Description
PINFRA* MM (Promotora y Operadora de Infraestructura, S.A. de C.V.)
The company that I am recommending has the following characteristics:
1.It is a key player in the Mexican infrastructure development industry.
2.Its main businesses are stable by nature and have very predictable cash flows (toll road concessions and ports).
3.It is a growing business, traffic continues to increase in both the toll roads it operates and the port.
4.Cash on hand is 70% of the current market cap and the company now trades at what we believe is half its LIQUIDATION value.
5.In addition, the company has US$600 mm of tax credits which effectively mean that they won’t pay taxes for some years ahead.
The company that I am talking about is Pinfra, a very important concession developer and operator in Mexico (it is the 2nd largest operator of toll roads in the country after the Federal government), and it trades in the Mexican Stock Exchange.
The company is, in my opinion, both an undervalued and misunderstood asset:
·It has a US$240 million market cap and a net cash position of US$140 mm!
·Its businesses are easy to understand; they generate a lot of cash year after year and are predictable by nature; however, nowadays, it is possible to buy the company at about half its liquidation value.
·The company has many years of experience as a successful concession operator.
·Industry growth should be substantial because of Mexico’s infrastructure needs.
·Ahead of presidential elections in Mexico, infrastructure development is as safe a sector as can be, given that all major candidates agree on the urgency of this matter and have made it a center point of their respective campaigns.
The way I structured this very easy to understand idea is:
1. Company History
2. The business and its growth potential
3. Infrastructure needs in Mexico
4. Valuation
a. Current valuation
b. Liquidation value
c. Ongoing business scenarios
d. Peer analysis
e. Residual value analysis
5. Risks
6. Catalysts
I. Company history:
Pinfra is the product of the reorganization of Grupo Tribasa. (Tribasa filed for the Mexican equivalent to Chapter 11 in 2000 and emerged from bankruptcy in 2003).
In its heighday, Tribasa was a US$3bn market cap company and was the 2nd largest construction company in Mexico.
It is well known that, during President Salinas’ term, Mexico went through an investment-led construction boom during which the main players overleveraged their balance sheets in order to compete for the large projects. This overleveraging proved to be a huge burden when the downturn came and led to the bankruptcy of most of the big domestic players.
The only big player that survived was ICA thanks to very aggressive cost cutting and various recapitalizations. (The last big one by Carlos Slim).
Today, Pinfra is backed by over 40 years of experience from Tribasa but, in our opinion, it is a totally different company in terms of its culture after going through a very difficult period that almost led to its demise five or six years ago.
It is also worth noting that today’s Pinfra is a collection of totally different businesses compared to yesterday’s Tribasa. Pinfra is now very concentrated in the highly lucrative concession business and prefers to operate toll roads rather than building them.
This does not mean that Pinfra is no longer a construction company; the point is that they prefer to be in high-margin businesses and leave the construction risk to somebody else.
II. The business and its growth potential
Pinfra is a collection of three very stable businesses:
·Toll road operating company
·Seaport business (Altamira port)
·Asphalt mix production business
A brief description of each of the businesses follows:
Toll road operating companies:
The company operates six toll roads in Mexico and one in Ecuador. Pinfra is the 2nd largest toll road operator in Mexico, after the Federal Government.
Among its most important roads are the Mexico-Toluca toll road, the Ecatepec-Piramides road and the Peñon –Texcoco road.
These toll road concessions have been securitized by Pinfra but the operating fee is still charged by the company year after year until the concessions expire and that is in itself a highly lucrative business (average EBITDA margins from the operation of the toll roads are 45% and should represent US$8.7 mm EBITDA during 2006).
These concessions expire on different dates, as shown below:
Concession Date granted End of Concession
Mexico-Toluca April 7, 2006 July 4, 2030
Ecatepec-Piramides May 29, 2003 December 11, 2017
Armeria-Manzanillo May 29, 2003 November 9, 2020
Peñon-Texcoco December 23, 2004 March 18, 2023
Tenango-Ixtapa October 4, 2005 March 31, 2026
Another aspect to take into account is that the securitized toll roads have a residual value that has to be taken into account in the Company’s valuation (residual because of the time difference between the concession’s ending and the estimated conclusion of the payment of the securitized debt); we will go into this with more detail when talking about the company’s valuation.
In addition, the company owns the concession of two other toll roads which have not been securitized:
Concession Date granted End of Concession
Atlixco-Jantetelco February 25, 2006 February 25, 2036
This road’s estimated 2006 financials are (US$):
2006e
Revenues $4.6
Ebitda $3.6
Ebitda Margin 78.7%
The other toll road is the one in Ecuador which ends in December 2009 and will contribute US$2.1mm EBITDA to the company with a 34.2% margin.
