Are there any threads on the forum discussing infrastructure construction companies?
I have a small interest in the topic, having watched the construction of the Tampere tram, where YIT and NRC Group (formerly VR Track) are strongly present… Nordic megatrends and the general atmosphere are moving towards increasing rail traffic.
I’ve researched NRC enough to know it operates in Norway, Sweden, and Finland. Looking at a couple of earnings reports, it seems they’ve faced difficulties in failed projects and digesting an acquisition. The strong decline in the share price is also due to the dumping of shares by the company’s former founder, i.e., the former CEO. They have also bought back their own shares during the COVID-19 impact period.
Good opening, I was just thinking that I could open a thread for this where one could follow the birth, twists and turns, and effects of infrastructure stimulus on different companies. At least in the domestic stock exchange, YIT and SRV can benefit from this. On the other hand, the share of infrastructure is limited for both in their overall business, for SRV, if I remember correctly, it’s only 8% of revenue according to an Inderes report, so a potential infrastructure stimulus could easily be buried under a recession in commercial construction for these companies.
With a small stake, I jumped on the NRC bandwagon. The purchase of own shares must be related to the announced employee share program. The insider information is at least involved.
However, I made the final decision because a good acquaintance works there and told me that the effects of the coronavirus might have even been on the positive side! Apparently, skilled labor has become available and applied for jobs at NRC in Finland. I guess the coronavirus has had some impact, but they apparently haven’t needed any co-operation procedures, apart from those related to mergers and acquisitions.
Construction is construction. The competition in these projects is just as bloody, regardless of what name you want to call it.
More interesting to me are the entities that operate these sites. Railways, customs roads, ports, and power grids are themselves natural monopolies and often profitable assets for their owners, not for the builders.
The link below contains information on the development of building permits and projects. Construction projects continue to rise, while, as expected, building permits go in the opposite direction. The collapse of commercial building permits, in particular, was surprisingly large.
Good opening. As someone interested in investing in infrastructure construction, I would currently keep my eye specifically on pure infrastructure companies, like NRC. However, YIT’s and SRV’s infrastructure results will always be balanced out by recessions in the housing and commercial property sectors, which as industries have generally always been a wilder rollercoaster than infrastructure. YIT’s order book seems quite healthy, even though a few larger upcoming infrastructure projects are still awaiting tenders. I don’t see anything interesting in SRV. When Lemminkäinen and YIT merged, a lot of competent bridge and earthwork personnel left for GRK and Kreate, which I currently see as the most interesting Finnish companies in infrastructure construction. No need to dream too much about them for the portfolio, as they are not listed on the stock exchange.
I’m a civil engineer in the infrastructure sector and I no longer invest in construction companies at all because I’ve always lost money with them. At least in Finland, the competition is too fierce and contracts are taken too cheaply, so I’m no longer interested. Margins aren’t very impressive, and a bad project eats into the profits of good ones. I don’t have any personal experience with those unlisted companies.
On the consulting side, the Swedish company Sweco has actually been a pretty good investment for its owners. Sweco (which recently acquired NRC’s rail and infrastructure design) is practically involved in designing all the tram projects currently underway in Finland.
YIT has had several weak commercial property projects. Have there been many, compared to domestic competitors? I.e., how has it performed compared to its peers?
There was some discussion about NRC in the Kreate thread, but I’ll continue here on a more appropriate board.
NRC is looking for more capital, and since the Q2 report, the share price has taken a deep dive from 8.44 NOK => 3.3 NOK in just over a week. They are seeking at least 200 M NOK, and a share issue is coming (if I understood the announcements correctly). Cash on hand after Q2 was 120 M NOK and H1 cash flow was -250 M NOK.
It looks like a potential acquisition target, but you would get the Finnish state-owned VR Group as an owner with an 18% (current) stake. I don’t see bankruptcy as an option because of Finland’s security of supply (NRC has critical maintenance contracts).
Destia has been aggressive in the market and has won contracts, at least on the maintenance side. Could this be a potential new owner? The French owner certainly has some money to put into acquisitions.
Does @Olli_Koponen have any comments regarding the market/NRC situation? Any views on potential parties for an acquisition?
Can’t say much else except that it’s grim. I don’t follow NRC officially, so of course, these comments should be taken with a grain of salt. Revenue last year was 6,700 million NOK and EBIT was 121 million NOK. The market cap for the company is around 240 million NOK, or approximately 20 MEUR. The stock has fallen over 95% from its highs.
Now, based on your estimate, they would still need to raise 200 MNOK in additional funding at that market cap
Investors have surely been thinking that these project write-downs weren’t the end of it, and a quick cash injection won’t save this yet; instead, there could be problems in the future as well. The falling share price makes the equation increasingly toxic for the company and shareholders, as the funding must be sought at a lower price, leading to greater dilution (if one does not participate in the share issue).
I also don’t believe in an acquisition right now, because the acquiring party would take a significant risk that the projects won’t turn around with just a small adjustment. Rescue attempts by the state or major owners could certainly happen, but it seems unlikely that another listed company, for example, would buy the company in this situation. Unless, of course, they have better information about the extent of the company’s challenges than the market does.
Let’s follow the situation. I want to emphasize, however, that I am not an NRC expert, but rather someone who has seen several construction companies with project problems during my career.
Thanks for the comment! I’ll keep following the market. It’s interesting to see what happens in the market as the economic situation tightens and public projects decrease. NRC is already in trouble, so a weakening market could wash it away.
The basic challenge or problem for construction companies is often that with growth, organizations start to bloat, and fixed costs along with them. So-called “back-office” functions start to grow, and fixed costs increase simultaneously. More management levels are formed, and operations begin to become more bureaucratic.
This leads to a decline in competitiveness compared to smaller and more agile companies. As competitiveness weakens, there is a risk that different units, struggling with profitability challenges, no longer cooperate other than on a superficial level and mostly start competing with each other.
The next step from this is project problems. Growth is sought through aggressive price competition. Since units easily start “competing” with each other, there is no longer cooperation in project pricing and execution planning. Well, this in turn means that the best expertise is not being utilized. To meet the unit’s revenue targets, risk-taking increases, and risks are no longer recognized where they were seen before.
When a project risk materializes, the real reasons are no longer investigated; instead, it’s mostly about protecting one’s own ass and blaming others. As the next step, the most skilled middle managers start getting fed up and changing jobs. Gradually, operations become inefficient and errors in project production start to increase, which in turn increases the project risk even further.
Surely this is just a minor issue as well. In the era of the new CEO, clearer write-downs have already been made in several previous quarters, hopefully this too has been anticipated to some extent. Now that there has been positive development on the results side for a couple of quarters already.
