Budimex has announced that its rail unit PNI has filed for bankruptcy protection for debt restructuring. At the same time, Budimex announced it has made a new write-down against PNI. At the group level, the write-downs will take PLN 45m from the initial estimate of 1H12 earnings at both the pre-tax and net profit level, the management said.
(At the parent company, the write-down of PLN 145.2m – PLN 108m on the asset and the remainder on liabilities, inventories etc. – will take PLN 123.4m from the net result after tax adjustments.) Moreover, Budimex flagged that the estimated impact of the continued consolidation of PNI on the group's pre-tax profits will come in at around PLN -100m in 2H12, with the firm stressing that the estimated future losses will also have a noncash character. In addition, according to the Polish Press Agency, the firm expects to post positive results in 2012, both at the group and stand-alone level. It was also flagged that PNI will seek only a minor reduction of liabilities and mainly wants to renegotiate contracts it is realizing, and that there are no banks among PNI’s creditors. The firm is carrying out six large contracts, of which two “at a significant loss”, while Budimex wants PNI to continue with the realization of four contracts.
The court’s decision regarding PNI is expected within a month and Budimex is counting on a positive decision, according to the company’s CEO. Budimex decided to stop financing PNI to prevent further cash losses. The CEO stated that from the cash point of view, Budimex engaged PLN 325m in PNI – the purchase price of PLN 225m plus a capital increase of PLN 100m – and by making write-downs the firm assumes this money is lost. Finally, the CEO stressed that no additional write-downs connected to PNI are expected going forward, that Budimex’s liquidity situation remains “good” and that no negative changes to the cash position occurred in July. News agency PAP also informed that Budimex’s CEO will present himself for a supervisory board review now that the PNI unit has filed for bankruptcy.
Our view:
PNI’s bankruptcy came as a major surprise for the market, after Budimex announced it had intended to make a significant PLN 182.3m write-off related to the value of its railway repair and construction unit at end-June. Following this latest news, it seems that the situation at PNI is worse than we had originally expected. We believe putting PNI under bankruptcy protection is a rational move, as it will prevent Budimex group from booking further significant cash losses, although the potential reduction of liabilities and the renegotiation of PNI’s contract is likely to be challenging. Thus the liquidation scenario cannot be ruled out.
At the same time, while we do not expect the group to face any major liquidity constraints in the quarters ahead, we are wary that the firm’s apparent intention of keeping PNI alive might bring additional cash outflows, primarily linked to the continuation of low-profitability contracts, putting pressure on dividend payouts and hitting the company’s financial results in the years ahead.
This latest raft of negative news-flow came out during last Friday’s trading hours, when Budimex’s stock price crashed 9.83%. We expect only a muted impact on the trading of Budimex’s stock today.