OHLA - Go With The (Cash) Flow - Model Update
All,
Please find our updated analysis on OHLA here.
Note: Beta testers can check OHLA on the portal here.
Liquidity and cash flow remain the key issue in the construction industry - OHLA is not an exception to this. Combine this with concerns around access to guarantee lines and expensive SSNs, and you get a recipe that leaves many with their heads scratching - us included. There will be a lot going on in the next 6-9 months, and we will be watching closely.
Investment Rationale
We are not taking a position at the moment as the company is entering another critical phase after the second recapitalisation, with the bonding line extension and refinancing of expensive SSNs coming up, which we would like to see how it plays out or at least get more clarity around it.
We believe the current price of 95% / 15.1% YTM is close to fair value; at the same time, we see limited upside with downside protection at c. 70%.
The company will need to deliver significant cash flow in H2 while continuing to win new business after very poor order intake / book-to-bill ratio in Q2 26; both are uncertain as working capital is heavily seasonal and winning new business requires access to guarantees, which is exactly what the company is fighting for.
While there are indicators that H2 will see a significant cash inflow (total customer working capital months is unusually high as at Jun-26), the exact timing is unclear and could slip.
Given these uncertainties and the company not having any further credit lines it could draw on, liquidity management will be key in H2.
The ongoing sale processes (Canalejas, Services business, and Czech subsidiary) could provide the much-needed cash inflow to create room to breathe, but both timing and proceeds are unclear at this point.
Key Conclusions
OHLA needs to improve its cash conversion and thereby its liquidity position in order to secure continued access to guarantee lines and thereby ensure its ability to bid for new projects.
The recapitalisation in 2024/25 provided some room to breathe, but the adverse ruling in Qatar, with disposal process timing slipping, creates some concern about the upcoming extension deadline for the government-backed parent-level bonding lines.
While recent business performance has been decent, with Construction margins improving and Industrials returning to profitability, cash generation is still limited.
Significant seasonal working capital swings and legal disputes are part of the industry and the business model but create some tail risk, particularly given a large part of the company's cash sits within JVs and a minimum cash requirement exists.
Notes with PIK interest step-ups are expensive (see YTM calculation below); refinancing will depend on bonding line extension, successful disposals and overall business performance.
OHLA once ran a substantial equity-accounted concession portfolio which it sold years ago and no longer books material concession earnings; the last legacy equity asset (Canalejas) is held-for-sale. The company now only targets limited new concession projects with geographic focus on South America.
Miscellaneous
The company currently does not have any debt facilities with headroom, which creates concerns should any adverse legal rulings or other unforeseen expenditures occur.
The extension of the government-backed parent-level bonding lines in Feb-27 is a critical event, as continued access to guarantee lines is crucial to win new business.
The timing of asset disposals and achievable proceeds are uncertain.
Should the concessions business increase substantially and/or become more capex-heavy again, this would be viewed as a clear negative.
Here to discuss this name with you,
Martin Hoelzl