Growth Opportunities in the toll road business
Traffic on Pinfra’s highways has increased from 108,800 vehicles a day in 2002 to 129,500 vehicles a day in 2005, a 4.5% CAGR during the period; however, between 2004 and 2005, it grew at a 6.5% pace following a slight tariff adjustment.
We estimate that traffic should continue to grow at about a 4% pace during the next 5 to 10 years.
On the other hand, of the US$700bn of investment in infrastructure that are needed in Mexico over the next ten years (more on this later), US$57 billion are for highways and transport development in particular.
There is a great need for highway development in Mexico and I believe that Pinfra’s experience (being the 2nd largest highway operator in the Country), will prove very valuable.
In the short term, the company is bidding for the equivalent of US$1.185 billion in highway concessions. These concessions are due to be awarded this year.
Seaport business
Pinfra owns one of only two terminals in the Altamira port.
Altamira is one of Mexico’s most important ports, located close to Veracruz in the Gulf of Mexico. The terminal has had five years of continued growth and prospects are bright.
Container growth has increased from around 65,000 pallets in 2001 to over 120,000 during 2005; General cargo has gone from 51,000 pallets to 155,000 in the same period; Auto shipping from around 10,000 pallets to 45,000 pallets, and of course, steel-related shipping has exponentially grown from 42,000 pallets in 2001 to 250,000 last year.
The point here is that Mexico’s port business is highly underdeveloped and has great growth prospects ahead. Pinfra should benefit proportionately.
Altamira is a federal-granted concession that expires in 2016 and is extendable at the company’s option until 2036.
The port’s financials are (US$):
2005 2006e
Revenues $29.9 $32
Ebitda $7.4 $8.2
Ebitda Margin 24.7% 25.6%
As can be seen, this is a predictable, high margin business.
Asphalt business
This is a very stable business whose growth is also closely tied to infrastructure development in Mexico City and its surroundings.
Mexico City’s streets are mostly paved with asphalt since concrete is not financially viable and asphalt works better given the city’s orography and climatic features.
Total production has grown from 575,000 m3 in 2001 to 864,000 m3 a year in 2005, an 8.5% CAGR growth pace.
Again, Mexico City and its surroundings ,the most densely populated center in the world, has a high need for pavement and infrastructure maintenance and development. The company’s asphalt business should benefit from that.
Pinfra’s asphalt reserves amount to 22 million m3 and currently produce 55% of the asphalt sold in Mexico City.
This division’s financials are (US$):
2005 2006e
Revenues $28.8 $31.2
Ebitda $5 $5.9
Ebitda Margin 17.4% 18.8%
III. Infrastructure needs in Mexico
Studies by both the School of Civil Engineers in Mexico and the private sector (namely Carlos Slim’s “Acuerdo de Chapultepec”), indicate that, in order to be competitive and close the investment lag that Mexico now has in infrastructure projects in general, approximately 7% of the Country’s GDP should be allocated to infrastructure investments during the next 10 years. This means somewhere around US$45 billion during 2006 growing at about 12% per annum to reach a US$95 billion investment by 2015.
The total investment in that 10-year period is estimated at US$700 billion of which roughly US$250bn will be pegged to housing projects, US$280bn to large scale infrastructure projects and the remaining US$170bn to smaller scale, regional development projects.
Pinfra is now bidding for close to US$1.2bn worth of concessions from the federal and local governments as shown below:
Concessioned projects Value in MM Usd
Coahuila & Nuevo Leon Highways 200
Sonora Highways 75
Morelos Highways 220
Michoacan Highways 500
Puebla Highways 70
Chiapas Highways 50
State of Mexico Highways 70
Mexico’s waste management 10
Total $1,195
All of these projects are due to be awarded during 2006.
IV. Valuation
2006e EBITDA Breakdown (US$)
Toll road operating companies 8.7
Atlixco-Jantetelco 3.6
Ecuador Highway 2.1
Altamira Port 8.2
Asphalt Biz 5.9
Total EBITDA 28.5
Est 2006 CAPEX 8
EBITDA-Capex 20.5
FCF 29.6 (Adding $9.1mm of Interest Income)
a) Current valuation
Price/Share $7.2
Shares Outstanding 380 mm
Market Cap P$2,730
US$ 248 mm
Net Cash US$ 140 mm
EV US$108 mm
EBITDA 2006e US$28.5
At current prices, Pinfra trades at:
EV/EBITDA 3.8x
EV/EBITDA-Capex 5.2x
EV/FCF 3.6x
FCF yield 28%
b) Liquidation value
I think, conservatively, liquidation value for the company is:
06e EBITDA Multiple EV
Toll road operating companies 8.7 7 61
Atlixco-Jantetelco 3.6 7 25.2
Ecuador Highway 2.1 3.5 7.3
Altamira Port 8.2 7 57.4
Asphalt Biz 5.9 6 35.4
Ongoing Businesses EV $186.3
+ Net Cash $140
+ Residual value of
toll road Securitizations (*) $125
EV $451
Shares Outstanding 380
Px/share US$ 1.18
Px/share P$ 13.05
Current Px/share 7.20
Upside 82%
·We use a 7x EBITDA multiple for very stable, predictable cash flows of toll road concessions and port operations in Mexico.
