The CEO of KÉSZ, Zoltán Jutasi arrived to the company with big ambitions. The expert who, together with other owners, bought more than 30% share of ownership is transforming the company known from construction industry into an asset management company, which besides of intensive international expansion will also further strengthen its real estate development branch. The IT segment can be a new direction, while Jutasi sees opportunities in the environment industryas well.
Based on the recent years’ performance, construction companies do not seem to offer the best opportunities for investment purposes. Many companies have weak financial background, and the price level on the construction market is lower than in the neighbouring countries. Why did you invest in KÉSZ?
KÉSZ is much more complex than other construction companies in general. If we talk about the construction sector in general, then you are right, and one of the reasons for this is that most construction companies are project management companies; there is no actual construction work, real value creation at these companies. Usually there is a well-qualified project management team, who can make a good portfolio of contracts, and can manage the suppliers and the buyers. I don’t mean that in a negative way, but it is for a fact that this creates a chain of subcontractors with many companies, where the profits get dispersed. KÉSZ is different from these businesses in many ways. One of them is that our company possesses a considerable amount of own resource base; with our foreign subsidiaries, we have around 1,500 employees in the Group, which in itself already distinguishes us from other companies in the sector. We also have our own production capacity; a steel factory in Kecskemét, concrete plants, a team dealing with electronics, which means that if we need to determine the cost of an investment project, we can calculate much more accurately. On the other hand, principals are starting to filter out the long chains of subcontractors, and this can be done by looking for companies that have their own capacities. Of course it comes with high risk, because it is a hard task to provide work for that many people.
We are also different considering growth; KÉSZ has grown a lot in the past year. While the industry has been talking about recession, our construction company’s revenue has increased from 35-36 billion HUF to 50 billion. Out of the 70 billion HUF revenue 50 billion comes from actual construction projects. We made profits from the recession in the industry. KÉSZ has gained major part of its profit from the private sector, where the recession weren’t so harsh due to the increasing ratio of foreign projects. We have a construction company in Romania, a concrete factory and construction business in Ukraine; we also have projects in Montenegro and Serbia, and projects are being prepared in Slovakia and in Poland.
Isn’t the lack of public tenders a disadvantage? Many companies gained a lot from them…
It is absolutely true, but those companies that get used to working for only one market can get too comfortable in the situation. Take a look at how these companies, which by the way are often the customer of KÉSZ as they do not have their own capacities, can perform in a regular competitive environment. They can achieve something using their network, but it has to be carried out by somebody.
In my opinion, in the case of the governmental district, bidders didn’t have the courage to go further with their applications because they were not able to determine the cost of the needed resources with certainty. All of the enterprises were afraid of undertaking a project at a fixed price, and then when the subcontractors realize that it would require 80% of the total capacity in Hungary, they decide to provide their services at a significantly higher price. Only a few had the courage to take the risk, in the end no one but us.
Why weren’t you afraid of taking the risk?
Because we have our own resources. It is another question that the project failed for political reasons. Sooner or later the possessions of own resources will become a very important factor in the construction industry. There are high entry barriers to the market, because although everyone can manage a project, the main question is who has the disposition of resources.
To what extent is it a trend on the market to build up the vertical system similar to what KÉSZ has?
The real estate development market is a different story. An RE developer possesses resources that are needed for the activity: money. RE development is launched by those who have sufficient financial support or own resources, or some kind of a combination of these two. The two fields should not be mixed up; we are also working on separating the two activities at KÉSZ. RE development is about finding a potential investment opportunity, investigating it, financing it with the help of (commercial) banks, and find a subcontractor for constructing it. Of course, if the company has the required resources for both, then it can execute is by itself in accordance with the rules. The fact that somebody is a RE developer doesn’t mean that they will move towards undertaking the actual execution of the project. I can imagine the opposite case more easily, because the profitability of RE development is much higher than of construction. The development department is significant within the Group, although it was not widely known until now.
To what degree this field is strengthening at KÉSZ?
Very much, it is top priority for us.
What has changed with the arrival of a new management team?
The transparency and the awareness. KÉSZ is not simply a construction company anymore, even though it is identified so. There were several successful investments, so today the company is rather an investment company. The primary function of the holding company is to handle the subsidiaries as an asset management company. There is a construction subsidiary, which transparently only deals with construction work in each country where it is present. We created the KÉSZ Real Estate Ltd. which includes real estate management, wealth management and real estate development as well. At the moment the Group’s real estate property is estimated to be between 30 and 50 billion HUF. Right now we are in the process of deciding what to do with each real estate: should we develop and operate it, or sell it. Currently there are five PPP-projects, among them the central library and the dormitory of the Budapest University of Technology and Economics and the prison at Tiszalök. Other than these, there are also two investments that are not related to real estate. One of them is a car fleet management company with about 300 vehicles, almost half of which are already on external market. The other one is an investment in the environment industry, a biodiesel plant in Bábolna.
Obviously you became owners with the intention to exit at some point. In what form can it be carried out?
I don’t want to exit. Compared to our history, it was a major change that we chose to invest in this company exactly because we saw the opportunity to think in long-term.
