LenSpecSMU : Regular Meeting with Investors MICEX, 31/01/2007
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LenSpecSMU:
Regular Meeting with Investors
MICEX, 31/01/2007
Introduction and Overview
1. Market FundamentalsPricesMarket Size and DynamicsMarket ShareMarket PositionGrowth Potential
2. Business OverviewKey Milestones in 2006Growth in FiguresBusiness Strategy
3. Financial OverviewKey Milestones in 2006Financial RatiosFinancial PolicyFinancial StrategyKey IndicatorsForecastCovenants and Assumptions
Market Fundamentals
4
Prices, Market Size and Dynamics: In Figures
2006
Number of buildings under construction, pieces 305
Areas in different stages of development, mn m2 12.0
Inc. LenSpecSMU, mn m2 1.2
By construction technology
Brick-monolith 68%
Brick 13%
Panel 10%
Other 9%
By price (per sq. meter)
Brick-monolith, USD 2 185
Brick, USD 2 005
Panel, USD 1 941
LenSpecSMU pricing vs. St. Petersburg average prices, USD / m2 (excluding elite residences)
St. Petersburg residential real estate market – second by it’s size in Russia
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USD
LenSpecSMU Average in SPb
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Other
Petersburgstroy-Skanska
Severny gorod
IVI-93
DSK Blok
Pragma
Stroimontazh
LEK
LenSpecSMU
`05`04`03
2.27
2.03
1.76
15.8%11.5%9.6%
64.3%
72.0%
74.6%
Market Share, Competitors
Newly-built residential areas accepted by State Committee, m2 mn
LenSpecSMU consequently holds leading positions in residential construction segment
St. Petersburg construction market is highly fragmented
Only 25 out of 100-115 construction companies registered locally have consistently appeared on the State construction committee report over the last 3 years.
LenSpecSMU has held and increased its market share during the last 3 years.
`06
2.37
10.1%
79.5%
114 115 100 109 Number of constructors
6
Market Share: Different Ratios
89,9%
10,1%
Share in acted by State Committee areas (2006)
Big share on a big market
Share in supply (2006)
Saint Petersburg
88,8%
11,2%
LenSpecSMU
7
Market specialization: Development and investment in construction. Quarter building.
Legal structure: Vertical-integrated industrial holding company.
Activity caliber: According to GOSSTROY LenSpecSMU takes 2 place in “Elites of Russia
construction complex” and 2-nd place in TOP 130 Russian construction companies (see the report of session of Federal agency of construction and housing and communal services of 27.07.2006 - http://www.gosstroy.gov.ru/docum_63.htm);
In TOP 500 Russia largest companies “Finans-500” LenSpecSMU takes 439 place (see “Finance” magazine of 18.09.2006);
In TOP 350 most rapid growth Russian companies LenSpecSMU takes 49 place (see “The Firm’s Secret” magazine of 25.09.2006);
In TOP 200 largest investment deals in Russia in year 2006 LenSpecSMU takes 160 place (see “The Firm’s Secret” magazine of 20.11.2006).
Technology: Brick-monolith housing.
Real estate segment: Mass business class housing construction; Commerce construction; Civil construction.
New development ways: Industrial construction; New projects in Moscow and St. Petersburg; Own real estate in management.
Market Position
LenSpecSMU: Total area under construction, ‘000’ m2
860.3 901.5 908.5 968.61 231.7
`06`05`04`03 `07F
`05`04`03
2 273.42 031.91 758.0
15.8%11.5%9.6%
LenSpecSMU: Market share in newly-built residential areas, accepted by State Committee, ‘000’ m2
10.1%
2 375.7
`06
8
Assortment of LenSpecSMU production
1,9%
7,0%
11,2% 4,3%
75,6%
2005
Commercial areas – one of the priorities of LenSpecSMU
2006
Residential areas
Commercial areas
Balcony
Parking places
Non-sold areas
51,9%
3,7%
14,9%
26,4%
3,0%
9
Demand Indicators on Primary Market of Real Estate
94,1%
5,9%
93,4%
6,6%
2004
Only about 6% of total selling areas stay unsold to the moment of acting the objects by the State Committee
93,7%
6,3%
2005 2006
Selling areasUnsold areas to the moment of acting the objects by the State Committee
Business Overview
11
Growth in Figures (Historical & Forecast)
`06`05`04`03`02`01
4 588
3 1612 541
3 1652 898
1 755
`06`05`04`03`02`01
239.9
359.9
222.5168.1
142.5123.0
Projects completed, area in ‘000’ m2 Number of SP agreements, items
LenSpecSMU – continuous growth of the business
12
Corporate Strategy: Organic Growth
Environment TargetsOverall Strategy
* - Compound Annual Growth Rate
Ambitious, reasonable strategic goals, firm basis
Our market has historically been development and construction of residential and commercial real estate
Segments of operations: 80% of the total projects portfolio is
concentrated in the residential areas for middle and upper-middle class;
Remaining 20% are projects for a lower middle class segment;
It is planed to increase the amount of commercial real estate construction up to 40% by 2009.
