Ferrovial’s Motorway division accounts for 72% of O.P.

FerrovialToowoomba Highway, Australia

Banc Sabadell | Despite Ferrovial´s excellent performance this year (+26% in absolute terms and +17% vs IBEX) our Objective Price still suggests potential (c.+10%) and the share remains one of our main bets in the sector.
The elevated visibility of its Motorway division (72% of the O.P.), where we expect an annual improvement of +6% in valuation, and the presence of relevant catalysts (sale of Services and third runway at Heathrow) add attraction to the investment thesis and should continue to support the share´s momentum. We maintain an O.P. 23.95€/share and a recommendation of BUY.

The Q119 results left a provision of 345 Mn€ (~2% of capitalisation) in Construction (5% of O.P.) to reflect possible losses in US projects, which does not undermine the excellent of Motorways, where the EBITDA grew +51% vs Q118 (vs 31% consensus). Managed lanes NTE and LBJ (11% O.P.), which grew +46% and 26% in local currency, as well as the recently inaugurated NTE 35W, which reached an EBITDA of 13 Mn$, contributed especially to these good results.

Catalysts. The sale of Services (12% of the O.P.) remains the main catalyst. There is speculation that the division is worth 2.5 Bn€ (~7X EV/EVITDA) vs our valuation of ~2.1 Bn€ (~6X EV/EBITDA) which would imply an impact of +2.3% in O.P. But most relevant is its strategic fir, as it will allow Ferrovial to reduce its indebtedness to ~2.1X NFD/EBITDA and to centre its efforts in the infrastructure divisions (83% of O.P.). The project for the third runway at Heathrow is also advancing and could contribute +7% to our valuation (we estimate an investment of £14 Bn and a return over RAB of 5.35%). At the end of 2019 there will be a CAA proposal on the regulatory WACC from 2022 which will be vital in terms of valuation (according to our estimates, for every ±100 b.p. in return over RAB our O.P. changes 0.7€; ±3%).

Rises in interest rates seem every further off. They remain the main risk given the sensibility of its principal assets, ETR407 (53% O.P.) and Heathrow (9%) O.P.), in which ±50 b.p. in debt costs means ±50 b.p. in valuation. However, in the US the market is already discounting an interest rate cut and Heathrow has its financing needs for the next two years covered, with which the potential effects of Brexit are minimised. Currency fluctuation is also a risk (-1% in the Canadian dollar would have an impact on valuation of 0.5% in O.P. and of -0.1% in the case of the US dollar), however, our estimates (1.16 €/$ and 1.52€/Can$) are sufficiently conservative.

Overall, we maintain our forecasts unaltered, which foresee a growth of 12% EBITDA TACC 2018-2021 (vs +11% consensus). Thus we think that the quality of its management and in its excellent track record in management of infrastructure will allow Ferrovial to continue generating value for the shareholder, something we expect to materialise in the short and medium term with the entry of new projects (it has already announced its intention of increasing its participation in ETR407 with an additional 5%), once the cash for the sale of services (>2 Bn€ BS€)) in Q319.