Description

Executive summary and valuation

Vinci (“DG”) is a ~€40bn market cap concession, construction and contracting businesses. We believe Vinci presents an attractive risk-reward with well protected downside in the form of long-lived concession assets and attractive upside from its contracting business, which we believe is valued at or close to zero at the current share price of €71. With more reasonable assumptions for what the contracting business (which has net cash) could be worth, we believe fair value for DG is roughly ~€100 per share.

DG owns marquee infrastructure assets (Portuguese / Gatwick airports, French tollroads, etc.), which we believe account for most / all of the company’s current valuation, and has a large and well-managed construction business which is unlevered (actually has net cash), has a strong backlog of projects, and has historically never generated negative EBIT. Each of DG’s assets is individually financed with non-recourse debt, and the Company has very little holdco debt with significant liquidity. At DG’s current value of ~€71 per share, we believe investors are discounting BOTH overly-bearish traffic assumptions for DG’s infrastructure assets AND attributing virtually no value to DG’s construction business, which we believe is inappropriate.

Based on the valuations discussed in more detail below, we believe DG’s equity value in its concession assets are worth ~€74 per share (~€46 of which is tollroads, ~€28 of which is airports). These valuations generally are based on the DCF value of each concession, including what we believe are conservative assumptions related to COVID-19 traffic impacts, at an enterprise discount rate of ~7-8%, depending on the asset.

While it is difficult to forecast the precise value of the contracting businesses in a highly-disrupted post-COVID world, we believe the contracting businesses is more appropriately valued on expected 2021 earnings / cash flow rather than a 2020 which will clearly be heavily impacted by virus lockdowns. Understanding the range of possible outcomes for 2021 is wide, we believe Vinci’s contracting business should be worth between €13 and €29 per share. This segment is discussed in more detail below but simplistically, the business has €3 per share in net cash today. If we put a 6x multiple on the lowest EBIT generated by the business since 2007 (€1.1bn in 2012 – and the company has completed a number of tuck-in acquisitions since 2012), the operating business would be worth ~€10 per share (in addition to the €3 of net cash). If we put a more reasonable 10x EBIT multiple on a reasonably-reduced EBIT of €1.6bn (versus previous consensus of €1.7-€1.8bn), the operating businesses would be worth ~€29 per share (again, in addition to the €3 of net cash).

Finally, DG’s holdco has €3.5bn of net debt (€6 per share), and €1.1bn of after-tax pension liabilities (€2 per share). In total, we believe DG should be worth ~€100 per share (+44% from current), with a downside attributing no value to contracting of ~€65 per share.

Airport assets (worth ~€28 per share)

ANA

The largest of Vinci’s airport assets is the concession for ANA Aeropuertos de Portgual, which operates the major airports in Portugal under a concession that runs until 2063. While traffic is severely impacted by the coronavirus, we believe ANA is a valuable asset with plenty of liquidity (it has no net debt), high EBITDA margins (~66% in 2019) and an attractive monopoly position.

Assuming 2020 traffic declines 50% and does not fully recover 2019 levels until 2024, we believe ANA is worth ~€12.50 per DG share (using a 7.5% - 8.0% EV discount rate, equivalent to a total valuation of ~11-12x 2019 EBITDA). Our assumptions for ANA are detailed below, and can be easily compared to close peer Aena, which is the monopoly operator of airports in Spain.

Gatwick

The next largest (though far smaller) airport asset is London’s Gatwick airport, which Vinci owns 50% of (Global Infrastructure Partners is the other owner), and is a freehold property (i.e. it is not a concession that expires). Gatwick is highly levered, but it’s debt has accommodative covenants (3-year average trailing EBITDA), none of its is recourse back to Vinci, and given the quality of the asset, we believe lenders are highly likely to waive any short-term, virus related breaches.

Gatwick was acquired in May 2019, obviously in a pre-virus world but also near the height of Brexit-related disruptions, for £2.9bn (€3.3bn). Valued at this acquisition price, it would be worth €5.75 per share to Vinci, however it seems prudent to take a discount to this value given the unprecedented COVID-19 traffic disruption. Valued at ~14x 2019 EBITDA (a higher multiple vs. ANA reflecting its permanent-asset status and value as a premier infrastructure asset), or a ~30% discount to what DG paid for the asset one year ago, we believe Gatwick is worth ~€4 per DG share.

