Tecnicas Reunidas – BME:TRE

17/04/20

Company Background: 

Tecnicas Reunidas (TRE) is one of the most important engineering companies in the world regarding the design, construction and management of industrial facilities related to oil. Despite the last years of diminishment in the activity, as a result of the plunge in the oil price, the company has continued gaining contracts with the main players in the sector

TRE has three business areas: refine & petrochemicals (45% of total sales), upstream & natural gas (49%) and Power & Water(6%). Its headquarters are located in Madrid (Spain) and its shares are listed in the Spanish market (BME). 37% of their shares are held by the Llado family (CEO)

Company data (17/04/20)
Market Cap600 Mill €
Revenue FY194’699 Mill €
EBITDA*110.2 Mill €
Debt584 Mill €
Cash & Equivalents799 Mill €

What is the business of the company:

TRE is an engineering company in the oil & gas sector. Its project are related with the design and execution of refineries, energy efficiency, basic and front end engineering designs, polypropylene production, gas turbine power plant. TRE carry out those projects in a consortium with other companies. Performing each one of them the part of the project where they have the expertise. The projects usually consist of three phases: Engineering, Procurement and Construction. Being the margins in the Engineering phase power that the ones obtained in the other two. The average duration of the project is around 18 months.

Current situation: 

TRE is one of the most renewed companies in its sector. One proof of that is the its clients are Saudi Aramco, ADNOC, BP, KNPC,… which have carried out project with them since long time ago. TRE is dependent on the oil price because the oil sectors invest in refineries and other elements when the oil prices are high to obtain quicker a return. 

Previously to the breakout of the Coronavirus and the oil war between Saudi and Russia, TRE had the biggest backlog of projects in its story. The share price has dropped 50% as a consequence of the fear from shareholders of the projects being stopped. This happened in 2015, and the consequence was to have a low margin during the next couple of years.

To solve this situation, the OPEC+ and the US and Canada hold a meeting in April, agreeing the biggest cut in OPEC history to balance off the decrement in demand caused because of the virus. This agreement will last two years, aiming for a Brent price around 45$ at the end of this period. Saudi and Russia even confirmed that they would cut more production to reach the target oil prices.

TRE main projects have not been stopped during March and April. Moreover, taking into account the OPEC agreement, the oil price is forecasted to increase up to a level where the investment is profitable. We are not aiming for the 5% EBIT margin that the company had in 2014, as it will take 3-4 years to recover. However, as soon as COVID-19 stabilise and countries around the world go back to use their factories and companies, the oil consumption will rise around 90 Million barrels /day.

Still far away from the 100 Million barrels pre-crisis due to the lack of flights, but it can be enough to see oil around 45$ barrel and companies reinvesting.

In addition to that, and due to the huge backlog of projects, the company is profitable and is trading at its lowest share price ever.

Catalysts in the short run: 

TRE has been heavily impacted by the Coronavirus and the fall in the oil price. As we said before, we expect the oil price to recover progressively during the next 12-18 months, along with the Coronavirus. The current projects have not been cancelled neither stopped. Consequently, it only can put the new contracts off for some months. However, TRE has a backlog for the next two years of revenue at its highest in history (more than 5’000 Mill €/year), and even although the margins are not fully recovered at least until 2022 (worst case scenario). It is expected to earn 50 Mill this 2020. It is almost one €/share in this catastrophic year. The margins will improve in the coming years, along with the recovery of oil. TRE needs an oil price around 40$/share to be profitable, as that is the price the Middle East is willing to invest in the renovation of its facilities.

Valuation: 

I have valued the company following a DCF model, assuming these hypotheses for the next five years:

  • TRE revenue will be around 5 bn € the next couple of years (Now is slightly higher, but we are assuming some slow down during the pandemic)
  • TRE will have a minimum margin (1% during 2020), and it will increase it progressively up to 3% during the next 4 years. (It usually has managed to have margins around 4%, so the valuation is quite conservative)
  • Capex and D&A will be in line with last years
  • Oil price(Brent) will recover and be around 40$ in 2020, 45$ in 2021 and 50$ per barrel in the coming years

Risks: 

  • The main risks are linked to the oil price of TRE as it would entail a diminishment of the TRE’s revenue because some projects would be delayed. 
  • This sector is quite unstable (geopolitics, attacks…), which can damage its cash flows
  • TRE has exposition to currencies as Turkish Lira which is depreciating considerably, it could affect its results.
  • Low diversification, 90% of its projects are in the oil & gas sector and 70% of them are in the Middle East.

Results:

Due to the high volatility in the oil price, all the geopolitical determining and the oversupply that it exists in the market currently, we consider investing in TRE a risky investment. Taking the current price of 12.70€/share, we would aim for a return of 76% in the next twelve months.

Annex:

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Disclaimer: This analysis is not a buy recommendation. It is only my point of view about the expected FCF of the company in the future with the information I have.