View
4
Download
0
Category
Preview:
Citation preview
AECOM Technology Corporation (ACM) Memo
Company Description AECOM is a premier, fully integrated infrastructure and support services firm. ACM is a leading solutions provider for supporting professional, technical, and management solutions for diverse industries across end markets. The company is a leader in all of the key markets that it serves, including transportation, facilities, environment, energy, oil and gas, water, high-‐rise buildings and government. AECOM specializes in providing integrated services for planning, construction and maintenance of infrastructures that includes consulting, architecture, engineering as well as managing the requirements for energy, water and environment. AECOM’s businesses have been classified into two distinct segments: Professional Technical Services (PTS), 92.2% of revenue and Management Support Services (MSS), 7.8% of revenue. Thesis / Key Points Ø Diversified Core Business Portfolio and Smart Repositioning
§ AECOM’s diversified portfolio comprises both designing and construction services. The company’s business is also spread across a number of key markets that mitigates operating risks. o AECOM has been going strong in the U.S. and Europe, the Middle-‐East and Africa (EMEA) (See Exhibit1). Also, AECOM is
strengthening its core business by developing its integrated service platform and gaining global expertise as a leading infrastructure provider (See Exhibit2). For example, the company’s construction services business in EMEA witnessed revenue growth of 100% and backlog growth of 50% in the year.
§ ACM has been repositioning its MSS business to make it more profitable. The company is taking initiative to shift from higher-‐volume lower-‐margin international and designing work to lower-‐volume higher-‐margin construction and maintenance work in U.S., primarily in markets other than the Department of Defense. o The business is showing signs of improvement with increasing number of new orders and desired backlog. In fiscal 2014, the
segment’s backlog increased 51% y-‐o-‐y to $2B with significant reduction in the overseas contingency operations work and domestic designation work. The segment operating income recorded y-‐o-‐y growth of 21%, while operating margin increased about 600 basis points in the year.
o With the overall fiscal 2014 revenue increased 2.5% to $8.35B, the PTS segment’s revenue grew 27%, driven by growth in construction services in the metropolitan cities and continued strength in the international market.
² The strong organic growth trends in the international and construction services markets more than offset the weak America’s designation business, which has already been the repositioning target.
o The MSS segment’s revenue fell 9%, which gave the company a huge market misperception. ² The decrease in MSS revenue was mainly due to decreased services provided to the U.S. government in the Middle
East, which would just be a one-‐time event. However, it is the MSS business that can provide continuously increasing growth on strong backlog and profit growth amid business repositioning.
o The accumulated backlog began to be converted to sales at a faster rate, driven primarily by private infrastructure investments. Those backlogs will contribute greatly to the construction services revenue. ACM closed the fiscal year with total backlog of $25.1B. (See Exhibit3)
o The emerging trends that show central bank easing policies need to be accompanied by fiscal stimulus to have a lasting impact on the real economy and positive inflation. The construction of infrastructure is one of the most often ways to boost fiscal spending and provide faster rate for backlog conversion.
Ø Continuously Strategic Acquisitions position ACM as the industry leader. § AECOM continuously evaluates the marketplace for acquisition opportunities. The company remains focused on acquiring firms, which have proven expertise in their domain. o In the past few years, AECOM has made key acquisitions like Tishman Construction and Bovis Lend Lease, which are now
contributing significantly to its growth. o AECOM has acquired Hunt Construction Group in the middle of 2014. The acquisition of Hunt added significant contracting and
construction capabilities to AECOM’s primarily architectural and engineering expertise. The synergies would be easy to grab as in many U.S. projects, Hunt was often a partner rather than a competitor for AECOM due to Hunt’s specialization in construction and contracting, as well as its focus on the U.S. markets, whereas AECOM derives ~60% of sales from overseas. Also, AECOM has expertise primarily in the commercial tall buildings, residential and hospitality sectors; Hunt added a strong position in the sports, health care and aviation market.
o Recently, AECOM closed the acquisition of URS Corp. for about $4B, becoming one of the largest companies in the engineering and construction industry. Following the acquisition, AECOM intends to leverage URS’ knowledge and expertise in key sectors like construction, oil & gas, power and government services, which are expected to be significant growth drivers. (See Exhibit4)
² The acquisition of URS was largely driven by the need to stay the number one global design company due to the acquisition-‐driven pressure from Jacobs Engineering Group, Inc.
