Description

History and Evolution of the Company:

 PINFRA is the resulting company from the reorganization of Grupo Tribasa which filed for bankruptcy after the Mexican mid 90's crisis and emerged from bankruptcy in 2003. The company came from being a cyclic business (as it was focused on construction) and a highly leveraged company; to a stable and predictable FCF generating business with a strong cash position.

This stability and predictable future cash flows come from PINFRA's operating segments (Asphalt Plant, Seaport Concession and its Toll Road operations), highlighting that it is a totally different business mix compared to what Tribasa use to manage, ie. PINFRA is now focused on the operation of toll roads rather than the construction thereof, PINFRA is still a construction company although they prefer to be in the high-margin business and leave the construction risk to somebody else.

 Today PINFRA is one of the largest highway concession companies in Mexico and has a presence in construction, asphalt production, seaport concessions, and other types of infrastructure.

 PINFRA Today:

 * Once the securitized debt of these roads is settled, PINFRA will take over its cash flows for the remaining years of concession.

The Business:

Business segments

PINFRA's businesses are easy to understand, constant cash generators, with a high-margin and they are predictable by nature as they mostly rely in concessions and natural reserves. Furthermore, PINFRA's businesses have a significant growth potential on going forward: 

1. Toll road management company (EBITDA: MXN $198 M; toll road operations margin: 51%; non securitized toll roads margin: ~70% )

Operates 14 toll roads in Mexico (3 under construction) and has grown in Average Annual Daily Traffic from 72,342 vehicles in 2003 to 124,008 in 2009 (CAGR 9.4%).

PINFRA is the second toll road operator in Mexico after the Federal Government in terms of total traffic.

Seven of these toll road concessions have been securitized by PINFRA but the company still manages the maintenance and operations thereof; therefore the company still charges an operating fee year after year until the concessions expire and that is in itself a highly lucrative business (51% EBITDA margin).

The company has the option to "pre-pay" the debt of these securitizations and keep the whole business for the remaining years of concession.

One of the highly misunderstood "hidden" values that PINFRA holds is the residual value of these securitized toll roads. This is precisely the future cash flows that the company will get from the remaining concession years from each toll road, after the repayment of the securitized debt (go to Residual Value of securitized toll roads for further details).

2. Asphalt plant (EBITDA TTM: MXN $186 M; margin: 27.6%[1])

This stable business is closely tied to the infrastructure development in Mexico City and its surroundings

Over the last 6 years its revenues have grown to a MXN $673 M level, at a 15% CAGR growth pace, and nowadays it has a capacity of 500 Tons per production hr. 

The asphalt business of the company should continue benefiting from the high need of pavement and infrastructure maintenance and development of Mexico City.

3. Seaport: Altamira Port (EBITDA TTM: MXN $123 M; margin: 35%)

PINFRA owns one of only two terminals in the Altamira port. Altamira is a federal-granted concession that expires in 2036; such concession is extendable for an additional time period of 20 years.

Container growth has increased from 147,627 TEUS[2] in 2003 to over 187,675 TEUS in 2009 (CAGR: 4.1%).

Thesis:

1. Great business with stable and predictable earnings and growth.

• Predictable and stable Revenue 6.5% CAGR 2004-09,
• EBITDA 10.1% CAGR 2004-09
• and FCF 32.8% CAGR 2004-09
• Highly Profitable: EBITDA Margin: 62.6% vs. 16.5% sector average
• Highly misunderstood "Pristine" Balance Sheet: Net Cash position of MXN $1,770 M

PINFRA's FCF is expected to double in the next 2 years, as the company should finish pre-paying the ARMEC[3] securitization during the first half of the year. We expect these 2 highways to generate a sum close to MXN $500 M of FCF in the first year after the debt settlement (2Q10-2Q11)[4].

