Investing.com -- S&P Global Ratings has upgraded the long-term issuer credit rating of industrial service provider, Bilfinger SE, to ’BBB-’ from ’BB+’ due to improved profitability. The short-term issuer credit rating has also been raised to ’A-3’ from ’B’. The outlook remains stable.

The upgrade follows Bilfinger SE’s improved operating performance in 2024, with S&P Global Ratings-adjusted margin reaching 7.5%, surpassing the expected 7.0%. The company’s focus on operational excellence is expected to maintain an EBITDA margin above 7.5% in 2025 and 2026, generating a free operating cash flow (FOCF) of €200 million annually.

Bilfinger SE is committed to maintaining a conservative balance sheet that supports an investment-grade rating. The S&P Global Ratings-adjusted funds from operations (FFO) to debt ratio is expected to be above 100% in 2025 and 2026, compared to 142% in 2024.

In 2024, Bilfinger SE’s revenue increased by 12% year on year to €5 billion, primarily due to the nine-month consolidation of the Stork acquisition. The S&P Global Ratings-adjusted EBITDA margin increased by 130 basis points to 7.5%. This improvement is attributed to favorable product mix effects, standardization, and benefits from efficiency measures.

The company is projected to achieve an annual organic revenue growth of about 4% for 2025 and 2026. This growth is expected to be driven by a sound order backlog valued at €4.1 billion at the end of March 2025, progress on sustainable and digital product offerings, and support from its clients’ outsourcing activities.

Efficiency measures finalized in 2023 continue to benefit Bilfinger’s profit margins. The company is expected to implement further measures that will drive operational excellence and benefit profit margins. These include a shift from a project-based business to a product-based one, increased standardization and bundling of its services, streamlining of procurement, and a greater emphasis on digitalization and innovation.

Bilfinger’s management is committed to a conservative financial policy to support the investment-grade rating. The group aims to keep net debt to EBITDA below 2x and FFO to debt above 50%. As a result, management is expected to avoid transformative acquisitions or significant shareholder distributions that could significantly change its capital structure and lead to an S&P Global Ratings-adjusted FFO to debt ratio of less than 45%.

FOCF is anticipated to remain sound, with around €200 million annually due to the company’s improved profitability and lower working capital requirements. Capital expenditure is expected to increase to about €100 million a year as the company invests in scaffolding, digitalization, innovation, and equipment replacements.

Bilfinger plans to use its high financial flexibility to support external growth and further strengthen its market position. The group maintained strong credit metrics in 2024 with an FFO-to-debt ratio of more than 140% and debt to EBITDA of about 0.6x. Bilfinger is expected to use its financial flexibility to pursue acquisitions that expand its revenue base and increase its market position.

The stable outlook reflects Bilfinger’s solid operating performance, supported by its sound market position, additional service offering, and stable demand for industrial services in its end-markets. This should enable about 4% organic revenue growth over the next 24 months. The group’s profitability should benefit from implemented efficiency measures, supporting an EBITDA margin of 7%-8% in 2025 and 2026. The very comfortable liquidity position further supports the rating.

S&P Global Ratings could lower the rating if the group’s adjusted EBITDA margin is less than 7% on a sustained basis, organic revenue growth is lower than industry peers, the group is unable to generate sound FOCF, or adjusted FFO to debt is not maintained above 45%.

An upgrade could occur if there is a notable improvement in scale, diversity, and further reduction in profit volatility, an S&P Global Ratings-adjusted EBITDA margin approaching 10% on a sustainable basis, and management commits to an even more conservative balance sheet for example maintaining FFO to debt above 60%.

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