In this post we shall 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, 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 if Veidekke is a sound investment or not, and that´s what we shall try to answer today. All of the data is gathered from Borsdata which I highly recommend.
Fincancial 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
As we can see, the profit margin is around 3%, which is about as high as it´s been for many years. However, more important, the equity ratio / solvency is low being only 17%, so the question is if they have enough liquidity to pay this in the short-term. We also notice that earnings / share is increasing, which is positive, and the dividend has been growing too. The payout ratio is just bellow 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 9260 to 14 869 MNOK within just 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 it´s short term debt because the financial assets can take care of that.
Also, few times has P/B 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.
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 lot´s 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 billions of the revenue, while industry (making roads and such) was about the double of that. But more importantly, the big part of Veidekke, the governmental property building part accounted for 20 billions
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 it´s workers own minimum 10% of the total shares, normally around 15% and new workers are rewarded with 10 000 NOK worth of shares. This is positive for the culture and Veidekke has been rewarded over and over one of the most attractive firms for industrial people.
There are two major risks involved with Veidekke
- A) Property prices drop in the same way as 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
- B) Loses big contracts to other 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 risk which will hurt the company in the short term:
- Veidekke doesn´t get paid by the contractor.
- Veidekke spens 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 – 125 NOK. Right now, the price is 83 NOK.
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