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Aegion Corporation: Construction and Engineering

April 19th, 2017Sector: IndustrialsSenior Analyst: Shreyash GoyalJunior Analysts: Hector Menses, Maciej Leleniewski Minh Tuan Nguyen, Shrey Shah, Xuantong Guo

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Agenda

Aegion Corporation - Investment Research Presentation: Spring 2017

Valuation Summary

Industry Definition

Industry Structure and Segmentation

Aegion Snapshot & Leadership

Aegion Value Generation

Industry Trends

Company Trends

Valuation: Comparable Companies Analysis

Valuation: Discounted Cash Flow Model

Valuation: Summary and Recommendation

Question and Answers

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Valuation SummaryRecommendation Summary

Company (Ticker) AEGNCurrent Trading Price (04-16-2017) $21.97 Recommendation HOLDTarget Price $23.74Upside Potential 8.00%

Valuation SummaryMethod Price Weight

Discounted Cash Flow 60%Perpetuity Growth Method $14.73 40%Exit Multiple Method $31.22 20%Comparable Company Analysis 40%P/E $20.95 20%EV/EBITDA $37.05 20%Target Price $23.74

Summary Recommendation: HOLD• Strong intrinsic competitive advantage• Poor performance in the past years due to harsh climate and energy downturn• Value dependent on near term operational excellence • $40 million share buyback reflects managements confidence• Buy if price drops below $20.81 ( 52 week Range: $17.18 – $26.68)

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Industry Definition: Pipeline Construction & MaintenanceCompanies in this industry construct and rehabilitatewater mains, sewers,drains,aqueducts,pumping stations, treatmentplants, oil & gas pipelines and downstream transportation structures. Also includes construction management and specialtrade contractors integral tounderground pipeline infrastructure.

Major Players and Influencers

AECOM: $5.37BNYSE: ACM

Fluor Corporation: $7.19BNYSE: FLR

Peter Kiewit Sons INC.Omaha, NE

MWH GlobalBroomfield, CO

Source: InvestSnips, Google Finance, IBIS World

Tetra Tech: $2.33BNASDAQ: TTEK

Aegion: $762.67MNASDAQ: AEGN

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Industry Structure & Segmentation

Non-Residential Construction $ 690.50 Billion

Source: US Census “Construction Spending”, IBIS World

Industrials$ 71,213 Billion

Construction & Engineering$1,150 Billion

Non-Residential Construction$690 Billion

9%

43%

48%

Oil and Gas Pipeline Construction 2017

Public Sector Clients

Private Sector Natural Gas

Private Sector Oil Interests

92%

2%6%

Water & Sewer Line Construction 2017

State and Local Government

Private Sector

Federal Government

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Aegion Fundamentals

Ticker AEGN

Trading Price $21.97*

Market  Cap 762.7  Million*

P/E 25.9x**

EPS $0.85**

EV/EBITDA 9.8x**

Backlog 689.6  Million**

Aegion Corporation: A Snapshot of the Company

Provider of global rehabilitation, maintenance and engineering solutions for water, energy, refining, miningand wastewater industries. Leader in using technological expertise and patented technology to completecomplex projects at higher efficiencyand lowercosts than competitors.

47%

33%

20%

Business Segments by Revenue

Infrastructure SolutionsCorrosion ProtectionEnergy Services

Aegion and its subsidiaries are:ØOperational in 80 + countriesØOwners of 88 domestic and 152 international patents across its three segments

*As of 04/16/17 **As of 12/31/16

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Experienced Leadership Driving Innovation

Chief Executive Officer: Charles R. Gordon• CEO since October 2016• Director at Aegion since July 2009• 25 years of managerial experience in water and wastewater industry• Held executive roles Siemens Water technologies from 2003 – 2010

Chief Financial Officer: David A. Martin• CFO since August 2007• Worked at Insitufrom Technologies from 1993 – 2007, starting as senior

accountant• CPA

Chief Strategy Officer: John D. Huhn• CSO since 2016• At Aegion since 2008• Responsible for identification, analysis, and completion of multiple

transactions that have increased Aegion’s presence in the industry

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Generating Value in a Standardized Market

Seek and Submit Competitive

Public Tenders

Seek and Submit Competitive

Private Tenders

Receive Subcontracting

Tender

Engage Required Material, Machinery

and Labour

Complete Planned Construction Efficiently

Subcontract Portion of the Project

Actively Manage Project

Handover to Inspection - $$$

Margin and Profitability

Analysis

Source: Company 10k’s, IBIS World

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Industry Trends

Investment in Water

Infrastructure

Recovering Energy Industry

Healthy Municipal

Bond Markets

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Water Mains Replacement Critical to America’s Future

$92,218 $146,997

$204,357 $82,866

$16,525   $25,222  

$302,782  $153,756  

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Northeast Midwest South West

2010-2035 Underground Infrastructure Needs

Replacement Growth

• Large proportions of underground infrastructure is in need of replacement

• The Safe Drinking Water Act (SDWA) ensures safe drinking water for the public and calls for timely replacement of water infrastructure

