M&A Update | Engineering & Construction H2-2017

The consensus forecast compiled by the American Institute of Architects (AIA) for non-residential construction spending estimates that 2018 and 2019 should see roughly 4 percent growth. The economists polled in AIA’s forecast remain positive about the near term prospects of the U.S. economy citing natural disasters, tax reform, the possibility of an infrastructure package and strong consumer and business confidence levels as proponents for continued growth. Furthermore, monetary policy remains expansionary with the current federal funds rate targeted at 1.25 to 1.50 percent. In 2018, the Federal Open Market Committee (FOMC) expects rates to move closer to 2.1 percent, but cites that timing of interest rate changes are dependent on numerous economic factors, including GDP growth, unemployment rates and inflation rates among others. On an annualized basis, real gross domestic product (GDP) grew 2.3 percent in 2017, which compared to a 1.5 percent increase in 2016, was a significant improvement. Nonresidential fixed investment and exports propelled the growth in the real GDP for the U.S. economy in 2017. Unemployment rates declined from 4.3 percent in July 2017 to 4.1 percent – a 10- year low – in December of 2017, signaling a robust job market. Inflation lagged behind the FOMC’s 2 percent goal at 1.5 percent in 2017, but is expected to rise to the 2 percent peg in 2018. Overall, the U.S. economy appears to be healthy. Select public company metrics Baker Tilly Capital reviewed publicly traded companies in the engineering and construction industry. As of December 31, 2017, the identified comparable public companies (after exclusion of outliers) traded at an average of 11.2x EV/EBITDA and traded between 4.2x and 19.5x EV/EBITDA. Average EV/EBITDA multiples expanded from 10.2x to 11.2x from July 1, 2017 through the end of the year, which equates to a 10.3 percent increase, mirroring the 10.7 percent increase of the S&P 500 during the same time period. The current multiple average of 11.2x marks the engineering and constructions group’s highest average trading multiple since before the Great Recession (2007-2009). Operationally, performance for the peer group was positive during 2017. Average revenue growth for the peer group was 6.21 percent during 2017, while EV/EBITDA growth averaged 1.43 percent. Thirty of 36 firms reported positive EBIT and 27 of 36 firms reported positive net income. Public company valuations for engineering and construction firms can vary considerably depending on the specific service and/or end market the company does business in. Generally, companies we classify as specialty firms lag the other constituents of the peer group in terms of trading multiples and that trend became more pronounced during the H2-2017. During H2-2017, specialty firms averaged 9.9x EV/EBITDA, while the diversified engineering and constructions services and contractor firms averaged 12.7x EV/EBITDA.

Sources: U.S. Census Bureau, American Institute of Architects, Wall Street Journal, Capital IQ, Federal Open Market Committee, Bureau of Labor and Statistics

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