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Fugro’s medium-term strategy confirms that the company has learned the lesson the hard way, and that the management is now capable of steering through a profitable growth era thanks to a network of diversified business lines. The increased capex requirements should not alarm the market as Fugro is able to translate investment spending into higher sales and profits which, in return, will feed shareholder returns as the company has resumed dividend payments.
Companies: Fugro NV
AlphaValue
The Q3 results reinforced the strong growth story only to raise the question of “Growth until when?”. The consistent and profitable expansion across regions allowed Fugro to remain in the higher end of the medium-term margin target. Additionally, a structural and steady balance sheet improvement has led to the resumption of a dividend payment earlier than we had expected. The announced dividend of €0.40/share and the amended dividend policy (25-45% of net income) signals further growth.
H1 revenues jumped by 22% annually across all regions except for the Middle East. Profitability continued to rise in all regions, led by the Americas where the EBIT margin soared 8.3% from -0.4% in H1 FY22. Overall, the group margin rose to 8.9% in H1 – 430 bps higher compared to last year. Free cash flow was positive in H2 despite turning negative in the quarter as growth and seasonality led to a working capital build.
The positive momentum supporting service companies has been favorable to Fugro as the company booked strong revenue growth in all regions and business segments. Revenues jumped by 27.5% yoy despite the Q1 being a seasonally low-activity quarter for the company. The EBIT margin jumped to 5.4%, testifying to improved profitability. A high working capital requirement on the back of full-speed growth is a drag on operating cash flow, therefore the management of working capital remains a key focus.
Robust revenue growth and margin expansion defined FY22 and the trend is expected to continue this year. The 38% rise in backlog value provides visibility on FY23 revenues. While the diversification, both geographically and across business segments, is appreciated, the higher capex needs thanks to growth and the need to maintain a low level of leverage is delaying dividend payments.
Revenue growth was mainly driven by strong demand and site characterization in the marine segment. The improvement in margins also continued to accelerate as the operating margin topped 10% although free cash flow growth was held back by higher capex.
The release of the H1 results have been advanced as the company is launching a refinancing programme. The latter includes a capital increase of €116m (10% of equity) with the support of core shareholders. The refinancing will increase the maturity of the debt to 2025 (vs 2023). The Q2 results were good, with revenue growing in both the Marine and Land divisions, and the Land division is improving operationally. The FY22 outlook is confirmed (continued revenue growth and further margin expansion)
Overall, positive update with “high client demand in energy and infrastructure markets”. The outlook was reiterated (revenue increase in all markets, further margin improvement). Q1 update showed revenue up 23% yoy and down 11% qoq at €365m. Bear in mind that the Q1 is seasonally a low quarter for Fugro, i.e. the trend remains positive for the yearly growth. The EBIT margin was close to break-even vs -5% in Q1-21.
Overall good release, and reassuring after the miss in Q3. Q4 revenue is up 25% yoy at €410m, driven by the Marine division (revenue of €294m, +34% yoy) with work in offshore wind and oil and gas. The EBIT margin is improving yoy (Q4 at 4.3% vs 1.1% in Q4 20) and hoh (H2 at 5.9% vs 2.5% in H1). The outlook guides for continued revenue growth and further margin expansion towards the 2023-24 target (EBIT margin of 8-12%).
Despite repeating the guidance for FY21, the market was spooked by the declining EBIT margin. Operations were indeed impacted by the breakdown of a vessel, as well as by the ongoing restrictions which were higher than estimated. On the positive side, the backlog is in good shape at €931m, possibly due to some postponements, but management mentioned that the backlog had higher pricing (and margin). It seems that operations will have to improve first in order to convince on this.
Positive results after the weak Q1, with the guidance confirmed (revenue growth / modest margin improvement) and expectations of “around break-even free cash flow”. Margins are improving indeed at 2.5% in H1, vs 0.6% in H1 20, while revenue is down 5% yoy. Activity is picking up sequentially in both marine (+47% qoq at €278m) and land (+17% at €111m) divisions.
Q1 is usually a weak quarter and this was no exception. Revenues are decreasing sequentially by 11% at €283m (and by -17% yoy), at both the Marine (€189m, -10% qoq) and Land (€95m, -10% qoq) divisions. Management guides for revenue growth in Q2 as the backlog is slightly higher than in Q4 (€875m) and expects a modest margin improvement for FY21.
Despite declining O&G activities, Fugro generated €105m of FCF this year, of which €97m in H2. This is due to tight working capital management in H2 (€42m), the divestment of Global Marine (€50m), €20m of deferred tax payments but also some margin improvement in Land and cost reduction measures (€95m of savings). These last two are particularly positive for 2021, as the company should also benefit from a strong offshore wind market and a recovering O&G business.
It could have been worse, thanks to offshore wind supporting the activity and up 40% yoy. As a result, oil and gas accounted for 42% of Fugro’s sales, compared to 52% for FY19. This trend could continue if global spending in offshore wind does indeed grow by 25% p.a. in the coming years. Visibility has improved in H2, and the company continues to adjust its cost base while the refinancing process has restarted.
The trading update confirms the halt in oil & gas activities, with management reporting that March’s order intake was “at a fraction” of January’s and February’s. The year now lies in the management of the backlog, which is still at a decent level, before it has another attempt at refinancing.
Research Tree provides access to ongoing research coverage, media content and regulatory news on Fugro NV. We currently have 0 research reports from 3 professional analysts.
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