Geography of business: Prior to 2005 - St. Petersburg and
North Western Region of Russia;
Since 2005 - Moscow (2 projects in progress) and Russia’s regional markets;
By 2009 it is planed to increase the amount of construction in Russian’s regions up to 40% of the total amount;
Expansion into European residential and commercial real estate markets is currently under consideration.
Total turnover: CAGR* of 20-40% p.a.
Revenues from the general contracting segment to reach USD 400 mn by 2009.
Volume of completed construction projects: 300k-400k m2 p.a.
Volume of pre-funding: not less than annual revenues.
Pre-funding should be raised evenly over the life of the project.
Expansion of business geography
To expand additional services provided for the customers after their purchase of real estate
Image – building of a brand name has been one of the priorities from the first days of the Company’s existence
Pricing and payment schemes – offering a high quality product at prices that are on par or slightly lower than those of competitors
Quality – construction quality that is better than competitors’
Clear positioning of the company product
To expand the range of own production goods
To continue work on the development of the combined construction and technology system for buildings (CCTS) to complete it in 2008
Increase in development projects in the market of land plots
Increase in highly profitable projects
13
Corporate Strategy: Profitability & Stability
Annual profitability of the entire Group of at least 20%.
For development projects: IRR of at least 30%.
For general contracting projects: margin calculated on a cost-plus basis to reach at least 15%.
Cash flows – please refer to the financial block of this presentation Sales of the residential units in the projects under construction –cumulative cash flows from on-going sales of units
in the started projects should generate enough cash to complete all in-progress projects. Therefore, every project should generate enough cash to finance itself after reaching 20%-25% of completion
Physical and monetary volume of projects in progress, in a preparatory stage and under preliminary analysis: a number of the in-progress projects should ensure that a targeted market share and an annual total volume
of the completed projects is achieved a number of projects in a preparatory stage should be large enough to replace the in-progress projects
reaching completion and to add new projects making sure that the growth targets are met Our experience shows that the number of projects under preliminary analysis should be at list three times
bigger than the number of projects in a preparatory stage. Legislation issues – at any time the level of actual and potential claims should not exceed 0.3% of total annual
turnover. HR issues – a targeted overall level of personnel turnover is set at 2% annually, including the middle management
turnover of not more than 1%. Compensation schemes and career planning should secure the changes on top-management level according the shareholders’ decision only.
Profitability
Stability
Strategic Goals:
Targeted profitability of the Group: 20%+ per annum
14
Corporate Strategy: Resources
Reputation One of the strongest brands in St.Petersburg (spontaneous brand recognition in St.
Petersburg about 42%). The image of stability and reliability promotes clients’ trust. Business transparency. Long-term relationships with over 200 suppliers and partners. Good relationships with a financial community. Long-term working relationships with local and federal government authorities and officials. Well-deserved respect by the professional community. Social responsibility. Personal reputation of owners and top management.
Technological intangibles Portfolio of patents. Well-documented technological processes for all stages of a building construction. In-house architectural and engineering capabilities and the library of the standardized building
designs. Strong market research unit. Established marketing and customer service divisions. Core activities are fully licensed.
Ample financial resources.
Own construction equipment (more than 30K m2 of the wall and column forms, more than 40K m2 of the plane forms; construction machinery fleet of more than 100 units; transportation fleet of more than 250 units; etc.).
A wide range of other construction site equipment.
Own Headquarter building, equipped with all necessary IT systems (10 000 m2).
