Ever since construction groups have been tackling infrastructure, they have contemplated themselves as operators. Hence, the Vinci type of success stories. Those construction groups that failed to make that pivot before the great financial crisis have tried a fast-forward shift. Some went too far too quickly (Abengoa), others have been slow (FCC), late (Sacyr) or successful (Acciona, now a green power play). The ytd performance of construction groups is telling, however. With a 30% gain, it is the third best sector performer, not far off the 32% gained by the Food sector.
The reason is simple: the sector is pulled by the concession-driven construction groups as the value of these concessions goes up with the drop in rates. Holding a concession is akin to owning a high yield bond. The Fed and ECB’s magic wand is operating miracles for the likes of Ferrovial.
We bunched together the airport and road concessions with construction groups and here is the combined performance:
Concessions pull (11 companies, in pink, see table below)
11 Construction and partly Concessions companies
The above table, ranked according to the ytd performance, makes a clear statement: when the concession business is significant as a proportion of the net asset value (Ferrovial with its 407 ETR accounting for 47% of its gross assets, Vinci with toll roads weighing 56% of its gross assets), the stocks are clear outperformers. Little weight is given to the construction engineering competences of these groups, which is a shame as they presumably would not have locked in good assets if they were not very well placed to know about their quality.
Infrastructure funds which have bid too much in too many instances for scarce big concession assets will come to discover that maintenance and upgrades are extraordinarily expensive when not internalised.
Holding those construction companies with concession assets or holding concession firms outright remains a no-brainer for as long as rates are meant to plumb new lows. To some extent, it may be even more attractive than property as authorised returns are flexible enough and attached businesses (say retail in airport) show relentless growth.
Sticking to the most concession-focused business would bring up the following portfolio of assets in the AlphaValue coverage. The paradox is that the average P/E at 18x is not over the top and the upside potential remains a pleasing 17%.
Essential valuation metrics for concession-related stock
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