09/11/23 Partnership between BAM and RR, up to Dutch
politics to say yes or no
BAM and Rolls Royce have signed an MoU to explore the
possibilities to develop multiple so called small modular
reactors in the Netherlands. Although it is up to Dutch
politics to decide if it wants to increase nuclear power in the
total energy mix, an SMR could be an intermediary and long
term solution, especially in areas with heavy industry, that
leaves little waste, is CO2 neutral and at relatively low cost.
It is obviously early days, but SMRs are viewed by multiple
countries as a solution to overcome the dependence on
fossil based power generation while building out renewable
energy in such a manner that it can sustain a whole
economy. As such we view even a simple MoU as positive.
In fact we hope that BAM and RR (or another SMR supplier)
succeed in convincing the Dutch government.
Multiple SMR suppliers, an attractive technology looking at
levelized cost
There are multiple suppliers of SMR technology including
GE, Hitachi, Westinghouse and Rolls Royce and even more
novel technologies are on offer by specialist firms like
NuScale Power, Holtec and Kairos. The principle is the
same. The key components of the reactor are manufactured
in a plant like environment, allowing for industrial production
at relatively low cost. The components are then transferred
to the site and assembled locally. Due to the small size and
industrial approach, SMRs in the UK, which is ahead of
continental Europe except Poland, can be developed at a
cost of c. GBP 1.8bn (€ 2.1bn) for a 470 Mw SMR, resulting
in a levelized cost of between GBP50-GBP 70 (€58-€82) per
Mwh, which makes it, at mid-point, cheaper than
(€83/Mwh), significantly cheaper than gas (€122/Mw) and
well cheaper than offshore wind (€96/mwh). All the LCE
data is from a EIA report dating from April 2023. And the
total construction period, according to Rolls Royce, is less
than 500 days or within two years. This will a giga nuclear
reactor construction time is between 6 and 8 years.
Significant projects if Dutch politics say yes and selects
BAM/RR
As said, it is very early days. The Dutch government may
decide to go for one or two large gigawatt nuclear reactor,
multiple SMRs, a mix of the two or none at all. Although we
certainly hope that SMRs will be part of the mix (it can help
heavy energy dependent industries like Tata to move to
hydrogen faster than based on renewable energy from
offshore wind), it is not certain that it will happen or that
BAM/RR is selected. But if that is the case, we assume that
BAM, per SMR project, will have a volume of at least
€400-500m (our estimate, we could be wrong), including
the building, the access roads and the electrical
infrastructure) whereas BAM Nutall, which is working on a
concrete project, mentions a volume for one SMR of GBP
500m. And because of the high safety requirements, annual
maintenance contracts will also be material. So it is an
interesting development for any construction company.
02/11/23 Strong beats on sales and adj. EBITDA
Despite all the issues that the construction markets in the
Netherlands, the UK, Ireland and Belgium face, BAM did
really well in Q3 2023. Sales beat our estimates by 6% with
adj. EBITDA beating our estimate by 34% (!) with the adj.
EBITDA margin coming in at 5.1% versus our expectation
of 4.0% and 3.0% in Q3 2022. We had expected loss
provisions in Ireland in relation to the Children’s Hospital
which have not occurred (BAM calls the results of the Irish
unit ‘strong’) while we had anticipated a weak
performance of both of the UK’s units but the Civil
Engineering activities have also done better than expected
(BAM Construction UK impacted by supply chain issues at
larger projects which we assume is the Silvertown project
again). In the Netherlands the Civil Engineering business
continued to do well (as expected) with home sales of the
property unit coming in at c. 370 versus an expected
300-400 (target for 2023 unchanged at 1,500 units,
significantly lower than in 2022 (2,208). BAM also mentions
that the contribution of the non-resi construction segment
in the Netherlands recovered, which is positive. Trade
working capital continues to trend down (-14.0% vs -14.8%
in Q2, 15.1% in Q1 and -16.5% at the end of Q3 2022),
which explains why, despite the stronger EBITDA, net cash
remains at €0.5bn. The orderbook remained solid €9.4bn (in
line), slightly lower than €9.5bn at the end of Q2 2023.
Upped 2023 adj. EBITDA margin guidance
Despite BAM stating that market conditions remain
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4
challenging, the 2023 guidance is upped. BAM now expects
to generate an adj. EBITDA margin of approximately 4.5%
versus a guidance previously that called for an adj. EBITDA
margin of at least 4%. We are at 4.2% for 2023. One
should not read into the improved EBITDA guidance that
there will not be any issues with the Children’s Hospital as
that is to be completed in the course of Q2 2024. But the
upped guidance is certainly positive, as is the BAM
statement that ‘following constructive engagement with
the client, BAM looks forward to handing over the project
within the revised agreed timescale’. As expected, there is
no news on the fiscal authority and public prosecutor
investigation.
2023 consensus to move up, we assume
Bloomberg 2023 consensus sales is at €6.0bn and given
that normally Q4 is at least €100m stronger in sales than
Q3, consensus sales is expected to move up c. 3%.
Unfortunately, there is no company compiled consensus
and Bloomberg shows an 2023 consensus EBITDA margin
of 3.9%. But we do not know whether that includes the JV
results and the PPP results, which are not part of IFRS
EBITDA. But we assume that the street did not count on 5.
1% in Q3 so it is likely that consensus moves up a little.