Other smaller airport assets

In addition to ANA and Gatwick, DG owns a number of other, smaller airport concessions spread throughout the world. While I won’t describe each of these in detail, several sell-side analysts covering Vinci have recently published detailed pieces which dive deeper into the value of each of these assets, and Vinci’s annual report provides detail on the capital structure and concession lives of each of these assets. 

Simplistically, if these assets were valued at ~11x 2019 EBITDA, they would be worth ~€11.50 per share to Vinci. This multiple is too high for some (AERODOM, for example, who’s concession expires in 2030) and too low for others (Osaka-Kansai, etc.) where long-lived assets and favorable regulation on tariffs allows for higher returns on capital. It does, however, provide a reasonable benchmark in total.

For more detail on these assets, see recent reports published by UBS or BAML which dive into each asset and comes to a roughly similar valuation to the simplistic analysis described above.

Tollroad assets (worth ~€46 per share)

ASF + Escota

By far Vinci’s largest asset is Autoroutes du Sud de la France (ASF), which is a ~3 thousand km network of toll roads running from Nantes in the west to Lyon in the east, and south to Biarritz and Toulon. ASF is operated by Vinci under a concession running until 2036 (and 2032 for the much smaller Escota portion of the network). Over the last 15 years, traffic on ASF has grown at a ~3% CAGR with the single worst year (2012) reporting only 0.1% growth. Compared with airports, we believe toll road traffic should be resilient in a post-COVID world, once quarantine restrictions are eased, as toll roads are a social-distancing-friendly way to travel and have historically received a “trade-down” benefit from more expensive airline travel.

Although ASF is levered (€9.7bn of debt, or ~3.2x 2019 EBITDA), the asset’s high margins (~75% EBITDA margins in 2019), low capex (~€360mm in 2019, or ~11% of EBITDA), and cheap debt (interest rate <2%) provide significant downside protection and would allow ASF to be free cash flow positive (with no opex or capex cuts) even with a total 2020 traffic decline of ~60%. Even in the most extreme of virus-impacts, we believe ASF has virtually no credit risk.

Assuming it takes two years for ASF traffic to recover to 2019 levels, no “catch-up” growth and a continuation of ~3% historical growth after 2023, we believe ASF should generate ~€53bn of after-tax, enterprise free cash flow over the remaining life of the concession. Discounted at a 6.5% to 7.5% enterprise-wide discount rate (equivalent to a ~9x 2019 EBITDA multiple), this cash flow stream is worth ~€31.70 per Vinci share today.

Cofiroute

The second major tollroad asset operated by Vinci is Cofiroute, roughly 1.1 thousand kms of tollroads running to the south and west of Paris. DG operates Cofiroute pursuant to a concession which expires in 2034. 

Similar to ASF, Cofiroute is levered (debt of €3.6bn is 3.2x 2019A EBITDA), but well protected by high margins (~75% in 2019), low capex (~15% of EBITDA) and cheap debt. With similar traffic assumptions as described above (gradual recovery by 2023, then a return to historical 3% growth) Cofiroute should generate ~€16bn of after-tax, enterprise FCF. Discounted at a 6.5% to 7.5% enterprise discount rate, we believe that cash flow stream is worth ~€9.70 per DG FP share today.

LAMSAC (Peru) and other minor tollroad assets

In addition to ASF and Cofiroute, Vinci owns a number of smaller concession assets spread around the world. The largest of these assets is LAMSAC, which operates a 25 km tollroad ring around Lima, Peru and has a concession that expires in 2049. The LAMSAC asset we believe generates ~€90mm of EBITDA and has no material capex. At ~14x EBITDA, less LAMSAC’s ~€330mm of debt, LAMSAC should be worth ~€1.65 per share.

Finally, DG owns a number of smaller concession assets (including smaller French tollroads Arcour and Arcos, tollroads in Greece, etc.) which we believe are collectively worth ~€1,600mm or roughly €3 per share. While these assets are not worth going through in detail, the detailed sell-side research reports mentioned in the airports section above provide some additional detail on these assets.

