2023-08-11 08:13:51 ET
Summary
- Heijmans is acquiring Van Wanrooij to become the second-largest Dutch property developer.
- The business is trading at only 3x EV/EBITDA pro forma for the acquisition, whilst remaining only 1x levered.
- Heijmans is well-positioned to address structural housing market issues and benefit from increased government investment in housing and infrastructure.
Thesis
Heijmans ( HJMNF ) is a Dutch construction company that has recently announced the acquisition of profitable developer Van Wanrooij. Post-closing (expected in Q3), Heijmans will be the second-largest Dutch property developer. Heijmans is now trading at just 3x FY23 EBITDA pro forma for the combined business. The addition of Van Wanrooij should consolidate market share and provide clear synergies, whilst leaving the combined business only ~1x levered. Heijmans is poised well to address severe structural issues in the Dutch housing market (currently a 390k deficit/4.8% total stock, 900k new builds required by 2030), and should benefit from increased central government investment in infrastructure.
Company Profile
Heijmans (as of June, Royal Heijmans) is a Dutch construction and engineering company. It has operations in the following areas:
Property Development (~26% '22 revenue/ ~31% EBITDA)
Heijmans develops mainly residential (but also retail commercial and industrial) real estate. They tend to act as the initiator, developer, and seller. Projects are mainly in inner-city and suburban areas.
Building and Technology (~43% '22 revenue/ ~28% EBITDA)
This includes residential and non-residential construction and renovations, developing concepts e.g. energy neutral timber framing, and maintenance/services.
Infrastructure (~31% '22 revenue/ ~41% EBITDA)
They design, build and maintain public spaces and infrastructure in the Netherlands, including energy infrastructure.
The split post Van Wanrooij acquisition will be pretty similar with revenues at 32%/43%/25%, respectively
The business has seen a turnaround after a lengthy restructuring (2009-2018), in which Heijmans divested all foreign assets, heavily streamlined operations, and shifted focus to profitability. This is now a Netherlands pure play. They've done well in the strong housing market over the last few years, generating tons of cash, which has been used, among other things, to cancel their preferred shares (€31m), pay dividends (€21m in '22) and just accumulate on the balance sheet (net cash position of €116m as of June 2023).
Key Financials
Van Wanrooij Acquisition
In June, Heijmans announced the acquisition of property developer Van Wanrooij expected to close in Q3 at an EV of ~300m, which is being funded via a mix of new stock issued (€24m), cash on balance sheet (€150m), a new 4yr amortizing term loan (€80m) and about €45m on their €177.5m RCF. Post-acquisition, the new company should be left with about €150m net debt. Van Wanrooij should add €30-40m EBITDA each year in the short term, and €50-70m EBITDA in the medium term. €150m EBITDA is expected pro forma for the full year 2023, €107m from Heijmans. As of Q2, management claimed they were ahead of guidance.
At the current Heijmans market cap of €300m, we get an EV of €450m post-closing. At ~€150m PF EBITDA FY23, we get a ~3x FY23 EV/EBITDA. Management is guiding for a net cash position by 2026, which seems pretty feasible since Heijmans pre-acquisition was generating good free cash flows (admittedly against a strong housing market).
This new acquisition is profitable and will immediately start to contribute to cash flows and EBITDA upon completion. While we haven't been given any detailed financials, it seems from the company presentation that in 2022, Van Wanrooij generated about €400m in revenue, and EBITDA of likely >€30m. The no. of homes developed by Heijmans will increase from 2000-2500/y to 3000-4000/y, and the size of the land bank will double to ~30k homes ready to be developed. This will make Heijmans the second-largest homebuilder in the Netherlands.
Drivers
There is a structural shortage of housing in the Netherlands, with a current deficit of about 390k houses , expected to increase in the short term due to an ageing population and smaller average household sizes. The Dutch government has set a goal of building 100k housing units a year (vs. a target of 65-70k over the past 5 years) and is targeting 900k new units by 2030 , increasing their previous target. This is ambitious. As such, the government is investing €11bn into this pledge, a large amount of which will also be put towards supporting infrastructure, another of Heijmans' business areas. Further, the Dutch government has confirmed that improving and maintaining existing infrastructure is a priority, and Heijmans estimates that the government budget in this area is about €3bn a year.
The Dutch housing market is expected to stabilise in 2024 according to research by Rabobank , with the number of transactions expected to bottom in 2023. While it is always difficult to make accurate predictions on the future state of the housing market, I am optimistic that we will continue to see decent enough volumes.
H1 Results
Heijmans recently announced their H1 results , which were strong. Overall revenue of €937m was up 8% year on year. Adjusted EBITDA for the half was €49m (vs. €67m in H1 2022), and operating profit was €23m (vs €40m in H1 2022). However, profits last year were bolstered by a gain of €19m due to the release of Wintrack provisions set aside in 2021 for a lawsuit . If we exclude this provision, we saw an increase in profits year on year. Property development revenue was down as Heijmans sold fewer homes amid a challenging housing market, but this decrease was more than offset by strong performance in the Building/Technology and Infra segments.
Valuation
At 3x PF FY23 EBITDA, this business is cheap. While we are likely at the top end of the housing market, I still think the new business is well positioned moving forwards with a strong order book (€2.6bn, an all-time high), and ahead of revenue/EBITDA targets as of Q2. Further, a large proportion of revenues are not housing-related; we have seen strong performance from the infrastructure segment, an area which has seen continued government investment.
If we look at valuations of other construction companies, according to data compiled by NYU Stern , as at January 2023 the Western European average homebuilding business EV/EBITDA was ~4.8x, and the engineering/construction company average was >8x. I find Heijmans' valuation a bit confusing. As homebuilders go, Heijmans is as good as the rest, and this new acquisition is a perfect fit which should give us some really good synergies. The market seems to be pricing for a credit event or a huge drop in earnings, yet this business has a solid balance sheet and earnings seem to be resilient. Given that the market is pricing for a worst-case scenario, in the (in my opinion, likely) event that the housing market does even out as expected and homebuilding/infra projects continue as planned and needed, we should see upside here.
For further details see:
Heijmans: A Cheap And Profitable Construction Business