VCISF - Vinci: An Undervalued Infrastructure And Energy Champion

2023-07-24 04:30:58 ET

Summary

• Vinci is the world’s largest transport infrastructure owner & operator and independent energy contractor.
• We find the valuation appealing and are drawn by the upcoming earnings growth combined with the potential for higher capital returns.
• At a conservative multiple, Vinci offers an 18% upside, and we recommend building a long position on Vinci shares.

We present our thesis on Vinci (VCISF), the world's largest transport infrastructure owner & operator and energy contractor. We find the valuation appealing and are drawn by the upcoming earnings growth combined with the potential for higher capital returns. Moreover, we believe the market is currently underestimating Vinci's Energy business. We would like to highlight that Vinci is also an attractive play for investors focused on generating dividend income.

Overview

Vinci is a French concessions, energy, and construction company. It is present in 120 countries and has more than 4000 business units. In FY2022 Vinci generated €61.7 billion in revenue out of which 55% internationally and 45% in France. The Concessions business which consists of Vinci Autoroutes and Vinci Concessions, with more than €40 billion of capital employed, uses an integrated model to design, finance, build and operate motorways, railways, and airports. The Energy business which consists of Vinci Energies and Cobra IS, with €9 billion of capital employed, provides multi-technical solutions, executes EPC contracts linked to energy, and develops renewable energy assets. Vinci Construction designs and builds infrastructure and various buildings, and Vinci Immobilier develops real estate.

Over the last decade, Vinci has performed strongly providing an annualized TSR (Total Shareholder Return) of 15% vs 10% for the CAC40 and Stoxx600. Meanwhile, underlying revenue has compounded at 2.6% CAGR, Net Income at 9.1% CAGR, and Free Cash Flow at 11.7% CAGR. Vinci has generated nearly €35 billion of FCF between 2013 and 2022 or 55% of its present market capitalization. The stock is liquid and easy to trade, in 2022 ca. €500 million worth of shares were exchanged daily.

High-Quality Concessions

Vinci has a high-quality asset base that consists of long-term assets with little to no disruption risk, a significant moat, and a high degree of inflation protection. The naturally monopolistic concessions have provided low volatility growth, with EPS growing 8 out of the last 10 years.

Vinci Autoroutes includes 4400+ kilometers under concession and owns 50% of France's toll roads. In 2022, Vinci Autoroutes generated €4.4 billion of EBITDA (74% margin). The earliest concessions to expire are Escota and Cofiroute in 2032 and 2034 respectively. Over the last years, several toll roads have been benefiting from higher heavy vehicle traffic driven by near-shoring trends and e-commerce. We expect these favorable tailwinds to continue. A major investor scare regarding the toll road concessions has been higher taxation. There is no clarity regarding this unfortunately, but we expect the impact to not be severe, especially as there is scope to rearrange the remuneration mechanism if taxation is increased to balance out the effects.

Vinci is uniquely positioned to benefit from the energy transition through several avenues including transport. We believe that transport and energy infrastructure will be more closely linked in the future, especially as a large part of carbon emissions is generated by road transportation. The current road infrastructure needs to be upgraded to comply with our emissions goals. This requires significant capex to be invested by concessionaries and sets the path for considerable growth as concessionaires should be compensated through a higher concession duration. The upgrades could include EV-charging infrastructure, renewables, decongestion measures, sharing, free-flow tolls, etc. The total size of the investment could be as up to a double-digit billion-euro amount which can imply a significant concession life extension.

Vinci Airports owns 12 airports in France, 10 in Portugal, 2 in the UK, 1 in Serbia, 5 in the USA, 13 in Mexico, 1 in Costa Rica, 1 in Chile, 6 in Dominican Republic, 8 in Brazil, 7 in Cape Verde, 3 in Japan and 3 in Cambodia. In total airports had a traffic of 210 million passengers, still 30% below the pre-pandemic peak. Vinci Airports generated ca. €1.6 billion of EBITDA (60% margin) in 2022.

We forecast strong EBITDA growth at Vinci Airports, driven by scope (airports in Brazil and Mexico), higher traffic, and inflation-linked tariff increases. Moreover, the Portuguese airport concessionaire ANA and the Gatwick Airport could grow additionally through higher capex. We forecast €2.5 billion of Airports' EBITDA in FY2024 or nearly €1 billion more vs pre-pandemic levels.

Vinci Energies

Vinci Energies is the largest independent energy services provider in the world. It generated ca €1.1 billion of EBIT in 2022 (at a 7% margin), mostly from small recurring contracts with an average size of €63k. Cobra IS, a leader in applied industrial engineering and specialized services generated €0.4 billion in EBIT (at a 7% margin). Since it was founded the energy business has been growing EBIT at low double digits with little volatility. As electrification accelerates over the following years driven by the green transition trends, we expect this growth to be sustainable. We forecast high single digits EBIT growth in the mid-term. Moreover, we see significant scope for valuation creation at the renewables JV with ACS. The business is currently in the ramp-up phase and should accelerate to 2GW of capacity construction per year. Given current and expected long-term energy prices our outlook on renewables is very constructive.

Valuation

We forecast €8.4 billion of EBIT and €8.5 of EPS in 2024. At its current share price of €108 / share, Vinci is trading at only 12.7x forward EPS. The pre-pandemic average is higher than 15x.

We believe that the fundamentals are currently looking better than historically, and such a discount cannot be rationally justified. From our discussions with various investors, we believe the discount is due to capital allocation fears as some major toll road concessions approach expiry between 2032-2036 and capital may be allocated to suboptimal investments to replace earnings. However, we believe there are a few additional points to consider. As we pointed out, there may be scope for a significant extension coming from the green motorway program. Moreover, management has demonstrated excellent capital allocation capabilities so far. We believe this discount should eventually narrow as more capital gets returned or reinvested in the concessions. In addition, this multiple implies that the market is underestimating the acceleration of Vinci Energies.

At a very conservative valuation, we value Vinci at 15x forward earnings or at €128 / share, or $142 / share implying 18% upside. However, given the earnings quality and growth, we believe it could be worth as much as 17x forward earnings or €144 / share or $160 / share, implying 48% upside.

Over the last 10 years, the dividend payout ratio has been over 50%. We believe there is significant scope to increase up to 65-70% while maintaining good leverage ratios and without affecting growth prospects. This would also allow investors to crystallize value. A target 65% pay-out in 2025 could mean as much as €6 / share in DPS, implying a 5.5% dividend yield.

Risks

Risks include but are not limited to adverse regulatory and taxation changes with lower than expected compensation, macroeconomic slowdown/downturn, operational cost increases that cannot be passed through, contract losses, electricity price declines, a slowdown in the green transition, adverse capital allocation decisions, value destructive M&A, etc.

Conclusion

We recommend building a long position on Vinci shares given the underlying fundamentals, attractive valuation, and capital returns.

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