ACS cash flow profile is now more resistant

ACSACS headquarters in Madrid

Santander Corporate & Investment | We reiterate our recommendation to Buy after revising our model with the aim of including the performance in the first quarter of 2019 and recent tendencies. We have lowered our new objective price (OP) for the close of 2019 from 4.7€/share to 42.5€/share mainly because the valuation at market prices of CIMIC (without recommendation) in our model.

There are no major changes in our estimates, although the weaker performance of CIMIC and the new premise of slightly higher outflows of operating capital had a negative impact on our estimate of net operating profits for Hochtief (without recommendation) – now 632 Mn€ compared to the previous estimate of 694 Mn€, not far from the extreme lower range of the company´s guidance for 2019 of 640-680 Mn€ – and of cashflows. Even so, the operational results of the other businesses were solid in the first half of 2019 and partially compensated for the adverse factors we have mentioned.

The contracts recently won in Australia support our opinion that there are no structural changes and that, before long, this will mitigate the loss of confidence in CIMIC which is being seen in the market (share price has fallen 30% since the publication of the results for first half 2019). Meanwhile, CIMIC is buying back shares (it began on 6 September and has acquired 0.1% of the capital), which seems to us a current decision in terms of the allotment of capital, given the current share price and that it indirectly creates value for ACS shareholders.

We are ever more convinced that: (1) the cash flow profile of ACS is now more resistant (c.32% of the cash flow of ACS shareholders comes from Abertis); and (2) part of its portfolio consists in services (around 60% of income) which in principle has a lower implicit risk than in a traditional construction business. 2019 will mark a milestone, as it will presumably mark the fifth consecutive year of solid cash flow generation and the absence of problems with operating capital (free cash flow according to ACS´ definition). In short, we forecast a revaluation of ACS, to the extent that the market recognises the changes experiences by the company.

In addition, we continue to see short/medium term catalysts with the materialisation of some concession transactions. We believe that there is value to emerge in our valuation of the assets of Iridium (at a book value for 2018 of 768 Mn€), in view of the inflation in concession asset prices. The acquisition of part of Brookfield by one of the fund DIF´s asset portfolios is a reflection of the latter and implies a price at twice book value for the current holding of ACS (average 9-10%) in these assets.