Not yet time for profit taking ahead of Q1; revisiting the upside
given the strong YTD performance; we, however, believe this could be too
early. Q1 should be a strong quarter, with French toll road traffic expected to
be c. 5% (JPMe), and order intake momentum likely to be supportive. We
continue to see meaningful upside to estimates and share prices. We reiterate
our OW recommendation for both stocks. Our revised April-17 PTs of €73
and €79 for Vinci and Eiffage suggest 11.1% and 15.6% upside.
Q1 should be strong. We expect toll road traffic to be very strong in Q1,
continuing on the 3% underlying trend observed in Q4, and further boosted
by one extra day in the period from the leap year and the positive impact of
the Easter holidays falling in Q1 this year. Overall, we expect 5% traffic
growth for the sector in Q1. Although we believe it is still too early to see a
bounce in contracting revenues, we expect order intake momentum to
remain encouraging.
See upside risks to estimates. We see upside risks on: 1/ traffic
expectations, given our (and we believe consensus) traffic growth
assumption remains conservatively 1.5% for 2016E; 2/ contracting revenue
which we expect to decline this year; 3/ margins assumptions which we
model flat at best in toll roads and only slightly improving from a low base
in contracting; and 4/ refinancing opportunities where we continue to see
material upside at Eiffage in particular. We revisit the upside potential in
this note for both stocks.
Valuations remain attractive. We mark to market our PTs for the current
French yields, which boosts our April-17 PTs for Vinci to €73 (11.1%
upside) and Eiffage to €79 (15.6% upside). Despite the YTD strong
performance, the stocks are trading on a small premium to their 10-yr
historical average, whereas the share of profits coming from the concession
divisions has increased materially, justifying in itself a material premium, in
our view. FCF yields for Vinci and Eiffage are 6.6% and 6.9% in 2016e.
See a further €18 per share on Eiffage by 2018 purely on deleveraging.
We forecast net debt to fall from €11.8bn in 2016E (including swaps) to
€9.9bn in 2018E (excluding swaps) at Eiffage. This in itself should boost
Eiffage’s equity value per share by €18 by 2018, and remains, in our view, a
material source of upside. We note that a placement from BPI (13% of
FGR’s capital) post the expiry of the lock up on April 22 would increase the
free float, which we think would be welcomed by the market.