VALUATION IN CIVIL CONSTRUCTION, AN ANALYSIS BEYOND DRE

When the various methods for evaluating companies are discussed, Discounted Cash Flow (FCD) stands out as one of the most suitable. The method is cited in the literature as one of the most used in the valuation of companies, especially when it comes to outlining acquisition, sale and investment policies. This occurs because the value of the company is directly related to expectations and capacity to generate future cash flow. The valuation of an asset is initially based on a thorough analysis of its Income Statement for the Year (DRE) and the operational specificities of the business that will be evaluated. It is common to use the DRE from the last fiscal years as a starting point to project the following years. This would be the usual path in all Valuations using the Discount Cash Flow method. Some sectors, however, have some peculiarities that must be respected, such as the Civil Construction sector, which has specific rules for the recognition of Revenues and calculation of Costs. The accounting of these companies is linked to the regulations of the CPC-47 (formerly CPC-17) where the principles for recognizing revenues from contracts for the supply of goods and services in various sectors, including Civil Construction, are established. The regulations establish the revenue recognition system in accordance with the Percentage of Compliance (POC), that is, recognition according to the physical progress of the work (over time) or upon the delivery of the keys (at a specific time), in the case of civil construction companies. The most common practice consists of using the evolution of the work considering a percentage of the cost incurred in relation to the total cost budgeted for the project, starting from the physical start of production, that is, of the execution of the work. Since accounting invoicing does not have a very well defined temporal relationship, at first, with the company's cash flow, it is recommended that The analysis of these companies is more focused on the operating cash flow of the business, than on the DRE itself, which will not provide much useful information to the evaluator. A good example is the Civil Construction companies listed on B3. It is observed that several have a positive Net Profit, giving the false impression that they are generating cash and, consequently, managing to honor their debts and paying dividends to shareholders. However, when carrying out a more in-depth analysis of disbursements and sources of financing, through the cash flow of the projects, the real situation of the projects can be observed, which in some cases, are even deficit situations in the short term, since the receipt of certain projects, when not financed through financial institutions, can take decades to occur. Because of the timelessness between the Accounting Documents and the Operating Cash Flow of the business in this sector, the construction of a valuation model must also take place be different. (1) Revenue projections must follow the financing terms agreed between the construction company and its direct clients and, if intermediated by financial institutions, the deadlines with the institutions themselves. In addition, the evaluator must always analyze the distractions that have occurred, which are very common in the sector; (2) For the analysis of Costs, it is necessary to accurately estimate the time of the work and the production curve, in addition to the seasonality of each project (in periods of rain and dry periods, the evolution of the project occurs in a different way); (3) Since the best analysis of the Cash Flow of these companies is not by the indirect method, estimating the NCG/CDG via Balance Sheet and DRE becomes indispensable at first. At this point, it is important to analyze the receipts and disbursement flows from construction, obtaining the operating cash flow of the business; (4) Perpetuity is directly linked to the business model carried out, that is, companies that have a specific purpose (even a long-term one), such as SPE's (specific purpose companies) that will build only one venture for sale, must not have perpetuity values, Vis-a-vis large construction companies that must include an associated perpetuity in their Market Value. (5) In both of the cases mentioned above, the sources of financing are generally through the capital of third parties (financial institutions). Therefore, analyzing the cash generation capacity to honor debts in this sector is as important as projecting Revenues and Costs. These companies generally have high financial leverage and rely on it to continue financing new ventures.

The biggest difficulty for an evaluator who wants to maintain the traditional FDC model when preparing the Valuation of a company in this segment, it is about accurately recreating its operating cash flow. In this case, therefore, it is recommended that you first project the operating cash flow of each project separately and then project your consolidated DRE. Although not trivial, this change in the financial modeling process, makes the assessment of the business more accurate and cohesive.

ARTICLE WRITTEN BY HENRIQUE PORTO - PARTNER OF FC PARTNERSGo to our site: http://www.fcpartners.com.br