Dear Mr. Buffett: The Case for Veidekee from ABG SundalVW Staff
Dear Mr. Buffett
Please find attached our analysis on the Norwegian construction company, Veidekke. Having read through your thoughts on investment, we are certain you will find this company attractive.
“Demonstrated consistent earnings power (future projections are of no interest to us, nor are ‘turnaround’ situations)” [*Warren Buffett’s letters to Berkshire Hathaway shareholders, 1991].
Veidekke has earned a pre-tax profit every year since inception in 1937.
“Businesses earning good returns on equity while employing little or no debt” [*1991].
Average ROE 1988-2012 is 19%, while the ROCE in the same period is 18%.
“In setting compensation, we like to hold out the promise of large carrots, but make sure their delivery is tied directly to results in the area that a manager controls” [*2003].
54% of Veidekke’s employees, or 3,350 persons, including the 500 leading managers, in total own more than 19% of the shares.
“Management in place (we can’t supply it)” [*1991].
Veidekke has had three CEOs in the last 77 years; the current CEO has been in charge for 24 years.
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price” [*1989].
With an all-time high order backlog and strong macro backdrop, Veidekke is still valued 20% below the mid-cycle valuation.
Furthermore, the implied P/E 2014e multiple for the construction unit is 5.4x. We are 5% above consensus for 2013e PTP and raise our target price to NOK 55 (NOK 52), which is still below the mid-cycle valuation.
Demonstrated earnings power
77 years in the black
“Demonstrated consistent earnings power (future projections are of no interest to us, nor are ‘turnaround’ situations).”
Warren Buffett’s letters to Berkshire Hathaway shareholders, 1991
Veidekke is currently Norway’s largest construction company, offering a complete construction product, from housing development and construction to major road and heavy construction projects. However, Veidekke (Norwegian for “road surface”) was founded in 1936 and initially constructed roads and laid cobblestone. The breakthrough contract came in 1948 when Veidekke was awarded the construction of the runways at the Sola airport outside Stavanger, the first of numerous major airport contracts.
The company went public in 1984, making it the company on the Oslo stock exchange with the longest history as a listed company. The 1980s was also a period of strong growth, helped by an active acquisition strategy; more than 60 companies have become part of Veidekke throughout its history, with the largest one being Aker Construction in 1991.
2012 ended with revenue of NOK 19.8bn – the annual average top line growth from 1988 is hence 10.5% (CAGR).
Via ABG Sundal Collier. Full document embedded below: