13 March 2018

Analysis of Bergen Group

Since fall 2017, Norne Securities has produced analysis of Bergen Group ASA. The latest update as of March 12, 2018, has a price target of NOK 2.80 per share. The whole analysis can be read here.

12 March 2018;

Getting much bigger through acquisitions

Weak 4Q results were overshadowed by two acquisitions which will make Bergen Group much bigger and more diversified. It is highly possible that part of the funding of the acquisitions will be raised through equity issue. We reiterate Buy recommendation with the target upped to NOK 2.80/sh.

Negative 4Q results, but positive cash flow and increased backlog

Although we had expected Bergen Group’s 4Q17 results to be negative, they were still weaker than projected. EBITDA was NOK -9m, affected by further reduced activity towards the Norwegian Armed Forces, a continued competitive market on prefabrication and some M&A expenses. On the positive side, net cash flow was positive and cash grew to NOK 53.7m (NOK 35.6m unrestricted). Also, order backlog rose to NOK 152m, from NOK 137m at the end of 3Q17. The 4Q results were eventually overshadowed by two new acquisitions announced on the same day.

Acquisition of Backe Bergen’s dry dock and feed barge production

Bergen Group is acquiring Backe Bergen AS’ dry dock at Stamsneset in Bergen with associated activities: production of feed barges for the aquaculture industry in Norway. The purchase price is NOK 40m in cash. The acquired activities had a turnover of NOK 52m in 2017 and EBITDA of NOK 5.8m. Bergen Group sees synergies with its existing activity related to engineering, fabrication and service of generators, also opportunities for product deliveries to the aquaculture industry. This acquisition also secures dry dock capacity suitable for Bergen Group’s other maritime activities, including future assignments from the Norwegian Armed Forces with their naval base Haakonsvern as a close neighbor to the dry dock. This way Bergen Group will also be able to replace its currently used dry dock at Laksevåg where the lease agreement expires on 31.12.2019: although it may be prolonged for some more years, the real estate company that owns the dry dock intends to develop a real estate project at the dock site and hence it was wise for Bergen Group to look for a substitution.

Implied EV/EBITDA of 6.9 in the transaction is not demanding vs. estimated Bergen Group’s EV/EBITDA of 15 for 2018 prior to the latest acquisitions, also given expectations of synergies and strategic importance of securing a dry dock. The acquisition is expected to be completed by May 31st.

Acquisition of Vitek, expert in piping and sewer systems

Bergen Group is also acquiring Vitek AS which offers all services related to piping and sewer systems, including pipe inspection, cleaning and renewal as well as waste management. The purchase price is NOK 92m (NOK 46m in cash and NOK 46m in new shares), plus a performance based compensation (earn out) for 2018 and 2019, totaling max. NOK 30m. The shares will be issued at an average price 30 calendar days prior to the announcement (NOK 2.04/sh.) This implies 22.5 mill. new shares vs. current 94 mill. Given that the market price is now NOK 1.89/sh., the share issue is made at favorable terms for Bergen Group. Vitek had revenue of NOK 99m and adj. EBITDA of NOK 11.6m in 2017. Market changes, new management and a healthy backlog allows the company to expect a substantial growth in 2018, with revenues of more than NOK 150m and EBITDA margin of 17% (=NOK 25.5m).

Applying 2018 guidance, EV/EBITDA in the transaction is 5.2, while 2017 result implies EV/EBITDA 11.4, both below Bergen Group’s 2018 EV/EBITDA 15 estimated by us prior to the acquisitions. Thus, the terms seem favorable for Bergen Group even before synergies. This acquisition adds more diversification to Bergen Group and may create synergies towards the maritime segment. The acquisition is expected to be completed by May 31st.

How will the acquisitions be financed?

Bergen Group needs NOK 86m cash for the two acquisitions, while at the end of 4Q the company’s cash position was NOK 53.7m, of which NOK 18.2m was restricted cash, hence unrestricted cash was NOK 35.6m. In other words, Bergen Group needs additional NOK 50m cash in order to complete the acquisitions. With a dry dock available for pledging and larger EBITDA base, we believe part of the amount may be raised through debt – we assume NOK 20m. Another part, NOK 30m, we assume to be raised through equity issue under a 10% discount to the current market share price.

Estimate changes

The two acquisitions combined add around NOK 200m revenue and close to NOK 30m EBITDA per year to Bergen Group, which is nearly doubling of the company’s capacity. For Vitek, we forecast NOK 140m turnover with 15% EBITDA margin for 2018, which is more conservative compared to the guidance, and assume 5% annual growth in revenue with unchanged EBITDA margin the following years. For the Backe Bergen part, we assume flat results in 2018 compared to 2017 and 5% annual revenue growth with the same EBITDA margin going forward. All factors combined, including lower WACC, our DCF value of Bergen Group increased to NOK 3.5/sh (from NOK 2.8/sh.).

Target price raised

The two acquisitions seem to have been made at favorable terms and make the company much bigger and more diversified, in addition to securing dry dock capacity. It seems Bergen’s ambitions of a growth through M&A haven’t been exhausted yet and more deals can be expected. What they need to show now is improved results and delivery on the guidance for Vitek in particular. We see some uncertainty with regards to the size of the potential share issue and share price involved as well as future development in results and therefore apply a 20% discount to the DCF value, resulting in a target price of NOK 2.80/sh. (up from 2.60). We stick to our Buy recommendation.

The analyse report as from 12 March 2018 can be downloaded here

Irmantas Vaskela