We downgrade our price target to EUR23 from EUR31 following PORR ’s profit warning and reduce our EPS forecast by 27% for 2017E and 15% for 2018E.

 

●  Profit warning issued: In an unscheduled H1 preliminary statement PORR suggested H1 EBITDA will be 20% below our forecast having decreased 18% yoy to EUR55.4m. Even more concerning, EBT has declined 88% to EUR2.5m (Berenberg H1 forecast: EUR21m). As a result of the profit shortfall management is guiding to full-year net income slightly below last year’s EUR65m; on this basis we see at least 15% downside to consensus expectations. We have reduced our net income forecast to EUR55m 2017E, -27% yoy from EUR75m.

●  The group’s Qatari exposure, as well as higher-than-expected costs in Germany, are the problem: We estimate that PORR’s order backlog is c11% exposed to Qatar via three large contracts. Qatar’s only land border, its border with Saudi Arabia, has been closed since June which has led to higher costs as logistics and supply processes have become more complex. As the new processes are now in place and sourcing agreements have been finalised PORR believes that the cost impact should reduce in H2. In Germany, PORR has been acquiring local players to achieve countrywide coverage. It will have completed three acquisitions in 2017 with total annualised revenues of cEUR500m. The costs associated with these acquisitions were higher than expected but management has suggested it will not make additional acquisitions in H2 2017. Furthermore, subcontractor costs have increased 10-15% as the market continues to grow strongly and there is a limited pool of labour. PORR is having to resort to using subcontractors from Austria and Poland to offset cost inflation.

●  It is tough to mitigate higher costs: Although some of the cost increases, such as acquisition integration costs, appear to be one-off in nature, we believe PORR will continue to bear the risk of rising subcontractor costs in Germany as fixed price contracts are already in the backlog. In Qatar, while the border remains closed, the cost of sourcing building materials will remain high. Management’s guidance suggests H2 net profit will be approximately +28% yoy, however, we are more conservative at +2.5%yoy.

●  Time to wait, don’t be tempted too early: Our main concern is that we lack visibility and the shares could de-rate further. Although the shares are down 36% ytd we would wait until we have more information on 30 August 2017. As a reminder, contractors rarely issue a single profit warning (Balfour Beatty, Carillion, Skanska, Bilfinger Berger amongst others provide evidence of this) as order backlogs are made up of fixed price contracts.