Contracting businesses (worth €15 - €30 per share)

Vinci’s contracting business breaks down into three sub-segments: Energies (~50% of contracting EBIT), Eurovia (~26%) and Construction (~24%). Through February 2020, Vinci’s contracting business had built its strongest backlog of projects in years, which should provide revenue support for the next several years, even with cancellations. The business generates roughly half of its revenue in France, with outside geographies broken down in the following table:

Energies

The largest and highest-quality portion of Vinci’s contracting segment is its Energies sub-segment. Energies performs engineering, design and construction for large scale infrastructure projects (~28% of Energies sub-segment) focused on grid design, public transport, etc., industrial clients (serving a wide range of industries) and IT / telecom industries. Energies has the highest margin and ROIC of Vinci’s the Contracting sub-segments.

Eurovia

Eurovia is primarily engaged in road and rail construction, competing in France with Eiffage and Colas and internationally with Strabag, Ferrovial, Balfour Betty and Skanska, among others. Eurovia owns many of its own aggregates reserves, providing integration and margin benefits vs. non-integrated peers. The majority of its work is paid for by governments (local, state and federal) and conducted pursuant to multi-year contracts as the company works through its backlog. As an example, Eurovia is the primary contractor working on the Grand Paris Express project – one of the largest infrastructure projects in Europe (details here: https://www.vinci.com/vinci.nsf/en/news-update/pages/grand_paris_express_the_biggest_infrastructure_project_in_europe.htm). While it varies by geography, we believe many of these projects are being deemed essential services and allowed to continue construction even in the current environment, while those projects that are disrupted should be able to claim force majeure due to declared national state of emergencies. 

Construction

Vinci Construction performs engineering and building services for non-residential commercial customers around the world. The business competes with Eiffage, Bouygues construction, Fayat, NGE, and Balfour Betty, among others. This sub-segment works on projects of a range of size, from >€100mm projects to projects worth singe-digit million €. 

Contracting businesses historically and in the current environment

Vinci has historically managed its Contracting businesses exceptionally well, remaining profitable thru the cycle. Exposure to government customers / infrastructure related projects and long lead times have historically muted / delayed the impact of business cycles on Contracting top-line, with revenue only falling modestly in 2009 (-6%) and after European government budgets became particularly tight after 2012 (down ~10% cumulatively). As reported on its recent Q1 trading update, Vinci’s Contracting segment is entering the new COVID-19 period with its highest ever Contracting backlog – while some of these projects, particularly serving private / industrial customers, may ultimately be cancelled or delayed, this should provide some tailwind for the business for at least the next few years. Vinci has a wide range of contract types, but has recently disclosed that they believe virtually all of their contracts contain force majeure clauses that should protect the business against write downs or losses on projects experiencing virus-related delays.

The Contracting segment has a highly variable cost structure – roughly ~30-40% of total costs are fixed, of which roughly half is labor. Many European countries (especially France) have put in place social programs which allow impacted businesses to furlough workers more easily than normal, which we believe should lower the total fixed costs in the business even further. Running this math through (and assuming modest furloughs and no reduction in other fixed costs) implies Contracting revenue could fall up to 25% before going EBIT-negative and up to 30% before going EBITDA-negative. We therefore believe there is no good justification for placing a negative value on this business, as we believe in implied by the current share price.

Key Risks

• European sovereign yields spike

• Infrastructure assets are particularly sensitive to yield changes

• Dividend cut

• We believe this is inevitable and should be widely-anticipated by the market

• While DG could continue to pay its dividend (plenty of liquidity) we believe suspended dividends (particularly from large, public corporations) is the social “cost” of easier labor / furlough policies in many European countries

• Slower than anticipated recovery in toll road and airport travel

• Write-downs in Contracting

• As discussed above, we believe this is unlikely however it is impossible to have full visibility into the breadth of Contracting contracts or the many virus-related impacts 

Catalyst

Lifting of stay at home restrictions, normalization of travel, positive earnings in Contracting segment