In this situation, investors are able to take advantage of a company who just recently went public in what was a stressed period in the market. There was nothing obvious in the MT_IM story which would cause them to cut the IPO range from €3.50-4.75 to €2.80-4.75 in a “normal” market, but being linked to the chemical/energy end-markets in a period where all cyclical stocks were being sold on fears of an imminent recession due to a credit crunch conspired against the company. Thus, not only did MT cut the price range, the shares got priced at the bottom of the range, and on November 26, the company started trading publicly at a huge discount. Peers – even those with high specialization and concentration in a specific sub-segment – currently trade at lofty multiples (see below) and so a company with MT’s market share positions and recent performance should be considered in a similar manner. This is an opportunistic investment gifted to us by the market, and investors are able to build positions at current levels before the sell-side initiates on the name and it becomes more obvious to the broader investing public.

From a fundamental business analysis viewpoint, MT stands out amongst peers for its relative margin stability over the last few years, indicating few problematic projects. During the roadshow, mgmt referred to their worst over-run being a 5-6% cost inflation (which thus created 0% margin on the project), on a €2-300mm project. The company takes the full provision as soon as problems become apparent but have historically been able to recoup a significant portion of the cost over-run.

Company description: MT is an Italian engineering and construction firm divided into four units: chemicals and petrochemicals; oil and gas; energy; and, infrastructure and civil engineering. In 2006, these represented 51%, 15%, 8%, and 24%, respectively, of consolidated revenues. MT is the global leader in the design and construction of polyethylene and polypropylene manufacturing plants, with a 30% global market share by installed capacity in the past six years. It is also one of the leading global players in LNG, with a 22% market share of regasification plant projects awarded in the last 4 years. In Italy, the company is a major operator in the design and construction of renewable-source generation plants and has an 11% market share in the country. Finally, MT is also strong in Italy in high-speed rail lines (with 37% market share).

MT has 322.5mm shares outstanding, which at the last price of €3.23 implies a market cap of €1.08bn. Pre-IPO, MT had net cash of €122mm, which if you were to simply add the net IPO proceeds of approximately €58mm would imply a position of €180mm, for an EV of €895mm. Note, however, that the company has a net financial position at the end of September of €345mm (I have used the more conservative figure for valuation purposes).

Note, founder/CEO Di Amato retains 63% of the company.

Current Valuation: At the current price, MT trades at a P/E of 16.0x in 07, 11.7x in 08, and 10.3x in 09. In terms of EV/EBITDA, MT trades at 6.5x in 07, 5.3x in 08, and 4.7x in 09. These are significant discounts to the peers - a group including CBI, FLR, FWLT, JEC, KBR, MDR, and SGR trades on average at 24x 2008 P/E and 13.5x 2008 EV/EBITDA. With the current punitive tax rate, which is a key area of focus for mgmt post-IPO, there should be some discount to the peers from an EV/EBITDA standpoint. [MT is currently at a taxed at a 50% effective tax rate but certain changes in Italian legislation for dividend-paying companies will likely result in a 5% reduction next year, and mgmt sees other improvements by tax optimization steps such as subsidiary consolidation such that they feel comfortable guiding to a sub-42% rate in 08 and beyond.] As this gets resolved, the discount should minimize, though one could also claim that a discount should persist to account for the relative size of the company – it is smaller than the peers listed but often takes on similar-sized projects, which thus by definition presents a relatively larger proportional risk.