• It is estimated that between $400B and $600B is needed for safe drinking water and wastewater treatment over the next 20 years

• The Water Resources Development Act will provide critical investment for replacement programs meeting standards defined under the SDWA

Source: EPA, AGC of America

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Recovering Energy Industry will Increase Infrastructure Spending

Source: EIA, IBIS World

40.0

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90.0

100.0

110.0

20.0

30.0

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90.0

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Dollars  per  Barrel

Dollars  in  Billions

Energy Construction Industry Revenues vs Oil Prices per Barrel

Revenue ($m) World price of crude oil ($ per barrel)

Energy Recovery will Spur Investment

• Prices of Oil and Natural Gas are forecasted to rise allowing for increased capital expenditure

• Increasing rig count and fracking activities allow for development of newer infrastructure

• Older energies facilities need to be maintained at intensive levels for greater downstream traffic

• Relaxed energy regulations under the Trump administration may increase infrastructure investments

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Healthy Municipal Bond Market Necessary for Stability

Source: S&P Indices by Asset Class, Charles Schwab, Moody’s

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April-­‐12 April-­‐13 April-­‐14 April-­‐15 April-­‐16 April-­‐17

US Municipal Bond Health Indicators

S&P  Municipal  Bond   Defaulted  Index S&P  Municipal  Bond   Insured  Index

• Stability in Municipal bonds guarantees investment of allocated funds into construction projects

• Local and State investment have grown to pre-recession level increasing traction for the industry

• Decreasing unemployment and rising wages over the outlook period - basis for investment growth

• Both high-yield and tax exempt municipal bonds are showing signs of increased stability with

higher average ratings and lower default rates

Municipal Bonds showing signs of stability

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Company Trends

Efficient Cash Generation

Operational Efficiency

and Margins

Strategic M&A

Activity

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Aegion Continues to Efficiently Generate Cash

111 Days103 Days

95 Days

86 Days79 Days

50

60

70

80

90

100

110

120

2012 2013 2014 2015 2016

Days

AEGION Days Sales Outstanding Trend 2012-2016

• Reduced DSO due to standardization in project planning, execution and billing policies for the CIPP operation in North America of Infrastructure Solutions segment

• DSO Target – 70 Days by 2019; Reduction in DSO is a main priority to generate cash• Cash Priorities:

1. Pay down debt ($70M over the next 3 years)2. Resources for fueling growth through M&A transactions3. Grow investor earnings through share buybacks ($40M share buyback for 2017)4. Target stock repurchases for future set around 3-5% of total outstanding shares

Source: Company 10K’s, Aegion Investor Presentation Feb ‘17, Sell Side Research

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Operational Efficiency is the Key to Aegion’s Success

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

0

200

400

600

800

1000

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1600

2012 2013 2014 2015 2016 2017F 2018F 2019F

Mill

ions

of U

SD

Operating Margins

Revenue Operating Expense Operating Margins

• Reengineered processes and technologies are improving operating margins• Introduction of LEAN operational guidelines titled “The Aegion Way”• The Aegion Way is:

• Standardizing operations across the three segments• Minimizing safety incidents and therefore, lost time• Minimizing waste generation through retraining and supervising • Optimizing labor requisitioning and reducing expensive part time employment

Source: Company 10K’s, Aegion Investor Presentation Feb ‘17, Sell Side Research

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M&A Processes: Expanding Markets and Technologies

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1000

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7000

2013 2014 2015 2016

Acquisition Expenditure Thousands of Dollars

• Aegion has used acquisitions to gather patented technology, trade secrets and skilled labor

• Entry into untapped or undeveloped markets positioning for first mover advantage

• “Strategic acquisitions are one of our top goals for the coming years” – Charles R. Gordon

• Strategic M&A’s are improving synergies for Aegion and reducing operational costs

Key Acquisition Target Markets:• Asia-Pacific: Fyfe Asia Pte. Ltd.• Middle East: Hockway• Europe: LMJ, Insituform Tech• Americas: Underground Solutions,

United Pipeline de Mexico

Technological Additions to Portfolio:Fusible PVC®, Tyfo Fiberwrap®, Fiberwrap®, Insituform CIPP®

Source: Company 10K’s, Aegion Investor Presentation Feb ’17, Aegion Earnings Call FY 2016

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Comparable Companies Analysis omp

Source: Company 10K’s, Google Finance, Bloomberg, Invest Snips

Company Ticker EV Market Cap Revenue EBITDA Net

Income P/E EV/EBITDA EV/Revenue P/Revenue

Aegion Corporation AEGN 1,002.3 762.7 1,221.9 102.8 29.5 25.9x 9.8x 0.8x 0.6x

MYR Group Inc. MYRG 706.2 664.9 1,142.5 78.8 21.4 31.0x 9.0x 0.6x 0.6x

Primoris Services Corp PRIM 1,350.0 1,224.1 1,996.9 118.5 62.6 19.5x 11.4x 0.7x 0.6x