2. Management

• BV per share (MXN $21.3) 21% CARG 2004-09
• Share repurchase of the first 3 quarters of 2009 of MXN $776 M or 7.2% of the current market cap
• Management states that a minimum IRR of 13% is required for any new project
• Administrative costs represent 1.1% of revenues (3 to 4 times below its comps)

3.Price

PINFRA's businesses are easy to understand; they generate a lot of cash year after year and are predictable by nature; however, nowadays, it is possible to buy the company at a significant discount:

• Significant multiple discount vs. sector
• 44% upside assuming 10% FCF Yield (FCF/EV)
• Furthermore, it isn't built in our Price Target, the highly probable scenario that PINFRA could win new concessions, increasing the value of its portfolio.

 What is the market misunderstanding?

Balance Sheet:

Debt

The company has zero corporate debt. As the entire debt comes from the highway securitizations and PINFRA doesn't own such assets or its cash flows, to date, and the debt is assumed by each toll road securitizations. It is important to consider that the cash flows from each toll road are used for the debt repayment of the securitization. 

Net Debt = debt - restricted cash (securitization trust cash position)

Cash Position

In the 3Q09 PINFRA held a total cash position of MXN $3.97 B.

This cash position is divided in:

• Corporate Cash: The Company's real cash position (TTM MXN $1.84 B).
• Restricted Cash: Cash from the securitized Toll Roads (MXN $2.13 B). This could be used for road maintenance or interest payments (if needed). Once the securitized debt is settled, the company will get the remaining cash.

Residual Value of Securitized Toll Roads:

This is the future cash flow that the company will get for the remaining years of concession, after repayment of each securitized debt.

Currently PINFRA has 6 securitizations of Toll Roads one of which includes 2 roads (ARMEC)

Residual Value Estimate:

Assuming an average traffic growth of 2.6% in PINFRA's securitized highways (in line with GBM analysts; vs. 3% company's base case) and an average WACC of 11%, we got to a Residual Value estimate of MXN $6.56 B.

Excluding ARMEC (which securitization is to be settled in the short run) the remaining 5 Toll Roads Residual Value estimate would be around MXN $2.8 B vs. company's base case of MXN $3 B

Valuation:

How is the market valuing PINFRA?

PINFRA's real intrinsic value (incl. residual value):

Data: 12M after ARMEC repayment (may10).

EBITDA: excludes the securitized toll road EBITDA; includes ARMEC's EBITDA as we already subtracted its residual value.

Figures in MXN $M

FCF:

                            FCF TTM from May 2010

• Assuming a 10% FCF Yield
• o Price Target MXN $42
• o Upside: 44%

Business Plan 2009-2015:

Considering the company's initial cash position and the expected Cash Flows from current projects, and subtracting the expected investment; we concluded that as of 2015, the investor shall get almost for free the remaining, roughly 17, years of concession of these same businesses.

Note on the industry:

It is worth noting that it is not built in our Price Target, the highly probable scenario that PINFRA could be granted with new concessions, increasing the value of its portfolio.

The following thoughts must be consider in order to obtain some perspective of the Mexican infrastructure industry's potential:

Considering that Mexico's GDP could expand over 3.0% on 2010, according to the Ministry of Finance, this year's investment in infrastructure should represent 5.0% of the country's GDP.

Furthermore, seeing the advance that the National Infrastructure Program (2007-2012) has had so far in the last three years, we can observe that roughly US $140 B or 60% of the investment goal established by the federal government still remains to be accomplished, and considering that the economic outlook has improved, it is more likely that a significant progress will occur during and as of 2010. 

[1] Includes PINFRA's construction business. The asphalt business EBITDA margin is ~ 37%.

[2] Twenty-foot equivalent unit

[3] This is the only of the 6 securitizations that includes 2 Highways: Armería-Manzanillo Ecatepec-Pirámides.

[4] ARMEC TTM FCF MXN $451 M

Catalyst

the repayment of ARMEC securitization will significantly improve the company's cash generation.

the company could be granted with new concessions as the PNI (National Infrastructure Program) advances in the following years