APRIL 20, 2018

What Business Portfolio ensures Profitability?

The Future Value Chain in International Construction

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The ECS industry’s five-year performance has been similar to that of S&P 500Aggregate ECS sample TSR versus S&P 500 TSR, 2012–2016

0

100

200

300

400

500

-40 -20 0 20 40 60

Company count

First quartile

= 21.9

S&P 500 median

= 15.8

Third quartile

= 9.5

ECS weighted

average = 13.7

AccionaACSAECOMAF GruppenAMECArabtecARCADISBalfour BeattyBilfingerBouyguesCarillionCB&ICFEChina CAMCChina CCCChina GezhoubaChina Railway Const.China Railway ErjuChina Railway Grp.China State C&EChina State C&IChiyodaCIMICCOMSYSDaelimDaewoo E&CDialogEiffageEMCOR

FCCFerrovialFluorFugroGamudaGraña y MonteroGranite Const.GS E&CHochtiefHyundai E&CIDEALIJMJacobsJGCJiangsu ZhongnanKajimaKandenkoKBRKEPCOKindenKyudenko Larsen & ToubroMaedaMasTecMetallurgicalNCCNippoObayashi

OHLPetrofacPINFRAPower CCCPT Pembangunan PT WijayaQuantaSacyrSaipemSalini ImpregiloSamsung EngineeringShanghai Cons.ShimizuSichuan R&BSinomaSkanskaSNC-LavalinStantecStrabagSweco ABTaiseiTécnicas ReunidasTetra TechTodaVINCIWorleyParsonsWS AtkinsWSP

ECS median = 14.7

Average annual TSR, 2012–2016 (%)

Sources: S&P Capital IQ; BCG ValueScience Center.

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0 5 10 15 20

11.4Banks 11.5

Consumer Services 12.1Food Retailing 12.4Transportation 12.4

Technology Hardware 12.6Consumer Durables 13.2Personal Products 14.5

Media 14.7Semiconductors 14.7

ECS 14.7Professional Services 15.2

Automobiles 15.7Diversified Financials 16.1

Pharma & Biotech 16.5Insurance 16.9Software 17.3

Healthcare Equipment

Median = 12.6%

Energy -4.1%Materials 5.7Retailing 7.0

Telecommunication 7.3Utilities 9.3

Real Estate 11.0Food and Beverage 11.1

Capital Goods

17.6S&P 500 15.8

Average annualized

TSR, 2012–2016 (%)

ECS sector with good performance vs other industries over the last 5 years

Median five-year TSRs by industry

Sources: S&P Capital IQ; BCG ValueScience Center.

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1960s 1970s to early 1990s

Mid1990s to

2003

2004 -

2008

Postcrisis

years

S&P 500 average

ECS average

8.3

10.6

5.6

5.9

8.5

5.7

8.7

8.7

10.6

8.9

0

5

10

15

EV/EBITDA

1960

S&P 500 median1

19801965 1990198519751970 2005 20161995

ECS median

2000

How the ECS Sector Stacks Up Against the S&P 500

Sources: Compustat, S&P Capital IQ; Global Vantage; BCG analysis.

Note: EV = enterprise value; EBITDA = earnings before interest, taxes, depreciation, and amortization.

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-40 -30 -20 -10 0 10 20 30 40 50 60

Average annual TSR, 2012–2016 (%)2

Average TSR,

weighted by

market

capitalization

(%)

TSR for specific

company

First quartile = 24.3

Second quartile = 14.7

Third quartile = 2.2

13.7

ECS TSR evenly supported by revenue growth, multiple expansion, and free-cash-flow contribution

Sources: S&P Capital IQ; BCG ValueScience Center

Free-cash-flow contribution (%)

Dividend yield3 4.2

Share change -1.8

Leverage change 1.7

4.1

Total 13.7

3

Valuation multiple (%)

Multiple change 5.3

2

Fundamental value (%)

Revenue growth 4.7

Margin change -0.4

.