KBR Inc. KBR 1,929.8 2,026.0 4,268.0 130.0 183.1 11.1x 14.8x 0.5x 0.5x

Mastec Inc. MTZ 4,103.1 3,108.8 5,134.7 443.4 142.3 21.8x 9.3x 0.8x 0.6x

Quanta Services Inc. PWR 5,711.8 5,459.6 7,651.3 544.2 221.4 24.7x 10.5x 0.7x 0.7x

High 31.0x 14.8x 0.8x 0.7x

Mean 21.6x 11.0x 0.7x 0.6x

Median 21.8x 10.5x 0.7x 0.6x

75th Percentile 24.7x 11.4x 0.7x 0.6x

Low 11.1x 9.0x 0.5x 0.5x

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Discounted Cash Flow Valuation Assumptions and Inputs

Source: Company 10K’s, Aegion Investor Presentation Feb ’17, Ibbotson Associates, Bloomberg, Google Finance

WACC Calculation:Cost of Debt 2.57%% Weight 33%

Cost of Equity 15.16%% Weight 67%

WACC 11.02%

Key Statistics:Terminal Growth Rate 2.00%Current Trading Price $21.97 Market Cap $762.67 MillNet Debt $239.63 MillBeta 1.78 Shares Outstanding 34.71 Mill Effective Tax Rate 18.73%

Forecasted (Millions of USD)

2017 2018 2019 2020 2021EBIT $77.99 $88.27 $98.24 $103.54 $107.03

Unlevered FCF $81.87 $64.13 $68.79 $76.15 $71.89 Net Present Value $268.81

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Valuation Summary and Recommendation

Summary Recommendation: HOLD• Current one year target price $23.74• Buy if price drops below $20.81 ( 52 week Range: $17.18 – $26.68)Despite the HOLD recommendation we strongly believe that Aegion has the right tools and expertise to succeed and can deliver significant upside in the long term.

Recommendation SummaryCompany (Ticker) AEGNCurrent Trading Price (04-16-2017) $21.97 Recommendation HOLDTarget Price $23.74Upside Potential 8.00%

Valuation SummaryMethod Price Weight

Discounted Cash Flow 60%Perpetuity Growth Method $14.73 40%Exit Multiple Method $31.22 20%Comparable Company Analysis 40%P/E $20.95 20%EV/EBITDA $37.05 20%Target Price $23.74

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Backup Slides

Tornado Chart

Sensitivity Analysis

Income Statement

Balance Sheet

Cash Flow Statement

Links

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Backup Slides: Tornado Chart

$-­ $5.00   $10.00   $15.00   $20.00   $25.00   $30.00   $35.00   $40.00   $45.00  

52-­week  range

Perpetuity  Growth

Exit  Multiple

Price/Earnings

EV/EBITDA

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Backup Slides: Sensitivity Analysis

DCF  -­‐ Perpetuity   Growth   Sensitivity

WACC

– 9.5% 10.0% 10.5% 11.0% 11.5% 12.0% 12.5% 13.0%

Term

inal  Growth  Rate

3.0% $21.61   $19.70   $18.05   $16.61   $15.36   $14.25   $13.27   $12.39  

2.5% $20.04   $18.36   $16.90   $15.62   $14.49   $13.48   $12.59   $11.78  

2.0% $18.67   $17.18   $15.88   $14.73   $13.71   $12.79   $11.98   $11.24  

1.5% $17.48   $16.15   $14.98   $13.93   $13.00   $12.17   $11.42   $10.74  

1.0% $16.42   $15.23   $14.17   $13.22   $12.37   $11.60   $10.91   $10.28  

0.5% $15.49   $14.41   $13.44   $12.57   $11.79   $11.08   $10.44   $9.86  

DCF  -­‐ EV/EBITDA  Exit  Multiple   Sensitivity

WACC– 9.5% 10.0% 10.5% 11.0% 11.5% 12.0% 12.5% 13.0%

Term

inal  EBITD

A  Multiple 13.4  x $39.07   $38.21   $37.37   $36.55   $35.76   $34.99   $34.23   $33.50  

12.4  x $36.21   $35.42   $34.64   $33.89   $33.15   $32.44   $31.74   $31.06  

11.4  x $33.36   $32.63   $31.91   $31.22   $30.55   $29.89   $29.25   $28.63  

10.4  x $30.51   $29.84   $29.19   $28.56   $27.94   $27.34   $26.76   $26.19  

9.4  x $27.65   $27.05   $26.46   $25.89   $25.33   $24.79   $24.26   $23.75  

8.4  x $24.80   $24.26   $23.74   $23.22   $22.73   $22.24   $21.77   $21.31  

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Backup Slides: Income Statement

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Backup Slides: Balance Sheet

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Backup Slides: Cash Flow Statement

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Backup: Navigation Links

1. Cover

2. Agenda

3. Valuation Summary

4. Industry Definition

5. Industry Structure & Segmentation

6. Aegion Corporation

7. Leadership

8. Value Generation

9. Trends Page Break

10. Water Mains Investment

11. Recovering Energy Industry

12. Healthy Municipal Bond Market

13. Company Trends Page Break

14. Cash Generation

15. Operational Margins

16. Strategic M&A

17. Comparable Companies

18. DCF Inputs

19. Valuation Summary

20. Backup Cover