🏗️👷 Business Overview

🎯Key Metrics

Total: -7/17

• +1 ✅ Projected Operating Margin: 10.55%
• +0 ⚠️ Projected 5-Year Revenue CAGR: 2.02%
• +0 ⚠️ Last 5-Year ROIC: 5.80%
• -2 ❌❌ Estimated Cost of Capital: 10.49% (greater than ROIC)
• -1 ❌ Last 5-Year Shares Outstanding CAGR: +6.77%
• -1 ❌ Projected 5-Year EPS CAGR: 7.29% (given that the companies can “manipulate” in a sense this values, below 10% it represents a negative)
• +1 ✅ Projected 5-Year Dividend CAGR: 11.63%
• -2 ❌❌ Estimated Debt Rating: Caa
• -2 ❌❌ Morningstar Moat: None
• -1 ❌ Morningstar Uncertainty: High

Despite the solid margins Mota-Engil seems to be destroying value given its higher Cost of Capital (driven by its geographic exposure to risky countries) compared to its ROIC. Also the dillution of shares, a non-existing moat (competitive advantages) and its lower estimated debt rating makes the company a risky bet.

Please make sure to have a higher margin of safety if the opportunity arises.

📈Business Valuation

To calculate the intrinsic value of the company I’ll use multiple methods:

• Discounted Cash Flows (DCF) – Intrinsic value is estimated by projecting its free cash flows over the next 10 years and discounting them to present value;
• EPS Growth – the fair value is estimated by projected the Earnings Per Share CAGR for the next 5 Years and then, given its current and historic values of PE, come up with a PE for the 5th Year. This will give us its price 5 Years from now using the formula: Price = EPS x PE that we then discount using the estimated cost of capital;
• Historical P/E – we assume mean reversion to the historical PE values;
• Historical EV/EBITDA – we assume mean reversion to the historical EV/EBITDA values;

I’ll give more weight to the DCF and EPS methods, and only then the historical ones. Giving the changing landscape of the world in general, is very difficult to believe that in 100% of the cases mean reversion to historical values is guaranteed.

Cost of Capital

I’ve used both the latest and annual financial statements of the company, the 10-Year Germany bonds as the risk free rate (for companies residing in Euro countries is what I normally use) and revenue geographic exposure to come up with its cost of capital, cost of debt and cost of equity. Please also note, that given the fact that Moody’s don’t provide a rating for the company we’ll be estimating it using its operating income.

Cost of Capital: 10.49%.

This value will be used later as a discount rate in the valuation methods.

Discounted Cash Flows (Weight: 40%)

I’ve used the latest and annual financial statements of the company, the analyst estimates for both revenue and margins and the cost of capital calculated previously.

This gives us a estimated fair value of 6.24 euros for Mota Engil.

We can also do some Monte Carlo simulations to execute multiple DCF valuations. Each simulation will randomize the inputs between some pre-defined values. For this I also used analysts estimates.

As you can see from the above Mota Engil seems to be undervalued, using DCF, because even on the lower end of the simulations its DCF estimated fair value is still high compared to the current company’s price.

EPS Growth (Weight: 30%)

For this valuation method, I’ve used the current EPS and the analysts estimates of EPS growth. I also assumed a 12 PE for Mota Engil given its history.

Then again, I used the Monte Carlo simulations to check how the estimated fair value changed as my assumptions were modified.

Using this valuation method, Mota Engil that is currently priced at 5.065 euros, seems to be overvalued being currently valued above the P90 that is 4.72 euros. What this means is that given that it’s above P90, exists 90%+ of chance for the real value of Mota Engil to be below what its currently trading at.

However, please remember the DCF valuation undervaluation output. Let’s continue.

Historical P/E (Weight: 20%)

The current P/E ratio is a little below or in line with its 7-8 Year average, this could mean the stock is undervalued or at least fairly valued. Using its historical average and comparing it to today’s price we reach a fair value of 5.14 euros.

Historical EV/EBITDA (Weight: 10%)

Its current EV/EBITDA seems to be lower than its average over the last 7 Years. This could mean the stock is currently undervalued. Comparing it to the today’s price we reach a fair value of 5.99 euros.

✍️Summary

Now that we did all the heavy work, let’s take the above and come up with the company weighted average fair value.

I basically take each valuation method used and given my confidence on the company apply a 20% or 10% discount (when to buy) and addition (when to sell) or use the Monte Carlo P10, P20, P80 and P90 values:

Feel free to choose your own values, but for me I’ll take a fair value of 4.70 euros for Mota Engil given the riskiness of the company explained through its metrics on the Business Overview.

Please remember that the fair value estimate is just a number and, probably, a very wrong number. However, overall, Mota Engil seems to be a little undervalued or fairly priced at the moment.

Fair Value: 4.70 euros