FCC is an (ex) domestic construction company that moved into Environmental Services & Water management. It is not alone in embracing new business models including Sacyr, ACS and Acciona, which moved from a domestic construction business model to respectively an international concession one, an international civil engineering one and an international electricity generation one, while Royal BAM partnered with PGGM to grow in the PPP area and Bilfinger shifted to industrial services.
With EBITDA from Environmental and Water Management increasing from c.40% of the group’s EBITDA in 2007 to c.80% in 2016, one is now hard-pressed to describe FCC as a construction company any longer. It should be thought of as a utility company.
Restructuring in progress but deleveraging not over yet
Management managed to decrease the level of net debt from close to €9bn in 2010 to less than €4bn in 2016, mostly through asset divestments, the deconsolidation of Alpine, which went bust in 2013, and two huge capital increases. On a net debt/EBITDA basis, the leverage has been reduced from an astounding 12.0x in 2013 to 4.5x in 2016. In the meantime, FCC decreased sharply its cost of financing. For instance, it decreased its cost of debt from an overall 4.54% in 2016 to 2.57% in 2017 thanks to an extensive refinancing programme. A good performance, but its deleveraging is not quite over yet, as we believe that the optimal level of debt lies at 3x to 3.5x EBITDA, as posted by its closest peers, namely Veolia Environment (Reduce, France) and Suez (Add, France).
A call option on cyclical activities
Cement consumption in Spain has stagnated at approximately 11Mt over the last four years, after a dramatic decrease since 2007 when cement consumption was over 55 mt. Officemen considers that a reasonable level of consumption in Spain should be around 30mt. Should cement consumption rebound to this pre-crisis and pre-bubble level, which is not our central scenario, the upside would be more than material for FCC.
The construction activity in Spain has been suffering from the fall in infrastructure investment as the Spanish infrastructure is a good quality one and the Madrid government is focused on reducing current budget imbalances. Overall, since 2007 (€4.1bn of construction revenue from Spain), domestic construction revenues have collapsed by 85%. Should a degree of recovery ever happen, a substantial upside would materialise in FCC’s earnings outlook.