² The deal was expected to return over 25% in the very first year of operation while realizing cost savings of about $250 million by the end of fiscal 2016.
Name: Xiao Dong Phone #: (434) 466-‐2061 College/School: COMM Year: 2016
AECOM Technology Corporation (ACM) Memo Misperception Ø For MSS segment, the 9% net service revenue decline indicates 27% y-‐o-‐y to $98 million in the Q3, which showed the unsuccessful
business repositioning. § However, as indicated above, the decline was owing to the project-‐repositioning initiative undertaken by the company to shift focus from lower-‐margin projects to higher-‐margin services. In the future, the MSS business will provide continuously increasing growth on strong backlog and profit growth amid business repositioning.
Ø The synergies from the acquisition of URS would hard to find. Both URS and ACM have struggled with falling or stagnant sales and their sales often overlap so some sales are likely to be cannibalized. § However, the acquisition makes strong strategic sense for both companies. The main competitor, Jacobs Engineering Group jumped from the spot number four to number two on the list of the top global design firms as well as the top U.S. design firms ranked by revenue and it surpassed the URS. After the acquisition, AECOM will maintain a large lead in its number one status, which would be a great selling point for its sales and marketing teams. And URS could better off than dropping to a number three or four with uncertain prospects.
§ However, the acquisition was aimed for a “complementary acquisition” since AECOM and URS had highly complementary operations and culture have been solidify confirmed. Also, URS could bring strong sector expertise in important end markets for AECOM and accelerate AECOM’s strategy of creating an integrated delivery platform with superior capabilities to design, build, finance and operate infrastructure assets around the world.
VAR Ø When asking about URS’ strong presence on the oil&gas segment, which could provide complementary benefit for AECOM,
“One of the best opportunities near term is in the industrial segment along the Gulf Coast – that was one area within URS that was poised for resurgence.” -‐ Adam Thalhimer, analyst at BB&T Capital Markets
Ø When asking about the acquisition of URS by AECOM, “You couldn’t have had a better marriage of two companies that complement each other’s skill sets, scope and capabilities so well… they both have the federal government as a large customer, but there is very little overlap in what they do” -‐ Will Gabrielski, analyst at Stephens Inc.
Ø Recently, Greenlight Capital by David Einhorn, disclosed a new position in AECOM. The position accounted for 1.48% of the fund’s portfolio. “Although the company reported soft fourth-‐quarter and fiscal 2014 results… the top line improved driven by the strength in Professional Technical Services… we were also impressed by the company’s backlog levels and Management Support Services business would benefit from the restricting initiatives.” – Yingying Zhang, intern analyst at Greenlight Capital.
How It Plays Out Ø Internally, AECOM has been the market leader in almost every key ending market. To further maintain the profitability and grab
more market shares, ACM has initiated the business repositioning which aimed to transform the focus of business from the low margin PTS business to the higher margin MSS segment. The MSS segment could provide continuous backlog and revenue growth in the future. Those backlogs will contribute greatly to the construction services revenue and require higher conversion rate, which has been executed through the increasing government infrastructure investments as the result of the fiscal stimulus.
Ø Externally, AECOM continuous to expand the company through strategic acquisitions. The recent acquisition of Hunt and URS proved the right direction of the executive board that enlarged the company market share in its core business market. Those strategic acquisitions not only increased the organic sales growth but also provided the potential for the synergies, which could benefit the company through increasing backlogs and enlarging business operational segments.
