participation as Director of the District Department of Planning of Bogotá during the administration of Mr. Enrique
Peñalosa, participating in the technical formulation POT (Plan de Ordenamiento Territorial).
16
Ricardo Sierra Moreno (Independent)
Mr. Sierra has been the president of Distrihogar since 1989. He has held senior positions at Suramericana de Seguros
and Corfinsura. He is a full member of the boards of directors of Carulla Vivero, Une, Bancolombia, and CrystalVestimundo.
Luis Fernando Restrepo Echavarría (Independent)
Mr. Restrepo holds a degree in Industrial Management from Georgia Tech University and an MBA from the
University of Chicago. He has been the president of Crystal-Vestimundo since January 2010; it is in this company
that he has held different positions as vice-president and, subsequently, as president of Calcetines Crystal. He has
been a member of the boards of directors of Andi Seccional Antioquia, Andi Dirección General (Bogotá), and of the
Zona Franca de Rionegro.
Jaime Alberto Ángel Mejía (Independent)
Mr. Ángel is a Production Engineer who graduated from the EAFIT University; he holds a specialization degree in
Computing from the same university, and an AMP from the Harvard Business School. His professional practice has
taken place at Organización Corona where he was, for 11 years, the Operations Manager of Locería Colombiana, and
then its General Manager for three years. He became the General Manager of Sumicol five years ago. He is also a
member of the boards of directors of Electroporcelana Gamma and Tecnnova.
Álvaro Jaramillo Buitrago (Independent)
Mr. Jaramillo is a full member of the boards of directors of the following companies: Casa Editorial El Tiempo,
Ocensa, TribecaAsset Management, and Avianca Holding. He is also an adviser for the board of directors of the
Daabon Group.
Francisco Díaz Salazar (Independent)
Mr. Díaz is a full member of the boards of directors of the following companies: Sociedad Portuaria Regional de
Barranquilla, the Sala Group, and Farmatodo Colombia. He is also the substitute director at the board of directors of
the Sociedad Portuaria Río Grande.
José Alejandro Gómez Mesa (Independent)
Mr. Gómez is a Civil Engineer with a specialization in finance. He is the current president of SBI Banca de Inversión
S.A. He is a full member of the Board of Directors of Capitex S.A. and a substitute member for the following
companies: Electoquímica West S.A., SBI Banca de Inversión S.A., and Inverquim S.A.
Figure 13. Ownership
30%
70%
Founding Families
Floating
Source: Conconcreto
17
Recommendation
Figure 14. Stock performance and Historical Recommendations
Historical recommendations
1
Date
09/09/14
Recommendation
BUY
Target Price
COP 2,005
2,200.00
COP 2,005
2,000.00
1,800.00
1,600.00
1,400.00
1
1,200.00
1,000.00
11-10-15
9-10-15
7-10-15
5-10-15
3-10-15
1-10-15
11-10-14
9-10-14
7-10-14
5-10-14
3-10-14
1-10-14
11-10-13
9-10-13
7-10-13
5-10-13
3-10-13
1-10-13
800.00
Conconcreto
Source: Serfinco S.A.
18
International Equity Trading Desk
Andres Jimenez
Head of Equity
aj@serfinco.com.co
(574) 3106553
Juan P. Vieira
Head of Trading
jv@serfinco.com.co
(574) 3106515
Andres Gomez
Head of Electronic Trading
ag@serfinco.com.co
(574) 3106544
Daniel Marin
Equity Trader
dm@serfinco.com.co
(574) 3106518
Andres Upegui
FX Trader
au@serfinco.com.co
(574) 3106587
Jose F. Restrepo, CFA
Equity Strategist
jr@serfinco.com.co
(574) 3106510
Research Team
Rafael España
Consumer Services and Holdings
re@serfinco.com.co
(571) 6514646 Ext. 4228
Bogotá
Centro de Negocios Andino
Carrera 11 No 82—01. Piso 6
Tel: (571) 6514646
Cali
Av 9 Norte Calle 13 Norte Esquina
Local 203
Tel: (572) 4858585
Cartagena
Torre Empresarial Protección
Carrera 3 No 6A—100 Of. 801
Tel: (575) 6930292
Alejandro Isaza
Cement and Construction
ai@serfinco.com.co
(574) 4443522 Ext. 6642
Medellín
San Fernando Plaza—Torre 1
Carrera 43A No 1— 50. Piso 10
Tel: (574) 4443522
Bucaramanga
Metropolitan Bussiness Park
Carrera 29 # 45 - 45 of 910
Tel: (577) 6970367
Barranquilla
Centro Empresarial Las Américas
Calle 77B No 57—141.
Tel: (575) 3606030
The analyst certifies that the opinions expressed in this report accurately reflect his personal opinion about the company of concern. Also, the analyst certifies that he has
not received, is not receiving and will not receive any direct or indirect payment in exchange for expressing a specific recommendation in this report.
Serfinco S.A. is committed to provide independent and objective research for all the companies in the coverage universe. During the normal course of business, Serfinco
S.A. intends to obtain revenue for banking investment services from all the companies in the coverage universe. The remuneration for the analyst is based, in part, on the
profitability of the firm, which includes investment banking and revenues from sales. The research analyst does not have a position in the fixed positions of this covered
company and does not provide any kind of services to the company. The research analyst has not taken part in any investment banking transaction of the company in
concern. Serfinco S.A. was not making a market in the titles of the company in concern when this report was published. In the last twelve months, Serfinco S.A. did not
receive, nor it is authorized to receive, revenues for investment banking services, services related to the title of non investment banking, or non title services rendered to
the company in concern. that could affect the objectivity of this report. Therefore, investors should consider this report only as a factor for their investment decision making. However, Serfinco S.A. intends to do business with the companies covered in this report. Consequently, investors should be aware that the firm might have an interest conflict.
19