Graña y Montero: Construction

THE COMPANY: Graña y Montero (G&M) is a Peruvian holding company consisting of seven firms that operate in sectors such as construction, engineering, real estate, infrastructure and services. G&M has more than 80 years of experience.

G&M’s stock, GRAMONC1, is one of the best-performing securities on the Lima Stock Exchange with a market capitalisation of $1.863bn. Thanks to the dynamism of the company, its excellent financial performance and the positive prospects for the growth of the construction GDP, G&M stock had had an extraordinary returns year to date of +34.6%.

G&M’s backlog grew to $3.075bn at the end of 2011, which represents a compound annual growth rate of 34% in the past six years. The company’s net income in 2011 was PEN289.1m ($105.9m), an increase of 16.4% over 2010. Total revenue was also up from 2010, increasing 69.6% to PEN4.24bn ($1.6bn), thanks to the organic growth of its subsidiaries, which account for 65% of the increase, and to the acquisition of Compañía Americana de Multiservicios, a former subsidiary of Enersis, which operates in Chile, Colombia and Peru, and accounts for 35%. There was a rise in net income, although margins fell during the fourth quarter of 2011.

DEVELOPMENT STRATEGY: The rapid growth of the holding has imposed some new challenges and opportunities. First, the growth has necessitated an increase in the company’s workforce from around 15,000 to 25,491 employees. The company intends to develop committed teams with unified goals, enhanced competitiveness and specialisation standards. Investment in fixed capital is necessary, but currently human capital investment takes precedence in order to meet the quality expected by the company’s clients.

Strengthening its position in Latin America is another one of G&M’s main objectives. Although it has executed projects in Mexico, Chile and Colombia for several years, in the future G&M expects to have permanent operations throughout the region.

The company is also working to maintain its good credit performance through the low leverage level of the company, which has been around 0.30x in the past two years. This has allowed the company access to finance with low financial costs.

Finally, for the past 10 years the company has sought to diversify the sources of its revenues in order to reduce the risk of the exposure to construction (pro-cyclical sector). This strategy has allowed the firm to reduce the exposure to the profit margin volatility of construction and engineering sector. The sector represents 60% of G&M’s backlog, while services, infrastructure and real estate contribute 25%, 10% and 9%, respectively, of the total of the backlog.

Some significant projects that the company currently has on its books include the second tranche of Lima Metro Line 1, two real estate projects in Comas (Lima) and Piura (located in the north-west of Peru), natural gas pipelines in the region of Ica and a hydroelectric project in Cerro del Aguila in Huancavelica, among others.

Other significant growth opportunities will be provided by Viva GyM, the real estate subsidiary of G&M, which will focus its efforts on meeting unsatisfied demand for property in Peru. According to a study by the Peruvian Chamber of Construction, 96% of total housing demand is not met by the current supply in Lima’s metropolitan area and 68% of this unsatisfied demand is primarily for houses with prices less than $30,000. It is expected that Viva GyM’s income will increase 25% on average in 2012-13. It is important to also consider that more families are expected to have the opportunity to buy property thanks to the development of mortgage credits through public programmes such as MiVivienda and other such state-sponsored financial initiatives.

In conclusion, G&M has taken and is prepared to continue taking advantage of the many opportunities that the country is offering, and this is why the company is an attractive choice for foreign investors.