STXPP.WA - Stalexport Autostrady SA

[Edward]

Description

 

The company operates the A4 toll road between Katowice and Krakow in Poland with the concession agreement set to expire in March 2027 (in 8 years). The company is valued at only PLN 1B while having over 300M in free net cash and cash generation run rate of 275M for 2019, growing around 10% annually. Discounting the next 8 years of cash flows at 10% and adding net free cash on the balance sheet, we arrive at a valuation of PLN 2.1B, twice today's market capitalization. Further details below (all numbers in PLN - Polish Zloty).

 

 

The History:

 

The company was a steel mill operator in the 90's and early 2000's. In 1997, it received a concession for the operation of the A4 toll road from Katowice and Krakow. In 2000, the Polish finance minister who was in charge of granting the concession became the company's CEO and remains CEO today. The agreement itself is kept secret by the government as one of its conditions, which leads me to believe it favors the concession holder to some extent.

 

In 2006, the company encountered financial difficulties, primarily related to the steel business. Atlantia SA, the huge Italian based toll road operator invested PLN 300M in the company for 60% of the equity, and the steel business was disposed. The funds went towards the continued development and maintenance of the toll road concession agreement, which remained the company's only business.

 

Since 2006, the toll road business has grown enourmously in profits, mainly to simple operating leverage. In 2007, Toll revenues were PLN 127M and expenses (cost of sales + G&A) were 90M, leaving 37M as operating profit. In 2018 the expense number remained about the same - however revenues shot up to 336M, and are expected to advance to 420M in 2019. This means net profit of the business (after 19% tax) grew from 30M to 186M in a little over 10 years. This revenue growth comes from a combination of 5-6% annual traffic growth and a few toll rate increases over the years.

 

Speaking of toll increases, in early 2019 the company announced a major toll increase of 25% on average. Trucks go from 30 to 35 PLN, and other vehicles from 18 to 23 PLN. Since traffic is about 20% trucks, this makes it 25% increase in revenue per vehicle. Considering traffic increases about 5% per year, this means revenue should jump from 336M to 441M PLN from 2018 to 2019 respectively.

 

Balance sheet:

 

A long time has passed since the recapitalization of 2006, and today the company is on a very solid footing. All major concession related obligations and debt are covered by 419M of bank deposits. In addition, there are 330M of cash which is free for distribution. There are no other major assets or liabilities.

 

Regarding distributions, the company is currently distributing part of its profit in the form of dividends, since 2016. This is a form of distribution that makes sense for the 60% holder Atlantia as they have all of their subsidiaries sending regular dividends to the parent. This is a special case in which we can piggyback and receive the same distribution. The dividend for 2018 is 0.37 per share, or 9%. This is likely to increase substantially as it is still only 40% of annual FCF which keeps growing.

 

Management:

 

The company is controlled by Atlantia SA and the CEO is Emil Wąsacz, formerly a Polish finance minister during the time the concession was granted to the company. He is likely to retire when the concession runs out in 2027. The company is a rather boring operation and not a lot of managerial acumen and ability is required - only not to kill the golden goose by mistake.

 

Risk:

 

Mismanagement or abuse by the controlling shareholder is possible, however the risk seems remote due to the size of the potential benefit to Atlantia as a whole which is a massive company compared to the stake in Stalexport.

 

Regulatory/government risk is always present due to the nature of the secret concession agreement and some historic contentions. More about that in the following article:

https://soldiexpert.com/moneyreport/concessioni-autostradali-atlantia-stalexport/37602/

 

 

The company might retain the funds generated and reinvest in another toll road concession in Poland - a possibility, however currently it seems that the company is an runoff mode. In addition, any new investment in another concession is likely to be made through a "clean" new company rather than a preexisting one. Hence my expectation to eventually receive all cash flows through dividends.

 

Company site:

https://www.stalexport-autostrady.pl/en/investor-relations/quotation

 

 

Catalyst

Price vs Value

A 30% increase in revenues and a 50% incease in net profit in 2019 as a result of toll rate hikes

The company is expected to distribute all FCF and wind down in 2027

[Mondegreen]

Looks interesting will investigate, thanks

[_JJ_]

Have you taken into account the profit sharing agreement with the state treasury as part of the concession agreement?

 

It's discussed in the comments on this blog:

https://alphavulture.com/2017/12/04/stalexport-autostrady-sa-polish-toll-road-at-a-20-fcf-yield/

 

 

[writser]

Have you taken into account the profit sharing agreement with the state treasury as part of the concession agreement?

 

It's discussed in the comments on this blog:

https://alphavulture.com/2017/12/04/stalexport-autostrady-sa-polish-toll-road-at-a-20-fcf-yield/

 

This.

 

I think this name is very interesting but it's hard to value a company that has an undisclosed profit sharing agreement where an unknown amount of future profits has to be shared with the Polish government.

[Edward]

Have you taken into account the profit sharing agreement with the state treasury as part of the concession agreement?

Yes. Such agreements usually provide that if profits reach a certain hurdle then there is some profit sharing.

 

I do not believe this is generally a problem for the following reasons.

