VCISF - Vinci's Concession Businesses Too Cheap A Clear Bet On Mobility Recovery

2023-04-04 11:51:27 ET

Summary

• Vinci SA is an interesting infrastructure player with excellent concession rights to key infrastructure like airports and highways.
• They also have a secularly interesting energy business with substantial recurring revenue from operation and maintenance work as well as strategic tailwinds from the Ukraine war.
• The construction exposures are also quite solid as they are on the public works side and have a decent amount of green tailwinds as they often relate to transport infrastructure.
• With their concessions being the backbone of their cash flows, a recovery in mobility has been a major force to support the continued recovery of the company's financials.
• While a 13x PE is not extremely cheap, it is cheap relative to the quality of the cash flows Vinci is entitled to.

Vinci SA ([[VCISF]], [[VCISY]]) is an exposure that conservative investors should consider. Most of their cash flows are from thoroughfare concession businesses, and their other exposures all have some degree of secular tailwinds that support them thanks to Vinci's niche in civil and industrial engineering.

Relative to the extraordinary moats innate to their business, the 13x P/E multiple for Vinci is cheap, and earnings growth is coming thanks to a pronounced recovery in mobility which still lies meaningfully below pre-COVID levels. The stock's net progress is minimal over the last three years, and the only consolation investors have had so far is the 3.84% dividend yield. However, we believe there is more return potential for Vinci as markets are likely to rotate once again to safer investments as the extent of the recession become more clear.

Vinci Brief

Vinci operates airport and thoroughfare concessions, and in addition to that it has an industrial energy business and another separate business also focused on industrial engineering called Cobra.

The airport businesses are in various countries, including the UK (Gatwick), Portugal, Eastern Europe and Latin America. The main ones are the UK and Portugal.

The thoroughfare business is focused in France, and that is where the majority of Vinci's revenues come from.

Cobra is focused on projects in the Hispanophone countries, while their other brands within the industrial segment are focused on general European projects, including a recent one in Germany to build their first regasification terminals to get them off Russian gas , but also electrification projects. These include both project revenues but also recurring revenues from maintenance, consulting, solutions integration and so forth.

The construction business is quite self-explanatory, and is focused on transport infrastructure and civil engineering stuff, including soil investigation and geotechnical surveying.

FY 2022

Vinci is a top-tier company involved in very high profile projects. They are on a design contract for the Toronto subway, they are building regasification facilities in Germany to take liquefied gas imports, and they have the concession to major airports like London Gatwick.

Orderbooks have been increasing in the Vinci Energies segment as well as in Cobra. In Cobra, many of the contracts are on an EPC basis , which are usually more profitable towards the end of the projects, which means that there is latent profitability as that orderbook liquidates. EPC projects are also skewed towards renewable developments and electrification that are likely to be less responsive to economic changes including recessionary pressures, which is a good thing for resilience. There is also a heavy renewable focus in Cobra as well as in Vinci Energies. Construction orderbooks are up with the substantial focus on public works showing resilience. 30% of these businesses are flow revenues and pretty recurring in nature, things like operation and maintenance.

In the mobility-based concessions, generally we are seeing a recovery in the Q4 2022 to the Q4 2019 levels. As of the H1 2022 , levels of traffic were still 30% less than 2019 levels in airports, and in the thoroughfares traffic had already recovered and EBITDA has grown since 2019. As of the FY 2022, airports still remain relatively depressed, down 19% relative to Q4 2019, but not at all locations like in Portugal and Serbia where things have entirely recovered. Japan is especially weak on the airport side.

With airports improving since the H1, this means that 2023 will likely have a full-year of restored mobility, where the only major risk factor is a recession hitting discretionary travel. But that would focus mainly on the airports segment (and possibly the stadiums business where Vinci conducts the programming for events at their stadium concessions), which is about one third of the less discretionary highway, roads and other thoroughfare concessions (things like railways) that Vinci also has.

EBITDA ultimately is growing in all segments.

Bottom Line

While airport traffic shouldn't be particularly recession resistant, we expect the delta to be positive as we move past COVID-19 in most geographies. Thoroughfares, which includes traffic from freight, should remain broadly resilient. Renewable investment shouldn't subside, and strategic energy development remains a relatively important market for Vinci. Moreover, construction is focused on public works, that aren't likely to see substantial declines in an economic recession.

We believe there is still capacity for Vinci SA earnings growth incrementally into 2023. You get this with almost a 4% dividend yield and a 13x P/E multiple, which implies less growth and with lower certainty than Vinci's business is capable of. There are also other smaller segments that add value to the company like ownership of renewable assets through Cobra and the real estate division. Vinci SA appears a buy at these levels.

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