In the year to date, Eiffage shares (+11%) have performed strongly on a relative and absolute basis against the backdrop of a historically low-yield environment, operational growth for key toll road asset (APRR) and sound recourse CF generation. Despite that, we still see upside especially based on what we regard as the undervaluation of its French toll Road business, APRR, and a recovery in the French construction sector, with growing cash flow strength and a possible short-term catalyst in a sale of the Sanef stake. Upgrade to Buy.
(i) A gradual recovery in the domestic construction sector (we forecast +2.7% over the next three years), which should underpin a modest recovery in Contracting EBIT margins (+60bp over four years, SGe).
(ii) The controlling stake in an attractive domestic toll road (APRR), which should see sustained EBITDA growth, with related FCF and dividend generation (+5.1% and 3.5% CAGR 16-25e respectively), and refinancing optionality
(>€5.5bn of debt to mature in 2017-2021).
(iii) Sustained recourse holding CF generation: We expect average holdco cash flow (pre-dividends) of €0.5bn over the next five years, resulting (ex new growth capex) in a holdco net cash position of €2.1bn in 2020e (vs €0.3bn at FY15).
(iv) Net profit and DPS growth: We project 18.6% net profit CAGR 15-18e from operating growth at contracting & concessions and lower debt costs (refinancing). On dividends, we estimate a 10% CAGR 15-18e, and 12.5% CAGR 15-20e. We forecast DPS of €2 in 2018e (in line with consensus), a yield of 3% at the current share price.
(v) Value: Our updated SOP model ouputs a 12m target price of €76.7 (55% concessions, 45% contracting), which with the 12m rollforward dividend of €1.5 p/share would imply a TSR (total shareholder return) of 17.7%.