Wednesday, June 16, 2010

Valemus Float - Valemus Share Offer Opens Today

Despite stock market volatility in recent times, the Valemus IPO appears set to proceed with the Retail Share Offer opening today. If successful, the float will raise over 1.2 billion dollars, making it the largest IPO so far this year. In fact it will be the largest initial public offering since Myer last year, although prospective investors would be hoping for a much better performance this time around.

Valemus is the recently renamed Australian arm of Bilfinger Berger - a German Construction and Engineering business. While Bilfinger Berger may not exactly be a household name, many of us would have seen the name Abigroup or Baulderstone on various construction sites around Australia over the years. And it is these two businesses which make up the bulk of Valemus Limited.

Abigroup used to be listed on the ASX until it was taken over by Bilfinger Berger back on 2004. Abigroup accounts for around 42% of overall revenue. Baulderstone (formerly Baulderstone Hornibrook) accounts for around 43% of group revenue. Both Abigroup and Baulderstone specialise in major infrastructure projects like bridges, roads, tunnels, ports and the like as well as other non-residential building projects. Conneq, the third arm of the business, is a services business and makes up the balance of revenue for Valemus Limited.

Turning to the financial statements within the prospectus actually gave me a pleasant surprise. The company is projected to carry no net debt - it is actually expected to have net cash of over $150 million. I must admit I was expecting to see a balance sheet loaded up with debt (like some other high profile floats in years gone by). The forecast price to earnings ratio is between 10.5 and 12 times and the forecast dividend yield is between 3.6% and 4.1% depending on the final price. It doesn't look overly cheap, but then it doesn't look way too expensive either.

When looking at the value of the offer, we could perhaps look at Leighton Holdings, which is what appears to be a similar business, at least superficially. Leighton trades on a price to (adjusted) earnings ratio of around 15 times. So on the surface, the Valemus IPO doesn't look too expensive. However we should keep in mind the Leighton is a much bigger beast with a strong history. It should also be noted that while Leighton closed today at $32.31, it has traded as high as $41.70 and as low as $21.10 over the past year. (Compare this to a company likw Woolworths which traded between $25.19 and $30.57 over the same period.) This should give some indication of the volatility one can expect when owning a company which operates in the engineering and construction industry.

The details of the Valemus float are as follows. There are a total of 555 million shares available at an indicative price of between $2.20 and $2.50 per share. The final price will be set at the completion of the Institutional offer and the price may actually be set above or below the indicative price range but Retail Investors will still only pay a maximum of $2.50. The total amount being raised under the offer is between $1.22 billion and $1.39 billion. The retail offer opened today and is due to close on 2 July 2010 although the Commonwealth Securities home pages warns that it may close earlier (not that this is surprising given that CommSec is one of the brokers spruiking the float).

If you are interested in this float, make sure you (or a trusted financial adviser) pay close attention to the risks listed in the offer document. Even though the company appears to be in a strong financial position, it is operating in a tough industry. It is cyclical and profit margins are very thin.

Valemus Limited is expected to begin trading (on a deferred settlement basis) on the Australian Stock Exchange under the ASX code of VLM on 9 July 2010.