Profit growth 4.3

1

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Top quartile with significant presence of Japanese, European and Chinese players – Absence of North American companies

26

26

29

30

36

49

29

31

0 20 40 60

5-year TSR (%)

Nippo

Obayashi

Kandenko

Shimizu

Kajima

8 Japanese firms

Maeda

Taisei

Kyudenko

24

27

30

31

33

38

0 10 20 30 40

AF Gruppen

CFE

Hochtief

NCC

Eiffage

Sweco AB

5-year TSR (%)

6 European firms

24

26

28

29

31

0 10 20 30 40

CH Railway Const.

CH State C&E

CH Railway Erju

Jiangsu Zhongnan

5-year TSR (%)

5 Chinese firms

CH Railway Grp.

25

35

55

0 20 40 60

PINFRA

3 from other places

5-year TSR (%)

PT Wijaya

PT Pembangunan

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Top quartile players distinguished by margin improvement and reduced leverage in delivering >29% 5-year TSRDrivers of TSR for top quartile E&C firms vs. overall sample (2012-2016)

-5

0

5

10

15

20

25

30

Contributions to TSR (%)

Share Change

-1.8-0.7

Dividend Yield

4.23.1

Leverage Change

1.7

9.5

Multiple Change

5.3

3.0

Margin Change

-0.4

8.6

Sales Growth

4.76.2

-5

0

5

10

15

20

25

30

13.7

29.7

TSR (%)

SampleTop Quartile

Sources: S&P Capital IQ; BCG ValueScience Center.

FCF yieldFundamental value

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European firms lagging behind Japanese and Chinese, but ahead of US firmsin last 5 years TSR

8,0

11,3

21,623,4

29,7

13,7

0

10

20

30

5-year TSR (%)

AmericasEuropeChinaAsia ex-ChinaTop quartileAll firms

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European firms compensated slow growth and margin deteriorationwith FCF yield

11,3

13,7

5-year TSR (%)

EuropeAll

1,1

4,7

Revenue growth (%)

-3,4

-0,4

Margin change (%)

3,75,3

Multiple change (%)

FCF yield (%)

Europe

9,9

All

4,1

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First quartile = 24%

Each business model includes winners and losers, with infra construction segment delivering highest 5-year TSR

• Slowdown in commodity

supercycle hitting more recent

performance

• Large spread of performance • Full spectrum of strong and

weak performers

• Top-performing group, driven

by presence of Japanese

players and dev-market

champions

Third quartile = 2%

Median = 15%

7550250-25

Sweco AB

WS Atkins

Stantec

WSP

Tetra Tech

AECOM

Jacobs

ARCADIS

AMEC

WorleyParsons

Fugro

7550250-25

EMCOR

Larsen & Toubro

Tecnicas

Dialog

SNC-Lavalin

JGCFluorChiyodaDaelim

CB&IKBR

PetrofacGS E&C

KEPCO

Saipem Samsung Engineering

-25 50250 75

Kyudenko

AF Gruppen

TaiseiPT Wijaya

MaedaKajimaNCC

Shimizu ObayashiHochtief Nippo

Kandenko

PT Pembangunan

COMSYS

Kinden

Granite Const.Toda

SkanskaCIMIC

MasTec

CFE

Bouygues

Strabag

QuantaIJM

Balfour Beatty

Hyundai E&C

Daewoo E&C

Salini

7550250-25

Gamuda

IDEAL

AccionaGrana

BilfingerSacyr

FCC

OHL

Eiffage

VINCI

Ferrovial

ACS

PINFRA

D&E companies Process EPC companiesInfrastructure

construction companiesConcessionaires1 2 3 4

Five-year annual TSR, 2012–2016 (%)

5-year TSR

(weight. average)

3,1% 1,9% 18,6% 13%

Sources: S&P Capital IQ; BCG ValueScience Center.

