Ferrovial FER
August 23, 2010 - 11:43am EST by
2010 2011
Price: 6.67 EPS $0.00 $0.00
Shares Out. (in M): 733 P/E 0.0x 0.0x
Market Cap (in $M): 6,194 P/FCF 0.0x 0.0x
Net Debt (in $M): 29,236 EBIT 0 0
TEV (in $M): 0 TEV/EBIT 0.0x 0.0x

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 1. Thesis:

Ferrovial is a collection of first-class infrastructure assets, including: Heathrow airport in London UK, and 407-ETR highway in Toronto Canada among others.

 FER stock has been crushed due to worries related with the company's debt position (carried since the London airports acquisition in 2006), a post-acquisition tough UK airport regulator and its exposure to Spain and construction...

 77% of EBITDA comes from concessions (mainly toll roads with predictable cash flow) and only 15% of total EBITDA is generated in Spain.

 The company has a net debt position of Eur $22.2 B, of which BAA (airports) and Cintra (toll roads) concentrate ~ 90%.

Financial risks have diminished significantly in the last months; after a debt restructure, Cintra's merger and the sale of assets (Gatwick Airport).

Coming asset divestments would take a load off the company's debt numbers "asset rotation".

 The company trades at a significant discount to a conservative valuation of its sum of the parts.

 2. Background:


In 2006 FER acquired BAA, which operates the London airports: Heathrow, Stansted, Gatwick and other airport assets.

As the transaction was settled in 2006 in the middle of a global bullish environment, the price paid and estimates for this business resulted to be rosy.

Valuation: FER paid a significant premium of 40% over RAB value (Regulated Asset Base, value given by the regulator to each airport's assets, from which the return for the owner is calculated).

The acquisition left the company with a new and more leveraged capital structure; debt hard to refinance.

Debt refinance was finally achieved in 2008, at a relatively high cost (although the restructure itself was a great success considering the credit market conditions).

 Regulation and economic downfall:

Soon after the acquisition was made, FER found a tough regulator and a very difficult economic and market environment.

 On the regulatory side BAA's airports confronted complains on the poor airport service in UK, which ended with the imposition of new goals including annual investment commitments (Capex). Note: it is worth noting that the Capex is built into the next year's RAB value. 

On the other side in March 2009, the UK Antitrust authority; forced the sale in 2 years of the airports: Gatwick and Stansted; and one of the 2 Scottish airports (Edinburgh or Glasgow).

 Gatwick Sale £ 1.51 B to GIP (Global Infrastructure Partners): Forced sale in harsh market conditions at 8.2x EV/EBITDA. BAA used £ 1.19 B of the proceeds for debt repayment.

We estimate the transaction was made at a 12% RAB discount.

NOTE: the Gatwick sale was valued bellow the RAB value. This represents an important margin of safety to the buyer as the same "initial" RAB is used as the initial value for the next year RAB and which is used for the calculation of the future regulated revenues...

 After the sale of Gatwick we consider the regulatory risk diminished, as the Antitrust Court resolved in favor of the motion of appeal presented by BAA against the decision of the CC (Antitrust authority). This removes pressure off the company by eliminating the sale compellment for Stansted and the Scotish airports, it improves the position of FER by enabling it to ask for a higher sale price in the event of a possible sale and it provides time to improve its corporate structure and its airport operations.

As well The British Department of Transportation (DoT) decided NOT to apply its proposal to change its administration scheme to regulate large airports.

 On the other hand, when push came to shove the economic downfall showed BAA's initial traffic estimates aggressive, affecting the traffic projections for the next regulated period 2008-13 (Q5). To this added the dry credit markets that made its debt refinance a very difficult job.

Note: each 5 years regulators and owners renegotiate the terms for the period regulated revenues.


In 2009 FER merged with its toll road company Cintra gaining:

Access to 100% of Cintra's cash position, vs. prior 66.88%.

Better access to credit markets.

Fiscal Consolidation in Spain (stake > 75%).

Coordination between: construction, development and infrastructure operation businesses.

 Del Pino family's controlling stake was diluted to 44.6% from 58.3% after the merger.

 Recently Cintra announced the process for selling a 10% stake in 407-ETR. Currently Cintra holds a 53.2% stake in ETR. After the sale Cintra would not loose the operation neither the control over the highway.

The sale implies a de-consolidation of Eur $3.3 B debt, lowering the group's net debt in ~14%, notwithstanding it also implies a de-consolidation of Eur $283 M EBITDA (12% EBITDA FER).


In 2006 FER sold its Spanish real estate division Habitat, anticipating the sector troubles.

 3. Main Assets:


9 years Sales and EBITDA CAGR 13% and 15% respectively.

Traffic 10 years CAGR 4.6%. Tariff 4 years CAGR 6.7%.

EBITDA margin 2000 - 66% vs. 2009 - 79.3%.

  • Located in the Greater Toronto Area: largest metropolitan area in Canada.
  • o 8th in North America, 6 million people (GTA).
  • Toronto 5th City in North America 2.6 million inhabitants.
  • Some of the most affluent cities in Canada and main employers are along the 407 ETR corridor (Oakville, Richmond Hill, Markham... & GM, RIM, Coca-Cola...)
  • 108 Km, runs parallel to the 401 highway, the city's first beltway, which is one of the most congested highways in North America.
  • First all electronic toll road in the world.
  • High degree of automation.
  • 7.0 million registered users; with a transponder (electronic detection devices) penetration rate of 79.7%.
  • ETR has gone from being seen a novelty or luxury to being an integral part of users' lives.
  • According to an independent study; similar 40 km trips on 407 ETR and Highway 7 in York Region show:
  • o Saving of 33 minutes on 407 ETR (24.5 minutes vs. 58).
  • o 3 liters per trip gas savings on 407 ETR; 4 liters vs. 7 liters (gas savings pay for most of the cost of the toll).
  • o 50% reduction in carbon footprint per trip.

