More constructive on European infrastructure spending
We turn moderately more positive on the medium-term outlook for European
infrastructure spending. We increase our revenue estimates for names with exposure to
European contracting and building materials, albeit only from 2018E given latecyclicality
of the sector and long lead times on large projects. Annual infrastructure
output in Europe (new construction) is 16% below the 2007 peak, the Eurozone Civil
Engineering PMI index is at a 2.5-year high, and contractors’ order backlogs have shown
an inflection in several markets, notably France. Among the Europe-exposed names, our
top picks are Buy-rated Vinci, Eiffage and LafargeHolcim. We are making PO and
estimate changes across the sector.
European Commission sees €30bn annual investment gap
We recently attended TEN-T Days 2016, a European Commission (EC) transport and
infrastructure investment conference. The EC estimates that transport investment
needs in Europe stand at €130bn pa, but the investment since the financial crisis has
been around only €100bn pa. Investment needs in the 30 priority transport corridors
(TEN-T networks) exceed €600bn by 2030.
Expect more EU measures embracing PPP projects
The European Commission recognizes that infrastructure investment needs cannot be
met by traditional funding from national budgets or direct EU grants alone and they
require increased private sector participation. In late 2014, the EC unveiled Investment
Plan for Europe (Juncker Plan) with a view to enable €315bn of investment in Europe
over 2015-17, funded with a €21bn contribution from the EU and assuming a 15x
multiplier. According to the EC, the Plan mobilized €108bn of investment through June
2016, with €8.5bn in transport infrastructure and €23.5bn in Energy. Press reports
suggest the Juncker Plan could be extended and upsized to c.€500bn in the coming days.
French road concessions may see a new investment plan
Governments seem also more receptive to see investments in infrastructure assets
already operated by the private sector. Notably, French road concessions were extended
in 2010 and 2015, in exchange for new capex. Management commentary around H1’16
results suggested discussions on a new investment plan could get under way. Visibility
on the detail and the timing is still low, but we estimate the 2015 concession extension
was favourable for the operators, with value creation for DG and FGR exceeding €3/sh.
Stock picking: Buy Vinci, Eiffage and LafargeHolcim
Our Buy rating on Vinci (Buy, PO €77) is based on its balance sheet strength,
management’s solid capital-allocation track record and the scope to improve profitability
in Contracting. We like Eiffage (Buy, PO €80) for its significant refinancing opportunity
and medium-term upside on cash returns. Vinci and Eiffage generate 79% and 99% of
sales in Europe ex-UK (64% and 82% in European Contracting), respectively. We
reiterate our Buy rating on LafargeHolcim, reflecting an improving earnings momentum
leading to higher FCF potential, combined with an attractive valuation. The group
generates c20% of its sales in Europe ex-UK. Our PO is raised to CHF60 from CHF58.