Description

COMPANY DESCRIPTION

Maire Tecnimont is an engineering and construction (E&C) firm specializing in gas and other fuel processing projects, including fertilizers, petrochemicals, and waste conversion. The company is increasingly trying to position itself as a provider of energy transition solutions and highlights the work in its Sustainable Technology Solutions (STS) segment as opposed to its Integrated E&C Solutions (IE&CS) business. However, IE&CS presently represents 98% of the company’s €16.8b backlog (including the recently awarded €8.3b Hail & Gasha mega-project in Abu Dhabi). Within IE&CS “Fuels and Chemicals” represents 51% of backlog, “Polymers” 20%, “Nitrogen Fertilizers” 15%, and “Hydrogen and Circular Carbon” 14%. Maire is the lead contractor or a participant in large often multi-billion-dollar projects with long 3-4 year lead times.

The company’s geographic exposure varies widely over multi-year periods. In 2015, for example, 59% of revenues were in Europe and the Americas. In 2019 that number was 9% with non-EU Europe accounting for 58% of revenue. This reflects a very large gas processing project in Siberia called Amur, which was a JV between Russia and China. This is an important part of the thesis. Presently the company is rushing to diversify away from this exposure and has won considerable work in the Middle East. The Middle East now represents 81% of backlog (62% ex-Hail & Gasha) up from < 10% just a few years ago. Developed markets are 10% of backlog.

INVESTMENT THESIS

Maire’s balance sheet is in a very dangerous position for an E&C reflecting some combination of poor bidding and project overruns. To evaluate E&Cs, we tend to look at the combination of days billed receivables (DSO) plus days of net unbilled receivables (unbilled receivables less deferred revenue). The most acute problems tend to be in companies with high unbilled receivables, as these typically reflect work performed about which the customer and contractor have not agreed.

Maire’s current 262 days consists of 56 days of billed receivables and 206 days of net unbilleds. In our view Maire’s €1.6 in equity market cap (€1.8b EV) is highly likely to become impaired with close to €3.0b in receivables and net unbilleds on the balance sheet. The mechanism by which this will happen is that there will be a call on the €2.6b in payables before the receivables can be resolved.

The following chart shows Maire’s history of days receivables plus days of net unbilleds. The company is at unprecedented levels both relative to its history and relative to other E&Cs, even ones that have run into trouble in the past.

VARIANT PERCEPTIONS

1. The Amur project in Siberia is still a major risk

Maire’s exposure to Amur has not been a secret. The stock sold off from > €4.50 (a 2021 ESG-mania high) to < €2.50 post the start of the war in the Ukraine. Activity at Amur has stopped, and the company’s story is that its unspecified in magnitude balance sheet exposure is roughly offset between receivables and payables that are the responsibility of their sub-contractors. Our work on Maire and other E&Cs suggests this is unlikely to be the case. Some of the payables counterparties are Chinese and they have started to exert pressure on Maire as the general contractor and deepest pocket. The market has given the company a pass as memories of Russia fade, and the company has aggressively bid in the Middle East to bolster its backlog. The stock has retraced to > €3.50. Ultimately, we see a significant call on payables coming the company’s way from its outsized exposure to a single project in Russia.

2. The Middle East is the worst operating environment for an E&C

The Middle East is a notoriously difficult place to get paid, and that’s for a well-functioning project. The Korean E&Cs all blew up in 2012 due to their rapid growth in the region starting in 2010. Carillion, a UK-based construction company, went bankrupt in 2016 on the basis of its foray in the region. Maire itself blew up in 2011 with the stock declining > 75%, corresponding to the last time the Middle East was a significant percentage of revenue. The market has been comforted by Maire’s recent backlog and revenue growth. On the income statement the company is showing a stable to up margin of around 6.5%, but this by assumption and not representative of the underlying economics of their projects. The Middle East has gone from < 10% of revenue in 2020 to 46% in 9M ’23 and as previously mentioned represents > 60% of backlog. The company has tried to stabilize the balance sheet post Amur, but net unbilleds have already started growing again after a decline in 2022.

3. E&Cs with these level of receivables funded by debt or payables virtually all end poorly 

We have studies E&Cs for many years. In addition to the aforementioned analogues other examples of past E&C blowups include Imtech in 2010-2014, UK contractors in 2014, the Japanese in the mid-2000s, and Fluor more recently. Our rough rule of thumb is that DSO’s plus unbilleds above 100 days is dangerous territory and unbilleds above even 20 days is a red flag. We are well beyond that here. In Maire’s case they have funded the growth in receivables through payables carrying a modest net cash position. This is cold comfort as the reason receivables grow in problem situations is that the cost of a project has outstripped initial estimates and importantly the customer’s willingness or ability to pay. However, the payables side of the equation cannot be controlled. Ultimately there is a “call on the payables”. The following shows Maire’s days payable.

KEY RISKS

1. There is an energy investment wave that papers over existing balance sheet issues

Presently the company is showing positive momentum in terms of orders (though H1 ’23 was weak), backlog, and revenue. Post Ukraine there has been a pickup in investment. As E&Cs grow they do receive some downpayments from customers that can backfill or cover balance sheet and cash flow issues. You are, in turn, taking some energy exposure in a short of Maire.

2. The Chinese and Russians figure out Amur and resolve Maire’s balance sheet

Amur is not the entirety of Maire’s problem, but it is significant, perhaps half. There is a chance that the Russians and Chinese come to a high-level political settlement over the project. Our work suggests the project has been run commercially with the Russian counterparties represented by Sibur and Gazprom (funded by Sberbank) and the Chinese represented by Sinopec (funded by a variety of Chinese banks). We see this as unlikely without some precipitating event that impacts Maire.

3. The company has been considered a green investment and the company has laid out aggressive 2032 targets

The “green” piece of Maire is tiny. But they have pledged to grow green revenues at an 18-20% CAGR and EBITDA by 7-8x with the whole company growing at an 8-10% CAGR and EBITDA 3-4x. We consider these targets wholly unrealistic, but there is a potential dream here.

VALUATION

In a Base Case, we apply 6x a “normalized” level of EBITDA plus apply a 10% call on payables. In a Bear Case we apply 10x a lower level of EBITDA with a 20% payables call. For a Bull Case we apply 6.0x a bullish estimate of EBITDA, which is just above the average forward multiple of the past seven years (5.9x) but inline with periods like 2017-2018 when investors became sanguine.

Catalyst

1. Amur comes back into the headlines
2. The balance sheet continues to bloat and cash flow does not match net income, which refocuses investors on the risks
3. The P&L for an E&C is assumption driven and does not reflect real project economics until late. As projects mature you could see a crack in EBITDA margins