Can IPO be an option?
I do not think that IPO or the involvement of a professional investor is out of the question, but only in a way that we remain in a controlling position.
What about capital? Sufficient capital is essential for quick growth…
It depends on to where capital is needed. One benefit of the reorganization is that huge reserves came to light. In the past KÉSZ moved to several directions, it engaged in numerous activities. Just by refinancing our bank credits and making the investment and business processes we use are clear and transparent, the financing ability of the company and thus the management of the potential business opportunities were significantly improved. A significant part of the PPP-projects is financed from own resources, as well as the biodiesel plant. There is no bank credit involved in these projects, so we have a lot of capital reserves.
Are there any plans for bigger real estate development projects?
There are some projects worth billions of HUF that are currently being prepared by the real estate development group.
Is it a goal of KÉSZ to undertake huge office-building projects and shopping centres? Or will your projects remain specialised?
In the upcoming half to one year we will definitely remain specialised, because opening to new fields requires very long and serious preparation. We are currently working on the strategy for the future direction of real estate development. I think it is possible that after a one year long transition period when we will have uncovered all consequences, we will move to a different direction. KÉSZ has a great business relationship network in the neighbouring countries, which is a huge competitive advantage. This is what we are trying to utilize.
You mentioned that you plan for long term. Where would you like to see the company five years from now?
My vision for five years from now is that KÉSZ is a regional investment company standing stable on multiple grounds. One of these is construction work; the other is the real estate market. Besides these two IT and environment industry can develop as well. One of the main proceeds of the next five years can be the fact that we have construction companies in the neighbouring countries, each of which can have a turnover above 10 billion HUF. Regarding investment development, I would like to clean up the company’s current real estate property and only keep those in our portfolio that have the potential to generate profit in the long term. Besides strengthening PPP projects I would like to enter several real estate development projects as well.
We will definitely open towards the information technology sector as a new direction for the company, while also moving forward in the environment industry. All in all,the main goal is strengthening the property management profile of the company.
When you purchased ownership in the company you obviously made a calculation about the value of it. How big is the growth you expect in the next 5 years?
It is business secret, but I expect significant growth in the value. KÉSZ possesses enormous reserves. By creating a conscious investment strategy we provide the company with an additional support that was missing from beside the value from material processes. From the history of KÉSZ it can be seen that the business is very strong at the level of value creating processes and in human resources. Bringing more awareness to the company can significantly enhance its performance.
Opening to the area of IT is not evident from me, even from becoming a property management company…
KÉSZ Holding is an investment company. IT has segments that are worth investing in. Although I am in a different position now, I still think it is a good opportunity.
I assume something has to be acquired in order to make it work as an independent division…
Of course. Although there is a complex IT system within the KÉSZ Group, as it is a serious task to provide technological support for so many employees, I do not think that this expansion should happen organically.
Is it a goal for the regional activity to overtake in terms of sales return and to put more emphasis on the external market?
Absolutely. It is a big regret of my past that although we always wanted to enter external markets, we were not able to do so. Among other reasons, this is why I am happy to be here, because here there is a real possibility of accomplishing this
What will be the main direction of the company on the foreign markets? Real estate development or rather construction works?
In Romania we would like to strengthen our construction work. 7.6 billion worth of investment is the plan for next year. There it would be a logical step to set up the real estate development company as well.
What about the other countries?
I think it is too soon to talk about that, we are only looking at opportunities in Slovakia and Bulgaria for now. We have only just started our work, currently we are working on reorganizing the company and strengthening the controlling system. KÉSZ was centred around one person, Mihály Varga, who managed the company alone, which is a big task at revenue of 70 billion. A decision making process had to be set up with positions supporting the decision making. It is for sure that we would like to strengthen our position on external markets.
Are there plans of expansion to countries in the region that can seem exotic? Your presence in Serbia is already unusual.
We are investigating Serbia as well. People think in many different ways about Ukraine but for example there is a very strong payment discipline there, this is how the economic system was socialised. It does not matter what kind of reputation these countries have, deals concluded in these places are often realised with greater certainty than in Hungary.
This way the foreign share can increase significantly in sales within five-ten years…
Unfortunately this is kind of a compulsion too. If an enterprise does not start to move towards these markets in time, it will fall behind…
Are there any public plans for 2008?
On the Group level our expectation is above 70 billion (not consolidated). 76-77 billion of sales return, which is equal to a 10% growth.
Where does that growth originate from? Partly from Romania, and where else?
We would like to grow on the Ukrainian market too, we would like to realise a serious growth on the field of real estate development. The transactions are already planned. We would also like to start new PPP-projects, and we have property items that we are developing. The biodiesel plant was launched recently, it will complete its first year of operation this year.
Last year was not very favourable for the construction industry, labour costs have increased significantly. Your turnover increased, you did not suffer its consequences, but still it must have affected you as well.
Decision makers should realise that some of them have been in a position on the other side as well; they know how these companies operate. Unfortunately this cannot be seen in taxation policies yet. This is the main reason why most companies relocate many of their fields abroad.
