Vaccine a positive for Europe’s largest transport infrastructure player
admin | December 11, 2020
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Having both a diverse business and geographic mix, Vinci S.A. (DGFP, A3/A-/A-) looks poised to benefit from the rollout of the vaccine as pent-up travel demand should increase both automobile and air travel. Initially hard hit by the lockdowns, the company’s US dollar bonds in the 10-year part of the curve could tighten relative to its US basic industry peers.
With just under half of EBITDA generated from its autoroutes segment and roughly 17% from its airports unit, the vaccine should prove beneficial in bringing EBITDA margins closer to pre-pandemic levels much faster than previously estimated. S&P was not calling for an international air traffic recovery until 2024 prior to vaccine announcements. Clearly air travel was the hardest hit, but toll road traffic was down nearly 33% in the first half of 2020 at DGFP. Road traffic trends have improved and are likely to make bigger gains in 2021 as employees go back to work and those who cannot afford air travel turn to the roads for vacations. While DGFP is typically compared to European peers, its USD 2029 bonds trade relative to US basic industry peers (Exhibit 1). The DGFP 3.75% 2029 bonds look attractive relative to the single-A basic industry curve and actually traded through PPG 3.75% 2028 bonds by roughly 7 bp (g-spread) in mid-January of this year.
Exhibit 1. US Basic Industry Single-A Curve (2- to 10-year)
Toll Road Traffic Now Close to 2019 Levels
Toll roads saw traffic decline 32.8% in the first half of 2020, despite witnessing a 9% increase in the first two months of the year. France’s 100km restraints imposed during lockdown forced light vehicle (LV) traffic to plummet 87% while heavy vehicle (HV) traffic fell 36%. Revenues at the autoroutes unit witnessed a 27% decline year-over-year (to EUR 1.9 billion) during the first half of 2020, while EBITDA fell 34% (to EUR 1.3 billion). The autoroutes unit enjoys very high EBITDA margins, typically in the mid 70% range. Despite the sharp decline in revenues and EBITDA, the margin only fell 690 bp year-over-year (to 69.9%). Trends did improve in May following the partial easing of travel restrictions and further improved in June when restrictions were lifted altogether. As of the company’s earnings call at the end of July, traffic levels had resumed and management noted that they are close to 2019 levels (Exhibit 2).
Exhibit 2. DGFP Weekly Change (First 30 Weeks of 2020)
Balance Sheet in Order, Liquidity Solid
DGFP has slowly been reducing its average interest costs over the past 5 years with a weighted average interest rate of 2.3% in 1H20. This is down from 3.5% in fiscal year 2015 and even down 10 bp from fiscal year 2019. DGFP repaid EUR1.6bn of debt in 1H20 which had coupons in excess of 3%. While the company has issued twice so far this year, it most recently issued a EUR Green bond in late November that priced with a coupon of 0.0%. Additionally, its Cofiroute (toll road) unit issued a EUR 950 million bond in May with a coupon of 1%. DGFP also had EUR 17.1 billion of liquidity as of 6/30/20, with roughly EUR 5.8 billion of cash on hand and EUR 11.3 billion of unused credit facilities. DGFP’s maturity schedule is very manageable with less than EUR 2 billion maturing most years. Over the next six years, only in 2022 does DGFP have more than EUR 2 billion maturing (EUR 2.7 billion).
Agencies Maintain Stable Outlooks
All ratings have been affirmed this year with a stable outlook. Most recently, Fitch affirmed the company’s A- rating with a stable outlook. The agency highlighted DGFP’s recurring strong and resilient cash flows from the autoroutes unit, which accounts for the majority of total EBITDA as the underpinning to the current rating. The stable outlook reflects strong fundamentals in a period of low visibility that the agency believes will have a short-lived demand shock, coupled with DGFP’s “unparalleled” liquidity position. Fitch goes on to note that its strong liquidity provides for a sufficient buffer against any further downturns.
Exhibit 3. S&P Adjusted EBITDA by Segment for DGFP (2017-2022E)
Additionally, while DGFP has been acquisitive over the past decade, S&P noted that its acquisition activity has helped to accumulate financial headroom. That said, DGFP’s revenue diversity, financial headroom and strong liquidity will help them weather any further potential challenges that the pandemic may cause. S&P estimates that 2021 EBITDA will rebound and exceed EBITDA generation witnessed in 2018. By 2022, EBITDA will be back in the EUR 8 to 9 billion range, a level only reached in 2019.