Andrade Gutierrez Engenharia 2Q23 Credit Report – Still waiting for a breakout

Report 5 October

Andrade Gutierrez Engenharia 2Q23 Credit Report – Still waiting for a breakout

By Jonathan Szwarc

In our previous report we presented a framework to describe how much Andrade Gutierrez Engenharia (AGE) would have to increase its backlog to become sustainable starting in 2024. The conclusion was that the Brazilian construction firm would need to increase it by 40% from the BRL 11.5bn level at the time. One more quarter has passed, and we haven’t seen any progress, as the backlog remained flat QoQ. AGE added almost BRL 1bn in new projects, but it consumed BRL 0.8bn and discontinued a project accounting for BRL 0.2bn.

In 3Q23 AGE announced signings for only BRL 250m, and if we assume revenues for 3Q23 are similar to what it reported in 1H23, we can see a backlog as of 30 September closer to BRL 11bn (it is possible that more projects have been signed without the client yet granting approval for AGE to disclose it, so there is a chance that we are being too harsh and the backlog won’t drop as much) (See Figures 1 and 2).

AGE has been adding projects regularly, and it probably has more projects that will be announced in 4Q23. However, we still expect the speed of new additions to be insufficient to ensure long-term financial stability.

The company has already submitted proposals for BRL 11bn. Clearly it won’t win all of the bids, but if we are able to learn this number over time, we can get an idea of how the backlog additions will evolve over a three-nine month period.

Looking at the backlog in particular, the company got into the data center business with a small BRL 23m contract. However, this seems to only be the first step and, if the whole project is executed, it could very well be several hundred million reais.

Financial highlights for 2Q23

Revenues (including direct invoicing to make it more comparable with the company’s backlog) were BRL 702m, up 19% QoQ, but still resulting in an EBITDA of around BRL -55m/BRL -60m. It is true that even though the company signed contracts for BRL 3.3bn, it takes a time for these to start generating meaningful revenues, meaning that at the beginning, execution is rather slow. We would expect a better 2H23 as the projects recently signed start to take their course. We have to remember that with the uncertainty of the exchange and AGE’s survival, backlog addition during 4Q22 were almost non-existing, so few new projects began generating meaningful revenues during 1H23.

This quarter we had a somewhat more complete information of the consolidated companies that guarantee the bond as the Brazilian construction company included the financial statements for Consag. We are now only missing Insag (the German company), so once we do, we will be able to have a more detail understanding of free cash flow, where the cash is, intercompany loans, where revenues are generated, etc. But it is certainly progress and a step in the right direction.

As announced last week, AGE opted for PIKing what they could from the coupon payment of the 2029s and we would expect them to also do it in December. However, after that there will be no cushion and AGE will have to come up with USD 37m (BRL ~190m) per year, which is more challenging considering a cash balance of BRL 369m the company has as of 2Q23.

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