·The way we get to the US$125 mm value for the residuals is by taking into account the number of years left in the concession and estimating the proceeds of securitizing those flows at current market rates.
·If you want to be extra-conservative and value those residuals at zero, the fair EV would be US$326 mm or $9.4 per share which would imply a 31% upside.
·An added margin of safety is that we are valuing the company’s US$600 mm of tax losses at zero.
·Since this is a liquidation analysis, we are assuming zero value for the projects that the company may win this year.
c) Ongoing business scenarios
We believe that Pinfra will be able to use its cash reserves to win $200 mm worth of 30-year projects with a 15% dollar IRR.
To be conservative, we will discount that new projects at 10% WACC.
06e EBITDA Multiple EV
New Projects’ present value 290
Toll road operating companies 8.7 7 61
Atlixco-Jantetelco 3.6 7 25.2
Ecuador Highway 2.1 3.5 7.3
Altamira Port 8.2 7 57.4
Asphalt Biz 5.9 6 35.4
Ongoing Businesses EV $476.3
+ Net Cash $0
+ Residual value of
toll road Securitizations (*) $125
EV $601
Shares Outstanding 380
Px/share US$ 1.6
Px/share P$ 17.4
d) Peer analysis
CINTRA (CIN SM- Cintra Concesiones de Infraestructura), a part of Grupo Ferrovial (FER SM), which operates toll highways and garages in Europe and North America, trades at 25x trailing EBITDA (it has EBITDA margins of 63%).
On the other hand, Cintra represents close to 8.5% of Ferrovial’s revenues and its EBITDA margins are fully 490 bps higher than Ferrovial’s consolidated (14%); Ferrovial trades at 13x trailing EBITDA.
On the port side, Associated British Ports (AB Ports) is subject to a takeover bid by Goldman Sachs and Macquarie. AB Ports (ABP LN), trades at 13x trailing EBITDA and its 5-year average multiple has been 10x EBITDA.
We will consider a 12x trailing EBITDA multiple for Pinfra’s toll business (half that of Cintra’s), and a 9x trailing EBITDA multiple for the port business.
With that, our liquidation value analysis would look like this:
06e EBITDA Multiple EV
Toll road operating companies 8.7 12 104
Atlixco-Jantetelco 3.6 12 43
Ecuador Highway 2.1 3.5 7.3
Altamira Port 8.2 9 77
Asphalt Biz 5.9 6 35.4
Ongoing Businesses EV $286
+ Net Cash $140
+ Residual value of toll road Securitizations (*) $125
EV $550
Shares Outstanding 380
Px/share US$ 1.45
Px/share P$ 16
Current Px/share 6.50
Upside 123%
e) Residual value analysis
The way we get to a value for the company’s residuals is by taking into account the number of years left in the concession, when the debt will be paid down completely and estimating the proceeds of securitizing the remaining cash flows at current market rates.
Concession Amount Securitized Est Payment Date End of Concession
Mexico-Toluca US$570 mm Feb. 2020 July 4, 2030
Ecatepec & Armeria US$176 mm May 2011 November 2020
Peñon-Texcoco US$168 mm Dec. 2016 March 2023
Tenango-Ixtapa US$63 mm Oct. 2017 March 2026
We estimate that, conservatively, the remaining cash flows could be securitized for US$125 mm.
V. Risks
·Mexico is weeks away from a very challenged presidential election. The two main candidates are practically tied in the polls. The leftist candidate, Andres Manuel Lopez Obrador, has a very populist message and has already said that he is against duopolies and excessive concentration of power in business in general. Because of the elections, there might be uncertainty and volatility but my personal view is that if AMLO actually wins (worst case scenario), Pinfra would do well since both candidates have repeatedly said that infrastructure development is a national priority.
·Interest rate hikes are certainly a risk to infrastructure development in Mexico and to Pinfra’s success.
Catalyst
-Analysts starting to cover the company.
-Free cash flow generation.
-Company winning concessions this year.
-Company aggressively buying back stock.