In this post, we analyse Veidekke, one of Scandinavia’s leading construction and property companies. The company has a dispersed ownership structure with emphasis on institutional owners.

Historical Stock Performance

As we can see, Veidekke has gone from around 10 NOK in 1998 to around 100 NOK in about 20 years, rewarding shareholders with 900% in price return. Include dividends, and you get a lot more. Since 1986, Veidekke has returned 16.9% to shareholders yearly.

The company consists of three parts: Entrepreneuring, Governmental Buildings, and Industry and Properties.

But, as we can see from the following chart (which says production of properties), Veidekke is quite sensitive to property prices. The question is, Is Veidekke is a sound investment or not?

That’s what we will try to answer today. All of the data were gathered from Borsdata which I highly recommend.

Financial Key Ratios

  • P/E is 12.6 while competitors like AF Gruppen and  Skanska have 18.32 and 14.3
  • P/B is 3.3 while AF Gruppen and Skanska have 6.8 and 3.0
  • Yield is 5.4% which is one of the highest in the industry

Financial Overview

As we can see, the profit margin is around 3%, which is about as high as it’s been for many years. More importantly, the equity ratio/solvency is low being only 17%. This begs the question, does Veidekke have enough liquidity to pay this in the short-term? We also notice that earnings/shares are increasing, which is positive, and the dividend has been growing too. The payout ratio is just below 70% which is what I normally aim for. 

Balance Sheet Liabilities

Balance Sheet Assets

From looking at the total equity, the return has been stable, so the low equity has to come from increased debt.  As we see, current liabilities or short-term debt is high, it’s increased from 9,260 to 14,869 MNOK within a period of 2 years. Good or bad you ask? As I’ve said before, debt isn’t bad (it’s often necessary in order to grow), the question is if Veidekke can pay this short-term debt. Comparing to AF Gruppen and Skanska, Veidekke has way higher debt/equity but look at the assets. Veidekke doesn’t have any trouble meeting its short term debt because the financial assets can take care of that.

Also, there were a few times the P/B  has been this low, and ROE is around 30%, ROC is around 25% and ROIC is 15%. If we look at the total capital – debt, which is a great way of getting a good overview of the whole situation, things don’t look so bad, quite average.

But then we have intangible assets, which sometimes is where the highest worth of the company is found. For Veidekke, the Intangible assets have stayed around 7% of the total assets.

 

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Moat/Competitive Advantage

People who know the property industry, know that once a company has won a huge contract and been accepted by the “government,” the offers and acceptance to do other jobs becomes WAY easier.

Again, let me state this more clearly. The competition for entering a market such as Veidekke did with the Stockholm contract is VERY tough. But once you win the contract, a whole new world of offers opens up and you can be sure that Veidekke will have lots of work to do in the near future.

While this post might make you think that Veidekke is a 100% property company, it’s not. In 2015, the property part accounted for 2.3 billion of the revenue, while industry (making roads and such) was double of that amount. But more importantly, the big part of Veidekke, the governmental property building part accounted for 20 billion.

And this is where the moat comes in. I believe that the moat which goes directly to the governmental property building part will increase Veidekke’s earnings for years to come.

Another moat is that Veidekke aims to have its workers own a minimum of 10% of the total shares. this is typically around 15% and new workers are rewarded with 10,000 NOK worth of shares. This is positive for the culture and Veidekke has been awarded multiple times as one of the most attractive firms for industrial people to work for.

Risks

There are two major risks involved with Veidekke

  • If property prices drop the same way it did in 2008. This will affect the revenue significantly, and then the short-term debt will be a problem. Right now, housing prices are insane in both Stockholm and Oslo, same with Toronto, New York, and Tokyo. If we see a global drop, Veidekke will suffer
  • They lose big contracts to competitors such as AF Gruppen and Skanska. The long-term performance is partially based upon the moat, and we don´t want to see that disappear

Other risks which will hurt the company in the short term:

  • Veidekke doesn’t get paid by the contractor.
  • Veidekke spends a lot of money on a project but doesn’t receive any return on the investment.

As for valuation,  I’ll keep it short since I don’t want anyone to buy based on my calculations, but my DFC analysis gives me a price around 95 to 125 NOK. Right now, the price is 83 NOK.

 

Take care,

Stockles


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7 Comments

Ole · November 16, 2017 at 3:07 am

Veidekke has returned not have as You write

    Stockles · November 16, 2017 at 8:20 am

    Hi Ole,

    Actually, they have. I´ve uploaded the image now which states my case.

      Ole · November 16, 2017 at 2:47 pm

      I meant the gramma, your gramma is wrong. 🙁

        Stockles · November 16, 2017 at 3:08 pm

        Oh I see. Yeah, I write quite fast so sometimes I do some spelling mistakes.

Chr69 · November 16, 2017 at 8:11 am

I think you are not correct on the Risks.
Point a) prises. Yes this is a risk.
Point b) Loose big contracts. I don’t think this is a problem. There will be a lot of big contracts in the future. Both from “Statens vegvesen” and from “Nye veier” And ofcourse there will be schools, shopping senteres, offices,
You miss:
Point c) They will not get paid for the job they do. Maybe because they do not agree with the developer. Like this case: https://www.bygg.no/article/1331474
point d) They get the big contracts but they do not manage to make profit, or even loose money on the job.

    Stockles · November 16, 2017 at 8:27 am

    Hi Chr69,

    Well, if we look back at the late 80´s and beginning of 1990´s, contracters such as Veidekke didn´t have much to do. Actually, my parents, who both work in this field, had to move from Norway to Sweden because the government didn´t build much at that period. This is the situation I´m thinking about when pointing out risk B.

    Point c is fair, but I don´t see that as a way of hurting the business in the long term. Point d is also fair, but again, I don´t see that as a problem for the long term outlook. Would be painfull in the short term, but Veidekke would most likely survive and go on.

    Thanks for stopping by Chr69.

Tom @ Dividends Diversify · November 16, 2017 at 7:49 pm

Hi Stockles,
Interesting analysis on a company I was not previously familiar with. Thank you for putting it together. Tom
Tom @ Dividends Diversify recently posted…Where I Went Wrong….with General Electric (GE)My Profile

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