Odebrecht Diversification Drive To Dull World Cup Hangover

BMI View: We expect Brazilian construction company Odebrecht to continue to successfully diversify outside of Brazil as the World Cup project boom dissipates. Peru, Central America and Africa are all expected to shore up the order book.

Odebrecht, Brazil's largest construction company, has been one of the biggest beneficiaries of the World Cup build up. Whereas construction companies from the host countries of other sporting tournaments have entered periods of weak growth following the completion of tournament projects, we believe that Odebrecht should emerge stronger, as the company continues to expand successfully outside Brazil.

In support of its expansion plans, the company has issued USD6.5bn in debt since 2010 through Odebrecht Offshore Drilling Finance and Odebrecht Finance Limited, to support all areas of the business. The company has seen the cost of its debt come down, with falling bond yields over recent months indicating investors view the diversification and expansion strategy positively. In July 2013, the company launched one of the biggest bond issuances in Brazil in 2013, raising USD1.69bn, with a coupon of 6.75%; the bond is currently trading with a yield of 5.035%.

Diversifying As Domestic Market Concerns Grow
Odebrecht Offshore Drilling And Brazil Government Bond Yields, %

BMI View: We expect Brazilian construction company Odebrecht to continue to successfully diversify outside of Brazil as the World Cup project boom dissipates. Peru, Central America and Africa are all expected to shore up the order book.

Odebrecht, Brazil's largest construction company, has been one of the biggest beneficiaries of the World Cup build up. Whereas construction companies from the host countries of other sporting tournaments have entered periods of weak growth following the completion of tournament projects, we believe that Odebrecht should emerge stronger, as the company continues to expand successfully outside Brazil.

In support of its expansion plans, the company has issued USD6.5bn in debt since 2010 through Odebrecht Offshore Drilling Finance and Odebrecht Finance Limited, to support all areas of the business. The company has seen the cost of its debt come down, with falling bond yields over recent months indicating investors view the diversification and expansion strategy positively. In July 2013, the company launched one of the biggest bond issuances in Brazil in 2013, raising USD1.69bn, with a coupon of 6.75%; the bond is currently trading with a yield of 5.035%.

In line with our expectations that Odebrecht would aggressively pursue contract opportunities internationally, the company has won a series of contracts in Latin America, and is in the running for several more.

Diversifying As Domestic Market Concerns Grow
Odebrecht Offshore Drilling And Brazil Government Bond Yields, %

Brazil Remains Important

Brazil remains Odebrecht's largest market (according to the latest 2012 figures, when it accounted for 56.6% of revenue), and despite the completion of major World Cup projects, it will remain a key market for the company.

We expect Odebrecht to continue to target opportunities domestically, especially those related to the BRL235bn concessions programme. Odebrecht has already won a number of contracts under the concessions programme, including the BR-163 highway concession, Galeao Airport concession and the Sao Paulo Metro Line 6 Public Private Partnership (PPP).

However, the sustainability of the company's order book in Brazil remains questionable and we continue to expect Odebrecht's international contracts to account for an increasing share of the total over the coming years. On top of the ongoing business environment issues, which are making market opportunities in Brazil tricky to identify, uncertainty over policy beyond the 2014 election and the backlash over World Cup spending could limit Odebrecht's scope for domestic expansion.

Brazil Falls Behind
Selected Latin American Countries: Construction Industry Value Growth, % year on year

Targeting Latin American Growth Markets

Odebrecht has been keen to pursue opportunities in faster growing Latin American construction markets, especially as Brazil's own industry has struggled to generate growth over recent years. With Brazil expected to remain the laggard in Latin American construction growth, seeking opportunities beyond the domestic market should help to shore up order bookings.

Peru has long been the focus of the company's regional strategy, and we expect it to continue to benefit from an ever growing project pipeline. Our outlook for Peru's construction industry is the most positive it has been over the last 10 years, with progress finally being seen on major projects. Odebrecht is positioning itself as a major player in the market. It has already secured a number of projects and assets, including the Chaglla hydropower plant, the Lima Overhead Railway, and in June, the Belo Horizonte hydropower plant. It is currently bidding on a major gas pipeline - the USD3.6bn Southern Peruvian gas pipeline.

Outside of Peru, Central America holds potential for the company. The mixed growth outlook, combined with small scale, limits competition and bodes well for strong regional players. Odebrecht's potential is illustrated through the awarding in June of a 50-year concession to build operate and maintain a power plant in the Bocas del Toro province in Panama, for which it was the sole bidder with a bid of USD1.05bn.

Over the next couple of years, we also expect Mexico to form part of the company's strategy, as a MXN7.7trn infrastructure plan and the liberalisation of the energy sector provide scope for investment and contract opportunities in Odebrecht's core sectors. Thus far, the company has invested USD1.8bn in energy and petrochemicals as part of an USD8.1bn investment drive in Mexico. We expect continued expansion in these sectors, in addition to transport over the coming five years.

Targeting Opportunities In Europe And Africa

Further afield, Odebrecht is looking to expand its European and African exposure. Portugal has been an obvious target, given the cultural similarities. Odebrecht signalled it intended to expand in Portugal through participation in the bidding for Portuguese airport operator ANA, although it failed to win. It is continuing to target the market, and in June moved forward to the second phase of bidding for the privatisation of Empresa Geral do Fomento (EGF), the waste management subsidiary of Aguas de Portugal. Odebrecht is looking to utilise its position in Portugal to expand further into Europe and North Africa.

The company already has well established operations in Sub-Saharan Africa (SSA). Leveraging cultural ties, it has a strong presence in Angola and Mozambique. However, the company is looking to expand beyond its traditional areas of operation and increase revenue share from the 3.2% registered in 2012. In pursuit of this goal, the company established a new unit in 2012 - the Odebrecht Africa Fund - which will undertake investment in the region. The unit currently controls a number of retail and resource assets.

Read the full article

This article is tagged to:
Related sectors of this article: Infrastructure, Companies - Infrastructure
Geography: Brazil
×

Enter your details to read the full article

By submitting this form you are acknowledging that you have read and understood our Privacy Policy.