Core competence: acquisition of development projects and supervision of all steps of project realization
Intangible Resources Core Tangible Resources
Necessary combination of resources in place
15
Customer Project Project status
OJSC Transneft Construction of a pumping station Complete
FGUP Admiralteiskie verfi Reconstruction of a building berth Complete
VINCI Construction Grands Projects Construction of a multi-functional trade centre (foundation) Complete
FGUP ROSTEK Construction of the administrative building for a Customs terminal Pulkovo In progress
RAO UES Construction of a South-Western Power Station In progress
TOYOTA Construction of fascine fields Complete
NISSAN Construction of fascine fields In progress
Industrial Construction
LenSpecSMU experience in industrial construction
Industrial construction – new operational segment expanding rapidly
Up to date LenSpecSMU successfully completed 4 industrial construction projects. Other 3 projects are in progress. Project pipe line for industrial construction rapidly increasing.
In 2005 LenSpecSMU entered a new business segment – construction of industrial facilities.
Rapid economic growth of the North West region and substantial demand for construction of industrial facilities led to creation of a new Group’s entity that specializes on industrial construction – CJSC EtalonPromstroy.
Financial Overview
Present Situation Future Situation
Financial Strategy
17
Debt restructuring: LenSpecSMU increased the share of public debt and its maturity, and decreased the interest rate;
On 5th May 2006 LenSpecSMU executed its liabilities under put-option of bonds series 01;
On 26th July 2006 bonds series 02 were issued (1.5 bln rubles for 3.5 years);
Consolidated financial statements under IFRS (IAS) for the last 3 years were completed;
Standard & Poor’s has assigned rating ‘B’ outlook ‘Stable’ to LenSpecSMU.
LenSpecSMU continues its financial strategy execution
Present Situation 1Key Milestones in 2006
18
In 2006 LenSpecSMU paid the principal of the debt for the sum of 46 mln USD and about 323 mln rubles ahead of the schedule;
New borrowings totalled 12 mln USD and 1500 mln rubles in 2006; As a result, the structure of the debt has much changed to public debt,
longer maturity and lower interest rate.
In 2006 the debt structure became more comfortable
Present Situation 2Debt Restructuring
19
LenSpecSMU is a private closed joint-stock company. Therefore at the stage LenSpecSMU does not perform fund rising by the means of public equity market. However corporate strategy of the company assumes IPO in Russia or abroad during nearest 5 years.
LenSpecSMU became the first construction company of St. Petersburg to tap public debt capital markets, issuing RR 1.0 bln of bonds on Moscow Interbank Currency Exchange. Second bond issue (RR 1.5 bln) rapidly followed in 2006. By the beginning of 2007 LenSpecSMU plans to issue USD 100 mln credit-linked notes.
Bonds (01 series) Bonds (02 series)Placement 28.04.2005 26.07.2006Volume RR 1.0 bln RR 1.5 blnMaturity 5 years 3.5 years
Redemption
10% - 25.10.200715% - 23.10.200820% - 23.04.200925% - 22.10.200930% - 22.04.2010
100% - 20.01.2010
Put-option dates 05.05.200605.05.2008 28.07.2008
Call-option >1 year NoneCoupon payment 182 days 182 days
Coupon rate
1 – 15.5% 2 – 15.5%3 – 12.0%
4 – 11.75%5 – 11.25%6 – 11.0%
7-10 – TBD*
1 – 11.69%2 – 11.44%3 – 11.19%4 – 10.94%5-7 TBD*
* - To Be Determined
Rapid progression on Capital Markets
Present Situation 3Access to the Capital Markets
20
Repayment of principle Interest rate
RR mln USD mln RR mln USD mln
2007 67.7 4.0 250.7 1.0
2008 101.5 2.5 230.1 0.6
2009 304.5 2.5 193.5 0.4
2010 1 703.0 2.5 84.9 0.2
2011 - 0.5 - 0.01
TOTAL 2 176.7 12.0 759.2 2.2
LenSpecSMU has a number of opportunities to make its debt position lighter
Current debt position of LenSpecSMU
Current debt position of LenSpecSMU reflects vast additional borrowing capacity
Present Situation 4Schedule of Debt Service and Repayment
21
2003 2004 2005
Balance (‘000’ RR)
Total assets 5 227 166 6 685 075 9 769 734
Loans and borrowings (interest-bearing debt) 213 618 267 668 1 568 491
Equity 134 906 327 091 625 958
P&L (‘000’ RR)
Revenue 1 964 887 6 145 168 5 629 222
EBITDA 48 429 201 702 547 008
Interest payable 3 942 5 572 37 778
Net profit 19 916 104 844 303 078
Ratios