 

The company was recapitalized by Atlantia in 2006. Obviously Atlantia are experts in this field, have had access to the (secret) concession agreement, and decided to go ahead. This was at a time when the Revenue of the business was around 125M (it was 336M in 2018 and will probably be around 440M in 2019). Also, the business was quite heavily in debt and there were issues with the steel division that had to be divested. Cash generation was only around 30M at the time. And yet, they valued the whole thing at 500M.

 

Since then, the company made around PLN 600-700M in cumulative net profits. Business risk is much reduced and balance sheet improved. Cash flows are excellent. But if you back out the profits since 2006 (which are all still on the balance sheet as cash deposits minus 100M in past dividends), it would seem that the business is selling for less than it was valued in 2006, which is bizarre. So there is a credible case to be made for a considerable undervaluation in my opinion compared with Atlantia's own valuation and considering the situation of the business then and now.

 

I believe Atlantia would not invest 300M in 2006 without envisioning at least a 10% ROIC, since they could have simply invested in a concession elsewhere at 8-9% ROIC with less risk and 100% control. This means that with my projections of cash flows until 2027, they would either not hit profit sharing or would only start scraping the threshold, which would still leave the value I illustrated for shareholders. Less than 2B PLN of value today means in effect that Atlantia made a bad deal investing in the first place, and I have no indication to believe they missed on this one.

 

Another way of looking at is that profit sharing would require the concessionaire to hit a return on investment threshold. Until recent years, the company was barely profitable despite sinking hundreds of millions into concession payments and road development expenses. I believe that total costs would exceed 1B PLN by 2027.

 

A lot of these costs are front loaded, and the dividends only started two years ago. So in effect the first 20 years of the concession were of zero value to the concessionaire. Stop for a second to appreciate that, and the meaning to any value calculation from the perspective of cost recovery and a reasonable ROIC to even hit any profit sharing thresholds.  Since Atlantia are effectively only making a reasonable profit (and receiving dividends) in the last 10 years of a 30 year concession, chances are that even if they make an obscene amount of money (which they stand to make), profit sharing will only kick in long after shareholders made a killing on the stock.

 

Lastly, the CEO wrote the agreement when he was Finance minister and made it secret - presumably because it was skewed in favor of the company and not the state. An indication is the fact they could lawfully raise prices by 25% on average recently and no one blinked.

 

In short, the first 20 years were all pain, now comes the gain.

 

These are my thoughts on the matter, and I would appreciate your perspectives.

[scorpioncapital]

I have a problem with a secret agreement. In Western countries such an agreement would have to be disclosed in public filings. That is the one thing that bothers me, lack of transparency.

 

Other than that, the 2 risks are possibly government encroachment on the profit stream or another road, but that is probably less likely.

 

 

[Hielko]

Have you taken into account the profit sharing agreement with the state treasury as part of the concession agreement?

These are my thoughts on the matter, and I would appreciate your perspectives.

If you want to blindly build your valuation on the premise that Atlantia knows what they are doing you also have to take into account that they happily sold a part of their stake last year... I think in general that building your investment thesis on the basis that one large party knows what they are doing is not advisable. Almost always, in every single company, there is always someone that supposedly has more information that you has and thinks it's undervalued. Doesn't mean they are right. Valeant is perhaps a poster child example, but you can build an investment thesis like that for really 99% of all public companies...

[Edward]

If you want to blindly build your valuation on the premise that Atlantia knows what they are doing you also have to take into account that they happily sold a part of their stake last year...

It's just common sense as to how these profit sharing contracts work. One argument was regarding Atlantia's involvement, the other was a common sense calculation regarding profit sharing for a concession agreement that has not made any money for the concessionaire for 20 years, and cost a lot in terms of investment to date.

 

I am not aware they have sold anything, at least according to the company's and Atlantia's disclosures.

 

Maybe you mean the public trading registration of some of their shares in 2018?

https://www.stalexport-autostrady.pl/en/investor-relations/current-reports/Report-No.-15-Undertaking-works-aimed-at-dematerialisation-and-admission-to-public-trading-of-89500000-G-series-shares-on-the-regulated-market/idn:1076

 

Almost always, in every single company, there is always someone that supposedly has more information that you has and thinks it's undervalued. Doesn't mean they are right. Valeant is perhaps a poster child example, but you can build an investment thesis like that for really 99% of all public companies...

I agree. Like I said, it is a matter of a common sense calculation of expected profits vs investment and how it looks in terms of project IRR to hit profit sharing.  The investment by Atlantia is just further indication of the same calculation.

[Edward]

A good summary of the investment in the road can be found in this 2011 presentation:

https://www.stalexport-autostrady.pl/en/download/Eng_Prezentacja-na-spotkanie-z-inwestorami-Wwa-FINAL-2011_03_10,360.pdf

 

One would notice that total expenditures envisioned total 1.75B PLN, most of which have been spent to date. In any concession agreement there is a clause that says that the concessionaire would recoup costs + a minimum return on capital before any profit sharing would begin. In this case it would be hard to envision profit sharing until cash flows hit about 3B PLN at least to allow for capital recovery + a minimal return on capital.