Vinci’s Defensive Concessions Business Will Drive Robust Growth in 2022

Business Strategy & Outlook

Vinci’s strategy to extend the maturity of its concession portfolio will help the company earn durable excess returns. Vinci’s business models rests on managing and operating critical infrastructure over long concession contracts, such as motorways and airports. The company’s actions to increase the portion of its concession-driven revenue, over its short-cycle contracting business. The concessions business earns high profit margins and enjoys significant barriers to entry. In contrast, the contracting business is less attractive on a stand-alone basis but allows Vinci to draw on its knowledge of critical infrastructure to bid on large projects that require greater know-how and less competition, supporting higher margins. Its expertise is likely a factor behind winning major infrastructure works such as the Grand Paris Express and sections of the High Speed 2 line. Vinci’s highly profitable acquisition of toll roads from the French government in 2006 has formed the backbone of the firm over the past 15 years. However, subsequent public disapproval of the deal has seen the state become less generous in awarding long-term extensions to Vinci’s existing network. The shorter-term extensions to be awarded given the need to invest in the decarbonization of motorways. Mergers and acquisitions have helped Vinci become the second-largest airport operator, which enjoys similar barriers to entry as its autoroutes business. While air travel remains depressed due to travel restrictions, Vinci estimates that its airports are only 10% exposed to international long-haul traffic and thus should see a quicker recovery in traffic once travel restrictions are lifted. A return to pre pandemic passenger numbers in 2024. The acquisition of the energy contracting division of ACS will provide Vinci with exposure to the fast-growing renewable energy sector as well as eight concessions mainly in electrical transmission. The development of greenfield projects fits with its expertise and may be the start of the company committing more capital into the renewables sector with the aim of potentially also operating these long-dated assets.

Financial Strengths

Vinci has been able to withstand the worst of global travel restrictions, which have kept earnings from the group’s concessions business heavily depressed, without a significant impact on the group’s balance sheet. Vinci has enough liquidity to meet approximately EUR 3.2 billion of debt maturing in 2022, while still being able to reward investors with a healthy dividend and share buyback of up to EUR 600 million. Vinci’s healthy balance sheet has allowed the company to refinance debt at extremely attractive rates. 57% of the company’s debt is at fixed rates, protecting it against a rising interest rate environment. The Vinci will generate between EUR 4 billion-EUR 5 billion of free cash flow during the five-year forecast period, which incorporates the acquisition of the energy contracting division of ACS at an enterprise value of EUR 4.2 billion paid fully in cash. The net debt/EBITDA to drop below 2 times in 2022, due to the consolidation of ACS and recovery in earnings from the airport segment. Both Vinci’s airport and autoroutes businesses have experienced a sharp upturn in traffic as travel restrictions have eased.

Bulls Say

Vinci’s portfolio of diversified concession assets is a unique opportunity for investors to own irreplaceable infrastructure across multiple assets. Returns are supported by long-term concession contracts and favorable demographics.
Vinci’s balance sheet and global presence position the company to boost its portfolio of high-quality assets, should governments look to privatize aging infrastructure.
A healthy order book provides earnings visibility and allows the company to be more selective when bidding on construction projects without taking on additional risks.

Company Description

Vinci is one of the world’s largest investors in transport infrastructure. Significant concession assets include 4,400 kilometers of toll roads in France and 45 airports across 12 countries, making Vinci the world’s second-largest airport operator in terms of managed passenger numbers. The concession’s business contributes less than one fifth of group revenue but the majority of operating profit. Vinci’s contracting business is made up of three divisions, offering a broad variety of engineering and construction services.

(Source: Morningstar)

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