Polish Construction Companies 2013 - key players, development and diversification prospects

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Contents

Introduction 5 1. Financial Analysis of the largest construction companies 7 1.1. Ranking of the largest construction companies by 2013 revenue 8 1.2. Ranking of the largest construction companies by 2013 operating margin 9 1.3. Ranking of the largest construction companies by 2013 net profit 11 1.4. Debt of 15 largest construction companies in 2013 13 1.5. Capital Expenditure to Sales Ratio of the 15 largest companies in 2013 14 1.6. Revenues of the 15 largest construction companies by geography and by type in 2013 16 1.7. Market capitalisation of the largest construction companies listed on Warsaw Stock Exchange at December 31, 2013 23 2. Prospects for development of construction companies in Poland 27 2.1. Introduction 28 2.2. Key success factors of the construction market development in Poland 28 2.3. Development outlook for construction segments in Poland 32 2.4. Public Private Partnership 45 2.5. Development strategies of construction companies 49 2.6. Conclusions 50 3. Profiles of largest construction companies in Poland 55 Bibiography 102 Contacts 104

Polish Construction Companies 2013 - key players, development and diversification prospects 5

Introduction

Dear Sir/Madam,

We have the pleasure to present the second Polish Construction Companies 2013 Key Players, Prospects for Development and Diversification report analysing the condition of 15 largest construction companies operating on the Polish market based on their revenue, and describing their prospects for business development and diversification.

2013 was another challenging year for the construction industry in Poland. Total revenue of all 15 largest companies fell by PLN 6.7 bn, i.e. 19.7% compared to the 2012 revenue. However unlike in the previous year, despite a sharp drop in revenues, the operating and net profits of construction companies were much healthier. As a result of a gradually improving financial position, capitalisation of the top nine listed construction companies in our ranking went up as much as 58% compared to the previous year.

There are many reasons for that. Firstly, 2013 saw the expiry of a lot of unprofitable infrastructural contracts which had their adverse effect on the performance in the previous years. Secondly, there was a sharp decline in the number of tenders for new infrastructural contracts that year due to the EU Perspective coming to an end which resulted in a significant decrease in revenues. Thirdly, the 2013 operating and net profits were diminished by one-off events, mainly related to restructuring or strategic changes in the leading capital groups in the industry.

In spite of the relative improvement in the financial position, the industry continues to struggle with the effects of the economic crisis. It is still awaiting a solution to the relative disproportion in the division of contractual risk between public institutions and general contractors resulting from a relative lack of flexibility in negotiations between the parties. Although a drop in revenue has a fairly smaller impact on the profitability of large construction companies, it still affects subcontractors for whom the shrinking market has been the main cause for bankruptcies and a significant increase in unemployment since 2012. As a consequence, undeservedly, companies are facing problems obtaining financing for the construction contracts concluded.

The first part of our report is a financial analysis of companies in the construction sector in Poland, based on 15 entities that have managed to build the strongest position on the market. We analyse their revenues, operating margins, net profits, debt, geographic and revenue structure. The source materials used in the preparation of the aforementioned section of the report are the financial statements and financial data obtained from the companies.

The second section comprises a high-level analysis of the prospects for the industrys short-term and long-term development, and a discussion of the possible directions for diversification of construction companies, in particular the Public-Private Partnership.

In the final part of the report we briefly examine the characteristics of the business activity of the 15 most important market players in 2013. We include the most crucial information concerning the scopes of their activities, ownership structures and detailed financial data derived from their annual financial statements.

We hope that you will find the Polish Construction Companies 2013 Key Players, Prospects for Development and Diversification report informative and that it will give you better understanding of the current construction market position, including its the prospects and challenges that lie ahead.

Polish Construction Companies 2013 - key players, development and diversification prospects 7

1. Financial Analysis of the largest construction companies

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No. CompanyRevenues in

2013(in PLN thousand)

Revenues in 2012

(in PLN thousand)

