VCISF - Vinci SA: Strong FCF Generating Machine

Summary

• VCISF has a portfolio of high-quality road, airport, and contracting assets.
• VCISF had strong financial results in FY22, with solid growth in various divisions and high FCF production in 4Q22.
• The combination of high FCF conversion rate, a large investable project pipeline, and top-notch management team creates a positive feedback loop for long-term outperformance.

Description

VINCI SA ( VCISF ) holds a portfolio of top-tier road, airport and contracting assets. I believe the stock has traded down due to broad macro weakness, which is fair given infrastructure asset investors are yield driven - as such, any change in rates would force shareholders to jump ship to high-yielding assets for better risk-adjusted returns. However, I think the market might be shortsighted on VCISF's recent shift to a more International portfolio and its ability to restore Airports and exploit white space opportunities in Energies.

FY22 review

Overall sales for VCISF came in at €61.7bn, which was just a tad higher than expected. Vinci Energies' stellar organic growth over the course of the year, as well as Airports' performance that blew past my revenue projections, stand out to me as the year's most notable achievements. Additionally, EBITDA and EBIT were ahead of expectations, while Concessions were about where they should have been. At the bottom line, for FY22, VCISF reported EPS of €7.37 and DPS of €4.0. For 4Q, orders totaled €15 billion, an all-time high that, in my opinion, improves the outlook for revenue growth in FY23/24. The majority of the 4Q beat came from Vinci Construction, but I should point out that Vinci Energies also showed signs of re-acceleration in 4Q22, which bodes well for sustained solid organic growth in FY23.

FCF

VCISF's FCF engine is still revved up, having produced over €5bn in FCF in 4Q22, well above consensus expectations. However, I feel obligated to mention that the increase in net working capital despite higher CAPEX was a major factor in this FCF beat. Nonetheless, this has once more demonstrated the primary appeal of VCISF, namely, its ability to continue generating large amounts of FCF that can be returned to shareholders. In particular, I believe the Energies platform and the Airports platform are the two best arguments in favor of VCISF ownership. The results for FY22 show that the company's underlying momentum and profitability are extremely strong, a result of the structural tailwinds that help maintain VCISF's leading positions in both divisions. In my view, the combination of VCISF's high FCF conversion rate (above 1x), a substantial pool of investment-worthy projects, and an exceptional management team work together to form a cycle that leads to sustained success over the long term.

Growth and margin expectations

I think VCISF has a bright future ahead of it. Passenger traffic at airports as a whole should continue to recover and increase, with Cape Verde expected to contribute 100 basis points to this growth in 2H23. Due to inflation-linked agreements in place in all of VCISF's primary regions, I expect a price increase in the high single digits. The unfortunate reality for Autoroutes is that traffic across the French network will suffer as a result of strike action and a slowing economy. Overall, a slight dip in foot traffic coupled with a similar increase in prices should lead to low- to mid-single-digit growth in the top line. That aside, VCISF is also executing well on other fronts, as evidenced by its robust construction performance reports and upbeat 2023 growth projections.

Guidance

Management anticipates continued, albeit moderate growth in revenue and operating income in FY23, with a slight increase in net income despite higher financing expenses. Specifically, management expects Vinci Autoroutes traffic to be on par with 2022, which was 1.7% above 2019 levels, and that Airport operating earnings and traffic would recover, with the latter hoping for strong recovery but unlikely to reach pre-covid levels due to slower recovery in Asia. On top of that, Vinci Energies should continue to expand while maintaining a healthy profit margin. In addition, large EPC projects that were recently won, along with new projects from the renewable portfolio, are also expected to contribute to a minimum 10% increase in revenue for Cobra IS. Last but not least, Vinci Construction will maintain a selective approach while enhancing its operating margin.

Returns algorithm

The IRR algorithm for VCISF has always been the same, and there is no change this time around either. The equation: Pricing + volume growth + FCF yield. As mentioned earlier, the former two would be in the low-single-digit, as such a large portion of returns will be from FCF yield (current ~11%). All in all, investors should expect low to mid-teens returns.

Summary

In 4Q22, VCISF generated a significant amount of FCF, exceeding €5bn, showcasing the company's potential to continuously generate substantial amounts of FCF. The strong FCF conversion rate, the vast pool of investment-worthy projects, and the expertise of its top management create a self-reinforcing cycle that should result in long-term superior performance.

For further details see: