Boskalis is a leading dredging company part of a de facto oligopoly as the four European players, namely Boskalis, Van Oord, De Nul and DEME, together have a market share of 70-80% in the open market. The company is also active in maritime infrastructure and maritime service. It used to create a lot of value as defined by its ROCE substantially above its 7.5-8% WACC between 2006 and 2015. But, in 2016-20, the ROCE was significantly below its cost of capital as the industries in which it operates have been hurt by the 2015 oil collapse and are long-cycle ones.
From bearish one year ago…
In our last Idea Kicker of 20/03/2020, we were bearish for several reasons. The pandemic, still a new phenomenon at that time, was not quite then on the front page. In essence, we didn’t have confidence in the Offshore Energy segment (40% of revenue) because of its past of yearly onerous contracts and, for the dredging & infra segment (50% of revenue), there were no signals of a new mega project coming up, making the difference between a normal and great year. The lack of good prospects in combination with a catch-up on capex that needed to be done just to continue business made us very cautious on the stock.
…to bullish now
Since then, the cards on the table have completely changed. The Offshore Energy segment survived 2020 without onerous contracts, a first since 2017. The segment was able to bring in €66m at the EBIT level, leaving behind the other segments for the first time since 2016. Note, however, that this figure is still miles behind the €210m of 2016. However, it shows the potential that there is, now that Offshore Energy projects are multiplying (with the help of free money of course) and ever bigger ships are needed to transport and install offshore wind turbines.
The biggest game-changer was perhaps in December 2020 when the company announced it had won its biggest contract ever in Dredging. For the next three years, Boskalis will be busy creating an artificial island at Manila, the Philippines, that will host a new International airport. The contract is worth €1.5bn and will bring in €500m of revenue per year. Again referring to our earlier comments, this is at the top of the window we hoped for ‘whenever a new mega project would arise’.
The cherry on top of the cake came with the Ever Given being stuck in the Suez Canal and Boskalis freeing the ship in an almost heroic way in less than a week. Although a small segment in terms of revenue (3%), the Towage and Salvation segment traditionally brings in a good amount of cash with an EBIT of €46m for 2020. The Ever Given project alone is estimated to bring in €20-25m, and so we have raised our estimations for the full year to €65.7m EBIT.
Stock up +50% ytd and but upside not exhausted
While indeed the market has taken an important advance on all this good news, the stock hasn’t quite reached its full potential yet, knowing that there are more opportunities around the corner that reveal signals of a long bull market in Dredging and Offshore Energy. It is clear that Offshore Energy is picking up speed and with oil majors stepping into the game the demand has only increased.
Projects are becoming more and more complex too, exactly where Boskalis’ heavy ships can make the difference. Floating windfarms, for example, require careful transportation and are placed in deep waters. In the US, Offshore Wind energy is finally picking up speed. To avoid having to work under the Jones Act, windmills coming from Europe have to be transported from Europe itself directly to the farm. All that is in favour of Boskalis.
In dredging, the pipeline remains enormous with over $50bn in projects confirmed for the next decade. And the chances are this number will only increase. Only recently the project of the Energy Island close to the Danish shore was announced. Although not confirmed yet, the chances are high that Boskalis will be part of it.
Dredging, Offshore Energy and Salvation are three money-printing aspects of businesses in effect benefiting from global warming. The case for digging again and again silting ports, for raising dikes, recreating or protecting beaches, etc., is enormous. So are the business opportunities linked to storms or offshore energies.
A €33 target, caution included
The next three years look very promising for the company. Without onerous contracts in Offshore Energy (fingers crossed…), the results could well surprise even further and a share price of €40 could be envisaged. A target price of €33 allows for the upward potential without ignoring the risks of a negative surprise.
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