Koninklijke BAM Groep Graham Defensive analysis: share Price seems to be lower than Value

BAM analysis based on Chapter 14 The Defensive Investor, part of Benjamin Graham's classic: The Intelligent Investor.

SECTOR: [PASS] BAM is neither a technology nor financial Company, and therefore this methodology is applicable. 

SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. BAM's sales of €6 670 million, based on 2022 sales, pass this test. 

CURRENT RATIO: [FAIL] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. BAM's current ratio €2 575m/€2 692m of 1.0 fails the test.

LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [FAIL] For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that do not meet this criterion lack the financial stability that this methodology likes to see. The long-term debt for BAM is €318 million and much lower than in the recent past, while the net current assets are -€ 117 million. BAM fails this test.

LONG-TERM EPS GROWTH: [FAIL]  Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. BAM's earnings have declined and were negative in 2020 and thus fails the EPS growth test.

Earnings Yield: [PASS] The Earnings/Price (inverse P/E) %, based on the lesser of the current Earnings Yield or the Yield using average earnings over the last 3 fiscal years, must be "acceptable", which this methodology states is greater than 6,5%. Stocks with higher earnings yields are more defensive by nature. BAM's E/P of 20% using an estimate of earnings over 3 years passes this test.

Graham Number value: [PASS] The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price. BAM has a Graham number of √((15 x €0,40 EPS) x (1,5 x €2,80 Book Value) = €5,21

DIVIDEND = EUR 0,15 recent dividend / EUR 1,92 = 8%

Note Tax fraud research currently taken place into former BAM International division:

Onderzoek Nederlandse autoriteiten. BAM International bv heeft in oktober 2022 van de FIOD en het Openbaar Ministerie vernomen dat zij verdachte is in een onderzoek naar fraude- en corruptiegerelateerde verdenkingen bij enkele reeds opgeleverde projecten. Het is momenteel niet duidelijk hoe lang het strafrechtelijk onderzoek zal duren en wat de uitkomst zal zijn. Daardoor kunnen eventuele negatieve financiële gevolgen, die het resultaat zouden kunnen zijn van het onderzoek – zo daarvan sprake zou zijn – niet betrouwbaar worden geschat, maar dergelijke gevolgen zouden mogelijk materieel kunnen zijn. BAM verleent alle medewerking aan het onderzoek en treft passende maatregelen, waaronder een interne review van de desbetreffende projecten. BAM maakte al in juli 2020 het voornemen bekend om de activiteiten van BAM International af te bouwen. Inmiddels zijn alle projecten van BAM International afgerond.

Conclusion september 2023: not a wonderful business, but selling well under book value and with an Earnings Yield of 20% BAM shares seem cheap today at EUR 1,92