  On July 15th, 2010 a Canadian pension fund placed an offer to acquire Intoll for US $3,100 millions (EUR $2,440 millions). Intoll has a 30% stake in 407-ETR, and an investment in an Australian highway.

The offer would give an implicit value of EUR $2,170 millions to Intoll's 30% stake in 407 ETR, therefore valuing the whole road in EUR $7,233 millions.

Ferrovial's 53,2% would have an implicit value of EUR $3,848 millions, or EUR $5.25 per FER's share; ~80% of the actual Ferrovial's market price (EUR $6.67).


Needless to say, Heathrow is one of the world's best airport assets. It is # 1 in passengers in Europe and # 3 worldwide, "Hub" with access to central London (20 miles), has great exposure to business travel, is one of the few main airports that saw positive traffic growth in the last 12 months and has a diversified traffic from all over the world.

 4. Debt

De-leveraging has taken debt from Eur $30 B in 2007 to Eur $22.2 B (10.6x net debt/EBITDA), even though 95% of total debt is non-recourse debt related to infrastructure projects.

 BAA and Cintra concentrate most of the group debt ~90% showing relevant maturities in: 2010 Cintra Eur $1.5 B; 2011 BAA Eur $2.0 B; 2012 BAA Eur $1.9 B and Eur $2.0 B corporate debt. Coming debt refinancing shouldn't be as challenging for FER as it has been in the last years, with more stable credit markets and better company operations.

 70% of BAA's debt is at the airport level and "ring fenced"; breaching the established triggers would restrict payments to other BAA companies.  The company feels comfortable with these limits, as at current debt levels it has headroom for £450 M in class A debt and £1.6 B in class B debt. In the last year, the company has restructured and reduced significantly its debt, mainly after the Gatwick sale and after it raised £ 935 M in the bond market.

 5. Other Business


Amey is one of the main services companies in the UK, which specializes in infrastructure maintenance (urban, road and railway) and facility management.

Amey is also one of the largest and most experienced operators in the field of private infrastructure and services development and financing for public administrations through PFI (Private Finance Initiatives) and PPP (Public Private Partnership) models.

Amey sold for £ 310M its 66% stake in Tube Lines, the company responsible for maintaining and upgrading three lines on the London Underground: The Jubilee, Northern and Piccadilly lines.


Swissport is the world leader in airport handling services, both for passengers and freight. It operates in 42 countries and 179 airports, provides service to over 70 million passengers and 3.2 million tones of freight per year for some 650 airlines.

Swissport was acquired by Ferrovial in October 2005 and it operates mainly in Europe (59%) and North America (33%).

For the eighth year running, Swissport has been nominated as the 'World's best handling Services Provider' by the UK Institute of Transport Management.

Services and Construction cash flows back FER's corporate debt. Corporate debt/EBITDA(Serv. & Const.) 2.8x; it is expected to be bellow 2.5x for 2010 and 2011.

6. FER intrinsic value

We arrived to FER's value by summing up each of the parts of both BAA and Cintra (highways ex 407-ETR DCF or P/BV multiples) and assigning a conservative multiple to the construction and services segments. Our valuation dropped the following results:

Low case: FER  Eur $11.8 or 75.9% upside.

Base case: FER  Eur $13.7 or 104.5% upside.

Best case: FER  Eur $16.1 or 141.7% upside.

  •  Low: 6x EV/EBITDA 11e Serv & Const; 15% disc. to Cintra SoTP; 20% Heathrow RAB premium.
  •  Base: 7x EV/EBITDA 11e Serv & Const; 10% disc. to Cintra SoTP; 33% Heathrow RAB premium (in line with valuation for recent issued PIK notes).
  •  High: 8x EV/EBITDA 11e Serv & Const; Cintra SoTP; 40% Heathrow RAB premium.
  •  In all cases Stansted is at 1x RAB value.

 It is worth to mention that the value of FER's stake in 407-ETR by itself accounts for 44%, 38% and 33% of our low, base and best case scenarios. We used the current offer for Intoll for valuing 407-ETR.

 In our worst case scenario we valued Heathrow airport with a discount of 12% of RAB value. This is the valuation of the sale of Gatwick airport which was a forced sale in the middle of a global crisis and a much inferior asset than Heathrow; and giving the low case valuation metrics to Cintra and the other business.

Still, our worst case dropped a price objective of Eur $10 or a 49% upside.


  • Sale of 10% stake in 407-ETR; would improve the company's financials and will reaffirm the highway's valuation.
  •  New Projects in Texas, North Tarrant and LBJ; the Two North Texas highways under development by Cintra have been named 2010 Projects of the Year by the American Road & Transportation Builders Association (ARTBA). Construction is expected to begin in early 2011 and be completed by 2015-16 and the duration of the concession agreements for both projects is 52 years.
  •  Sale of assets.
  •  Debt repayment.
  •  Cost of debt cut (restructure).
  •  Opex efficiencies (mainly in BAA).
  •  Heathrow's 3rd runway...
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