Nominal change2013 vs 2012

Percentage change2013 vs 2012

1 Budimex Group 4 749 459 6 077 660 -1 328 201 -21,9%

2 Skanska SA 4 202 767 4 282 087 -79 319 -1,9%

3 Strabag Group* 3 234 413 4 550 062 -1 315 649 -28,9%

4 Polimex-Mostostal Group 2 362 752 4 110 417 -1 747 665 -42,5%

5 Trakcja Group 1 674 984 1 346 676 328 308 24,4%

6 Mostostal Warszawa Group 1 633 363 2 929 049 -1 295 686 -44,2%

7 PBG Group 1 315 579 1 836 893 -521 314 -28,4%

8 Erbud Group 1 223 609 1 384 454 -160 845 -11,6%

9 Mota-Engil Central Europe 1 166 578 1 714 638 -548 060 -32,0%

10 Warbud 1 115 250 1 345 788 -230 538 -17,1%

11 PORR (Polska) S.A. 1 030 076 624 037 406 039 65%

12 Mirbud Group 937 301 589 808 347 493 58,9%

13 Unibep Group 920 548 837 821 82 727 9,9%

14 Elektrobudowa Group 905 553 1 018 002 -112 449 -11,0%

15 Eurovia 828 397 1 349 334 -520 937 -38,6%

Total 27 300 629 33 996 725 -6 696 096 -19,7%

Average 1 820 042 2 266 448 -446 406 -19,7%

Source: 2013-2012 financial statements

Chart 1.1: The largest construction companies in Poland by 2013 revenue (PLN thousand)

1.1. Ranking of the largest construction companies by 2013 revenueIn 2013, the combined revenue of all 15 largest companies was PLN 27 billion which constitutes a drop by PLN 6.7 billion, i.e. 19.7% compared to 2012. As in the previous year, the Budimex Group controlled by Ferroval of Spain tops the ranking with revenues of almost PLN 4.7 billion, i.e. a 22% year-on-year drop. Swedens Skanska came second with revenues of PLN 4.2 bn. In 2013, the company recorded only a 2% year-on-year drop and overtook Austrian Strabag whose revenues were PLN 3.2 bn, i.e. as much as 29% down compared to 2012. Please note that two out of the three construction industry leaders in Poland, namely Budimex and Starbag capital groups, faced a big year-on-year revenue decrease in excess of 20% each. As regards declines in the ranking expressed as a percentage, Mostostal Warszawa Capital Group, Polimex- Mostostal Capital Group and Eurovia whose revenues dropped, respectively 44%, 43% and 39%, suffered the biggest falls.

The Polimex- Mostostal Capital Group reported the biggest year-on-year drop as regards the revenue amount, i.e. PLN 1.75 bn, whereas PORR (Polska) S.A., Mirbud Capital Group and Trakcja Capital Group saw the biggest year-on-year increases in the revenue amounts of PLN 406 million, PLN 347 million and PLN 328 million respectively. Please note that as in the previous year, a relatively small number of companies earned revenues in 2013. Only four companies in the ranking managed to do that. At the same time, revenues of 11 companied went down.

Note: This analysis does not account for the performance of foreign branches of the construction companies operating in Poland or the performance of special purpose vehicles established under consortiums to carry out specific projects, because the relevant results are recognised in the consortium reports.

Polish Construction Companies 2013 - key players, development and diversification prospects 9

No. Company 2013 sales result 2012 sales resultNominal change

Percentage change

1 Budimex Group 395 416 459 871 -64 455 -14%

2 Skanska SA 293 171 347 602 -54 431 -16%

3 Warbud 110 664 103 566 7 098 7%

4 Trakcja Group 108 341 42 104 66 237 157%

5 Erbud Group 90 910 84 098 6 812 8%

6 Elektrobudowa Group 63 147 49 914 13 233 27%

7 Unibep Group 58 309 49 439 8 870 18%

8 Mirbud Group 54 837 31 583 23 254 74%

9 Mota-Engil Central Europe 51 617 69 996 -18 379 -26%

10 Polimex-Mostostal Group 24 673 -635 314 659 987 n.d

11 Strabag Group* 20 538 -164 680 185 218 n.d

12 PBG Group -12 170 -906 797 894 627 99%

13 Eurovia -152 289 -170 639 18 350 11%

14 Mostostal Warszawa Group -154 573 -48 387 -106 186 -219%

15 PORR (Polska) S.A. no data no data no data no data

Average 68 042 -49 117

Weighted average sales margin (in %) 3,63% -2,06%

Chart 1.2: Profit from sales in 15 largest companies in nominal terms (PLN thousand)

Source: 2013-2012 financial statements

1.2. Ranking of the largest construction companies by 2013 operating marginThe operating margin earned by the biggest construction companies, expressed as the operating revenue less operating expenses (excluding other operating revenue and expenses), indicates that the sharp decrease in revenue did not have a direct adverse impact on the deterioration in the operating profit on the core a