Note: D&E = design and engineering; EPC = engineering, procurement, and construction. Five-year annual TSRs as of December 31, 2016, in reporting currency. Some companies are

not listed above because they did not fit into a specific business model, however they are still included in the background curve.

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Infrastructure construction companies outperformed thanks to improved margins and FCF yields

13,0

18,6

1,93,1

5-year TSR (%) – Weighted avg.

Concess.Constr.EPCD&E

0,62,0

3,6

8,1

Revenue growth (%)

-2,3

4,0

-6,3

Margin change (%)

-8,0

3,83,3

7,25,2

Multiple change (%)

10,99,3

-0,9-3,9

FCF yield (%)

Concess.Constr.EPCD&E

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European Infrastructure Construction firms with good performance, but below Asian players

13,1

17,9

19,921,6

0

5

10

15

20

25

Asia ex-China

5-year TSR (%) – Infrastructure Construction firms

AmericasEuropeChina

Chinese players with most favorable conditions for outbound M&A?

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What we see good companies do consistently well?

Focus on few

markets in which

they can play to the

advantage of being

"local"

• Relationships,

reputation/refere

nces, local scale,

local knowledge

(labor,

regulation)…

• Manage a portfolio

of projects with

different sizes,

reaching critical

mass at local level

With this stable

base, compete

internationally in

relevant projects

• Selecting sectors

that fit with

their competitive

advantages and

have a good cash

flow profile

Focus on cash, strict

project control, and

cost discipline

• Go beyond gross

margin/EBITDA

margin – Cash

flow metrics

provide early

alerts in general

• Combine

operational

excellence at

project level

with tight

overhead cost

control

Complement

construction work

with "asset

development"

activities

• E.g.,

concessions,

real estate

development

• With frequent

asset rotation

• To drive

construction

business and

protect margins

Complement

portfolio with other

business activities

with more recurring

cash flows from

stable, longer term

contracts

• E.g., services

• Ideally with

lower cyclicality

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SG&A costs with impact on profitability and competitivenessThey represent on average ~5% of sales

4,34,54,6

4,95,35,45,5

5,85,86,0

0

2

4

6

EU North

America

EU AsiaEU North

America

EUNorth

America

SG&A costs / revenues in construction (%)

EU

Ø 5

EU

1-51-51-55-101-51-55-101-5>101-5Construction

revenues (B€)

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Levers to reduce SG&A costs

Simplify

organizations

Resize workforce

to new needs

Streamline

processes

Digitize

functions

Increase bidding

effectiveness

15

Talent considered one of the top pressing issues today

Adopt advanced

technologies at scale

Enable change

management and

adaptiveness

Integrate and

collaborate across

the value chain

65%

Attract new

talent and build

up required skills

39%

74%

Systematically

review portfolio

and embrace

new businesses

22%

Leverage data and

digital models in

processes end-to-

end

61%

17%

23 CEOs in Davos voted this

imperative as #1

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Strategic Workforce Planning is a key tool to cope with talent needs in short, mid and long term

Plan for optimal workforce

deployment according to

the commercial portfolio's potential

Ensure the availability of profiles

in the workforce to respond

to demand forecasts

Ensure optimal resource

assignments to develop

specific projects

Short-term Long-term

Evolution of

workforce

capabilities

Evolution of the gap

Objectives of SWP

Medium-term

Pipeline

Confirmed projectsOngoing projects

0 – 6 months 6 – 24 months >24 months

Demand for

resources

(FTEs)

Demand for resources

Supply of resources

Ongoing and portfolio

projects with high potential

Expected workforce evolution

(e.g.,: retirement, rotations, etc.)

Ongoing and recently

awarded projects (0-6 months)

Evolution of

resource availability

Strategic planning

(growth targets)

Assignment status and

availability of resources

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18

Thank you Santiago CastagninoPartner & Managing DirectorGlobal leader, Engineering & Construction

castagnino.santiago@bcg.com

19

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