Loans and borrowings / Total assets 4.1% 4.0% 16.1%
Loans and borrowings / Revenue 10.9% 4.4% 27.9%
Loans and borrowings / EBITDA 4.4 1.3 2.9
EBITDA / Interest payable 12.3 36.2 14.5
EBITDA margin (EBITDA / Revenue) 2.5% 3.3% 9.7%
Net profit margin (Net Profit / Revenue) 1.0% 1.7% 5.4%
3 years of IFRS accounting is possibility to study development on historical basis
Present Situation 5Key Indicators
22Cash flow is probably the best indicator of the construction company’s activity
Present Situation 6Cash Flow
3 305 020
4 872 764 5 155 221
9 799 486
-
1 000 000
2 000 000
3 000 000
4 000 000
5 000 000
6 000 000
7 000 0008 000 000
9 000 000
10 000 000
mln
rubl
es
2003 2004 2005 2006
23The main cash flow is still generated by sales of residential and commercial real estate, but other activities are also increasing
Present Situation 7Cash Flow Structure
87,2%
12,4%0,5%
Residential, commercial real estate and parking places
Hotel on Vasilevski Island (Project “At the Rostral columns”)
Industrial construction
24
Group strategic goals
Market share in St. Petersburg region up to 20% (not less than 300 000 m2 p.a. by 2008)
Market share in other regions up to 5 %
(Up to 200 000 m2 p.a. by 2008)
Diversification:
Construction of commercial real estate (up to 300 000 m2 p.a. by 2008)
Construction of industrial real estate (up to 100 000 m2 p.a. by 2008)
Operational profitability not less than 25 % p.a.
Sustainable growth ≥1.5
Growth of Enterprise Value of 20-50% p.a.
Growth of Equity Value
Financial Strategy 1Group Strategic Goals
25
Financial strategy of LenSpecSMU is based on transparency for investors and lenders.
IR efforts include mandatory and voluntary information disclosure in significant volumes, investors presentations, one-on-one meetings, obtaining credit ratings from one of the leading international rating agencies.
Financial Strategy 2Financial Policy
26
Mandatory disclosure of information performed by only one entity, CJSC CUN (issuer of two bond loans). The entity performs disclosure in accordance with Federal Commission For Securities Markets (FCSM) regulations.
However, additional voluntary disclosure of information performed by the group on the regular basis since year 2004. In order to maintain and to increase level of corporate transparency LenSpecSMU created financial website www.finance.lenspecsmu.ru (both in Russian and in English).
Using financial website the company publishes on a regular basis the following information: material facts; quarterly reports; annual reports; lists pf affiliated parties; statutory documents and licenses; securities issue documents.
Other types of voluntary disclosed information includes: structure of Group LenSpecSMU; information about top management of the Group; operational results ; RAS and IFRS accounts; credit history; additional information for investors (“Investor’s calendar” - list of essential dates for bond holders).
Increasing level of transparency - important intangible investment
Financial Strategy 3Financial Policy. Information Disclosure and Transparency
27
Growth of Equity by the means of retained earnings
Strategic / Financial Investor (Direct Equity)
Private placement
Initial and secondary public offerings
Financial Strategy 5Equity Strategy
28
Debt denominated in depreciating currencies: USD, EUR
Fixed of step down interest rates
Increasing diversity of lenders in various segments of debt capital markets
Public transactions are the priority:CLNSyndicated loansEurobonds
Long-term loans and credits are preferable
If required, significant loans from major Russian banks are possible to arrange using pledge of property
Currency
Interest Rates
Lenders
Maturity of debt
Financial Strategy 6Debt Strategy
29
Ratio Criteria 2005
Current ratio = Current assets / Current liabilities ≥ 2.0 1.8
Working capital / Total assets, % ≥ 40 39.4
Interest-bearing debt / EBITDA ≤ 4.0 2.9
EBITDA / Interest payable ≥ 2.5 14.5
Interest bearing debt / Tangible Net Worth ≤ 3.0 1.9
Profitability = Operating profit before interest and tax / Sales, % ≥ 25 8.8
RONA = Operating profit before interest and tax / Net assets, % ≥ 20 9.8
ROE = Net profit after tax / Opening equity ≥ 0.8 1.0
Sustainable Growth = Retained earnings / Opening equity ≥ 1.5 1.3
Financial Strategy 7Key Indicators
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