Ferrovial: Setting its Sights on North America?
Ferrovial, an infrastructure holdco, is chasing a US listing. Its stock price has outperformed the sector on the news after making a statement about investors’ opinion on the subject . As it happens, the majority of the company's assets are in North America, so that the decision to list in the US is consistent with a hoped for access to a wider capital pool. It does not hurt shareholders or management stock options either. What’s not to like? Only the Spanish roots of Ferrovial are shocked. By discounting the benefits of a US listing on the spot, Ferrovial has wiped out our upside potential though.
The growing North American market
As shown below, the US has experienced a decline in its infrastructure spending as a percentage of GDP. It peaked at 0.57% in 2009 and has since decreased to 0.47% in 2021.
Moreover, a study conducted by Ipsos has concluded that only 30% of Americans are satisfied with its country's national infrastructure, compared to the global world average of 38%. Additionally, 57% of respondents believe that the US is not doing enough to address infrastructure needs.
Among the legislation enacted in US since late 2021 to enhance economic competitiveness, innovation and industrial productivity, the Infrastructure Investment and Jobs Act (IIJA) stands out as directly related to infrastructure, presenting potential benefits for the likes of Ferrovial. This legislation entails substantial public investment in US transportation networks, broadband and public works projects. With an estimated allocation of $1.2tn over ten years, this law explains the resilience of the infrastructure market despite higher interest rates which were supposed to cool down demand. It also underscores the US commitment to modernising its ageing infrastructure. Therefore, Ferrovial's order book stood at €15bn in September 2023, equivalent to 20-24 months of revenues, with 50% of the projects located in North America. Additionally, highway contract awards, a leading indicator of construction activity, are on the rise due to funding from the IIJA, propelling market growth. The contract awards have consistently exceeded the 10-year average over the past two years, reinforcing our optimism about the demand outlook.
A dividend collector
Ferrovial's ability to maintain an appealing shareholder return is closely tied to the dividends collected from its infrastructure assets. The peak in dividends from these assets occurred in 2019, totaling €729m. However, the impact of COVID-19 disrupted this pattern, especially given that a significant portion of Ferrovial's assets involves transportation infrastructure with inherent traffic volatility. While dividends from airports are yet to resume, there has been a notable rebound in traffic on North American toll roads, enabling the resumption of dividend payments. As a result, our estimate suggests that the total dividends received by the company in 2023 could amount to €718m, with 85% originating from North American toll roads, while in 2019 the contribution was 65%.
Anticipating a continuous rise in population leading to increased congestion, Ferrovial expects that this pricing power will drive growth and, consequently, result in higher dividends. With seven road projects in the pipeline, all located in the US, the company aims to expand its presence further in North American roads.
Ferrovial has projected the dividend receipts for the 2024-26 period to total €2.2bn, with shareholder distributions reaching €1.7bn. It is important to note that these projected dividends exclude any contribution from Heathrow.
Heathrow sale
We see Ferrovial as a holding company specialising in infrastructure which operates by rotating its portfolio of mature assets with limited growth prospects into assets hopefully offering greater growth potential. Despite the recovery in Heathrow's traffic, we view the divestment positively.The sale agreement is contingent on the tagged shares being sold, so that parties are exploring options to satisfy this condition. This is akin to say the completion of the transaction is in doubt as the exit boat is under the water line. The buyers must be entertaining fresh ideas about the ‘right’, i.e. lower price. If approved, the sale of Heathrow would result in toll roads representing 85% of the group's Net Asset Value (NAV). We anticipate that Ferrovial might reinvest a portion of these proceeds in airports to rebalance its portfolio. Should that transaction fail, Ferrovial will presumably have to gear up to pursue its US expansion. It has a long history of not being shy in that respect (2023 net debt/EBITDA seen at 10.6x).
Should European investors take the Ferrovial ride? Yes. For at least two reasons:
1) competence at sweating assets including in North America; and
2) the CRH relisting in the US showed that the P/E can increase by c. 40% nearly ‘overnight’
For the full research with the valuation, please contact us - https://www.alphavalue.com/#trial
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