Description

PINFRA

The company-

As reference please refer to the VIC writeup made on Pinfra in 2010. However, new highway concessions have been incorporated since, and much cash has been generated (and distributed) in the meantime. We'll address that as well.

In a nutshell Pinfra is Mexico's largest and most profitable toll-road operator, with two very profitable port operations and an asphalt plant as add ons.

The above mentioned writeup mentioned the great need for quality infrastructure in Mexico. Namely Mexico ranks as the 4th country in the world with the most vehicle traffic per highway kilometer. We've come a long way since 2010 and infrastructure has been developed every year albeit at a much slower pace than actually needed and hence the great runway for continued growth in coming years.

Pinfra is the largest toll operator with 27 highway concessions, followed by Ideal (Carlos Slim owned) with 15 concessions. In terms of highway kms it ranks second to ideal with 1,053km but is by far the most profitable operator (86% EBITDA margins, followed by Ideal's 80%) and has remained so over the years. Also, it has proven to be able to grow and compete for new concessions while being a very effective capital allocator. The only one of the big toll road operators in Mexico that consistently operates with a net cash position and that has made part of it's culture to always operate while maintaining a pristine balance sheet.

Pinfra started trading in the Mexican Stock Exchange in 2006, and in 2013 did a follow-on listing Pinfra L shares. 

Since our last writeup, the following highway concessions were also added:

Tlaxcala-San Martin highway (2010)

Piramides-Texcoco highway (2010)

Oriente package (2012)

Michoacan package (2012)

Mexico-Toluca tranche 2 (Marquesa-Lerma) (2013)

Tlaxcala-Puebla highway (2015)

Puebla elevated bypass (2016)

El prieto and Jolopo bridges (2017)

Siglo XXI highway (2018)

Monterrey-Nuevo Laredo highway (2020)

New Veracruz Port Terminal (2020)

When we last presented this idea to VIC, Pinfra had 13 highway concessions and one port operation. Fast forward today and Pinfra manages 28 highway concessions and two port operations.

Much public information is available and we could expand on much more detail but every investor will probably have a view on discount rates and how to value an asset like Pinfra accordingly. We mean this follow-on to sort of a teaser on our first write up ten years ago and hope to drive the point that this continues to be one of the best businesses we can think of, extremely resilient during tough economic conditions, with a proven track record of both execution and profitability, trading at a valuation that we truly believe to be one of the most compelling investment opportunities we can find today. We hope to make it clear this is a great asset that is trading at a ridiculously low valuation. 

The opportunity-

Simply stated, we can't think of many businesses that enjoy the resilience and profitability that this does, has such a lengthy track record of successfull execution and profitable growth with such an attractive runway ahead of potential growth trading at such a low valuation.

Mexico is on sale at the moment.

We would argue most Mexican blue-chips are at their lowest valuations ever and at their peak profitability. We've heard the argument that most smart money has simply lost interest in Mexico, and that appears to certainly be the case up to now. Our variant view however is that (IF) sentiment and eventually flows reverse as more participants realize the bargains left behind, we'll look back to today's prices and find out they might have been opportunities of a decade. The flip side, at least in Pinfra's case, is that if that doesn't happen, we'll get back our investment in six years or less by dividends and buybacks.

We like the odds here.

Valuation today-

It is our view that one of the better ways to measure potential returns on infrastructure assets is through the use of Implicit Internal Rates of Return. To be clear, at this moment all of the infrastructure companies in Mexico (Airports and train operators) trade at double digit implied IRR's.

As a sidenote, we also would encourage interested investors to delve deep into GMXT (Grupo Mexico Transportes), Mexico's leading train operator which we believe to also a be a great business trading at very attractive valuations.

But let's skip to the point. Our view is that Pinfra is trading at firesale prices. PINFRA L shares trade at a current implicit IRR of 42% whereas PINFRA (ord shares) trade at a 24% implicit IRR.

We note that every investor will have different discount rates for their respective valuation models. We want to drive the point that this is an asset to spend time on because regardless of most scenarios it is on sale today.

Our FV for Pinfra is $280 pesos per share almost a double from today's prices.

Why now?

Pinfra just reported their third quarter last week. Numbers were great (as expected). Revenues up 11% YOY, EBITDA up 18%, Net income up 10%, free cash flow generation of 15% annualized, net cash position (mayority) of $8.8 bn MXN.

When such a high quality asset trades at a 15% free cash flow yield, has close to 18% of it's market cap in cash and trades at a TTM EV/EBITDA multiple of 5.8x (3.3x EV/EBITDA on Pinfra L) we think it's time to look again (closely) on this company and figure out if you'd want to own today.

They also just announced they've bought back $1.25bn MXN in the quarter, and $4.3bn MXN year to date. A whole 8% of shares outstanding. While also announcing a $3bn dividend for 2022. (6% dividend yield, 10% when in Pinfra L).

Let's remind ourselves that this asset that now trades for rougly 6x EV/EBITDA not long ago traded at 14-15x. And this is not the case of multiple compression because of growth disappearing. Not by a mile. This, in our opinion, is pure market mispricing.

Worst case scenario in our view is to own a great asset that (between buybacks and dividends) will be paid back to us in five or six years. Best case is to get a multiple re-rating and continue to own this asset for years to come.

Catalyst

Ongoing buyback (8% of shares outstanding to date)

6 or 10% dividend yield (depending on share class)

Mexico re-rating (less optimistic on this perhaps)