Risks / What Signs Would Indicate We Are Wrong? Ø AECOM derives a considerable share of revenue from government projects. Therefore, the company tends to be impacted by
the changes in government’s rules and regulations. Moreover, these projects are mostly long-‐term contracts and any budgetary changes in the tenure can affect AECOM’s business. Also AECOM will be negatively impacted if the U.S. government reduces the percentage of outsourced projects.
Ø A significant portion of the company’s business is on fixed-‐price basis. As the company generally executes these contracts via third parties, it runs the risks of loss if the sub-‐contractors are not able to do the required amount of work in scheduled time.
Ø The company’s long-‐term debt remains a burden going forward, given its recent acquisitions. The total enterprise value of the URS acquisition will reach about $6 billion including the debt held by URS. Further the company intends to utilize its free cash flow for repaying long-‐term debts with an aim to reduce leverage ratio to 2.0x by 2017 (See Exhibit5).
Signposts / Follow-‐Up Ø The future conversion situation and usage of backlogs Ø The upcoming 10-‐K file in the fiscal 2014 year Ø Debt payoff situation for the acquisition of URS Ø Global government easing policies, especially the focus on
fiscal stimulus Ø Any further potential bid opportunities for AECOM Ø The progress of the transformational deal for AMC and
URS: the Barclays Center and World Trade Center
Important Company Financial Data (See Exhibit6&7) Ø The company delivered strong new wins of $4.2B in Q4
and closed the fiscal year with total backlog of $25.1B, including $3B inherited from the acquisition of Hunt.
Ø Book-‐to-‐burn ratio was of 1.7x, a 52% y/y increase and 33% organic y/y growth.
Ø FCF exceeded net income: $162M FCF in Q4 and $298M for the fiscal year; operating income of $103M and net income $64M; adjusted EPS for Q4 was $0.79 and the full-‐year EPS was $2.53
Ø Adjusted EPS Guidance of fiscal 2015 will be $2.75 -‐ $3.35
AECOM Technology Corporation (ACM) Memo Exhibit1: Global Presence of AECOM:
Exhibit2: AECOM as the market leader and the reasonable merger with URS
AECOM Technology Corporation (ACM) Memo Exhibit3: AECOM benefits from the MSS segment for the accumulated backlogs
Exhibit4: The complementary strategic acquisition with URS
Page of Exhibit(s)
AECOM Technology Corporation (ACM) Memo Exhibit5: FCF and Debt Reduction drive balanced capital allocation strategy
Exhibit6: Company Comparable Valuations P/E (TTM) P/E 2015 P/E 2016 Est. 5-‐Yr EPS
Gr% P/CF (TTM)
ACM 14.5x 12.3x 10.0x 12.4 9.7x Industry Average 34.2x 36.8x 76.7x 10.9 18.7x S&P 500 18.7x 17.4x 16.2x 10.7 15.6x JEC 15.1x 12.6x 11.1x 11.5 12.2x FLR 16.1x 15.7x 13.9x 12.3 11.7x PWR 18.1x 19.2x 14.9x 8.0 14.5x KBR 50.2x 189.2x 14.5x 12.0 7.3x P/B (Q3) ROE (TTM) D/E (Q3) EV/EBITDA (TTM)
ACM 1.4 10.0 0.4 7.7
Industry Average 1.8 -‐2.7 0.2 17.3
S&P 500 7.2 24.7
Exhibit6: ACM always beats the EPS expectations
AECOM Technology Corporation (ACM) Memo Ideas for the Club 1. MII could hold internal stock pitch competition, which could let members get more involvement and truly
practice their skills. Also, it would be nice to organize stock pitch competitions with other investing groups in UVa, i.e. AIF, GMG, SWS and etc.
2. MII could give more feedbacks about the stock pitches that presented in the meeting. The clear Criteria for a
good pitch may be a great way to let people know what they can improve. 3. MII could give more specific goals for associate teams. MII could set up weekly goals for the team to educate
team members about fundamental investing ideas and basic accounting and investing approaches. 4. MII could set up the Risk Management Department, which could make MII react more efficiently with the
existed portfolio.
Recommended