Graña y Montero: Construction

The Company

Graña y Montero (G&M) is the largest engineering and construction company in Peru, with 80 years of operation. G&M has four complementary business segments: engineering and construction (provides specialised services in engineering, civil works, electromechanical construction, building construction and mining contracting), infrastructure (develops energy, mass transport, water and sewage projects, and operates toll roads), technical services (provides operation and maintenance of infrastructure assets, information technology services, and electricity network services) and real estate.

G&M’s backlog had risen to $4.6bn by the end of 2012, representing a compounded annual growth rate of 40.6% in the past seven years. The company’s earnings before interest, taxes, depreciation, and amortisation (EBITDA) rose to PEN772.7m ($291m), which represents an increase of 16.8% year-on-year. Revenues reached PEN5.2bn ($1.958bn), 22.3% higher than in 2011, and were driven in large part by the strong performance of its real estate (+63.4%) and infrastructure (+29.7%) business segments.

Development Strategy

G&M has experienced significant growth in the past six years and is expected to continue on this upward trajectory going forward, maintaining solid financial results with low leverage, with a debt-to-EBITDA ratio of 1.1x at the end of 2012. Based on these projections, the company increased its capital through a significant $413m American depositary share sale in July 2013.

As a major player in the construction and engineering sector in Peru, G&M continues to maintain its favourable position after years of rapid growth. It is likely to benefit from the $27bn investment in mining projects for the period 2014-16. G&M participates in several mining projects. These include Las Bambas, Toromocho, Mina Constancia and Cerro Verde in Peru, Mina Caserones in Chile and Minera Panamá in Panama. The Peruvian government is making efforts to reduce the infrastructure gap, estimated to be at $88bn by the Peruvian Association for the Promotion of National Infrastructure.

G&M is expected to participate in the tender process for these projects. At the same time, it is important to note that infrastructure projects tend to deliver stable cash flows (44.6% of G&M’s EBITDA). This will help G&M to reduce its exposure to the pro-cyclical behaviour of the construction business. The engineering and construction segment represents 63% of G&M’s backlog, while the technical services, infrastructure and real estate segments contribute 17%, 18% and 2%, respectively.

The company has also signed a concession contract for the Vía Expresa Sur project ($230m) with the municipality of Lima, and is expected to sign a contract for the $790m Vía Expresa Javier Prado project (in a joint venture with the French company Vinci). In the real estate segment, G&M’s subsidiary Viva G&M will focus on the housing gap in Peru. According to the Peruvian Chamber of Construction, 98% of total housing demand is unmet by the current supply in Lima’s metropolitan area. Moreover, 68% of this shortfall is concentrated in housing priced below $30,000. These numbers support the company’s decision to focus on the affordable housing segment. At the same time, G&M is also developing the $680m Cuartel San Martín project comprising residential and office buildings, as well as a shopping mall, hotel and convention centre.

As for the company’s regional expansion, G&M has interests in Chile through the acquisitions of three companies: CAM (a former subsidiary of Enersis), an electricity networks services company in 2011; Vial y Vives, an engineering and construction company, in 2012; and DSD Construcciones y Montajes, a company focused on the energy, oil and gas, and mining sectors in 2013. G&M has executed projects in Mexico, Chile and Colombia for many years, and is expected to continue participating in new projects outside Peru due to long-term relationship with its clients.