Vinci: Deleveraging Nicely On Top Of Its 4% Dividend Yield (OTCMKTS:VCISF)

Vinci SA (OTCPK:VCISF, OTCPK:VCISY), which we covered last year during its ongoing recovery from the COVID-19 hit to its airport concessions, continues to make dramatic improvements thanks to passenger recovery and margin lift in its construction businesses. Order intake continues to grow within the energy, Cobra and the construction businesses. With EPC economics being an important factor in those segments, we should see some tail-end margin uplift as these projects become delivered. Financial costs are, of course, going up, but net income growth is still coming in, and more importantly, the company is deleveraging at a decent pace even with the current dividend, which is what we see as the main mode of return here.

Having retraced to levels similar to where we last covered it, Vinci SA stock is not unattractive at the 13-14x P/E multiple. It is expected to report first quarter earnings on Tuesday, April 23rd.

Earnings

When we last covered Vinci, it was early 2023, so while COVID-19 was clearly fading, the total recovery in traffic at airports had not yet happened. Now it’s happened, and they are now at or beyond 2019 levels at a lot of the concessions.

In addition to the increased scope of their concessions, Vinci saw massive like-for-like airport growth as a result. Calling out Japan specifically, where only in late 2022 did policies change to allow for foreign tourism, the recovery was particularly sharp, also supported by a weak Yen promoting inbound tourism to Japan.

For the thoroughfare concessions, fewer calendar days and some more public holidays meant that performance was a little bit more muted than it could have been in the fiscal year, where we are similarly seeing greater inland mobility due to the pandemic restrictions and concerns having subsided.

For the other concessions, which include stadiums, the Rugby World Cup France 2023 was a major event to drive substantial growth of around 150 million EUR. The company is continuing to invest across its infrastructure concessions to grow its base.

In the energies, construction and Cobra IS businesses, which are generally engineering businesses that have an engineering, procurement and construction (EPC) business model, deliveries of projects and hitting milestones came in at normal pace, driving strong growth, particularly in the renewable area in which Cobra is focused. Importantly, order books are also growing. This latter dynamic is important because the beginning of EPC projects tend to be less profitable and more capitally intense than the end, where the economics typically begins improving. We are seeing some evidence of that, though, already with previous cohorts of projects coming towards their end, and order intake slowing slightly on a proportional basis. Therefore, there is margin pickup in these segments, with operating income going ahead of sales in pace. Note that the underlying profitability of the concessions is much higher.

Let’s take a look at the debt situation, which, we believe, is center to the return model.

The construction businesses are the most capitally intense, and the least cash generative, and help less in the deleveraging. The vast majority of the work is being done by the concessions businesses, which are more profitable and less capitally intense on an incremental basis. The concessions businesses are also benefiting from the traffic recovery, which is of great benefit to their high operating leverage business models.

The rate of deleveraging is excellent, going from 18.5 billion EUR net debt to 16.1 billion EUR.

It would be great if they kept up this 10% annual deleveraging rate as the financial costs are mounting due to the higher YoY interest rates.

Bottom Line

We should start seeing peak traffic very soon, and while there are still base effects that will help at the beginning of 2024, the run-rate levels by Q4 2024 should be the new peak run-rates that we can expect from the concession businesses. Nonetheless, even if less cash generative and profitable, we expect that electrification and general green and LNG development projects should continue to support the construction, energy and Cobra businesses.

As long as the level of cash generation can keep being pushed up, a relatively onerous debt level can continue to be driven down at an even higher pace. Investors benefit from deleveraging even while a dividend yield of 4% is being paid. Also, the P/E is 14x for the current EPS, meaning around 7% earnings yield. However you look at it, you are getting a decent yield exceeding risk-free rates in Europe for a rather low-risk concession profile.

While there is some discretionary flex in airports, and arguably some cyclicality in the construction and engineering businesses, although many are engaged in strategic projects, we feel that the risks in a lot of the major cash generators are low and the deal with Vinci is quite good, although not superb. On a relative basis, however, the deal looks great where everyone knows that usually concession and infrastructure multiples are massive, certainly much higher than where Vinci SA stock currently trades.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.