SNC - SNC-Lavalin Group

[no_free_lunch]

I want to own snc so much and agree on potential but it seems the operations are always a couple quarters away from turnaround. I don't think it's a problem with investors understanding the financials but rather these operational challenges.  They create concern and cause investors to focus on the downside.

 

Agreed that it could use outside shareholder friendly counsel.

[Dazel]

 

I could not agree more with you...and that is why the share price does not recognize what you see as well. A capex business that transitioned into a cash business with a world class royalty company worth the entire market cap. Berkshire would buy this in a phone call but it is too small for them. It is a Buffett type investment getting  a great business on the operating table except in SNC case they have already left the hospital and are at the office about ready to turn on the money printing machine... It’s just right size for Fairfax to be significant upside in relation their size  but not too big for too much risk. If Fairfax were to buy it and own it forever and the type of  business (now) that we all keep talking about them owning. Becoming more like Berkshire.

Or Fairfax can just buy a big piece and treat like Buffett does with public investments...it’s priced like deep value but the assets are first class. Very rare...and something Fairfax should own...this is not a Resolute type investment..these are world class assets to be held forever.

 

[Gabriel]

Thanks Dazel for a thorough analysis of the value of SNC.

On the short squeeze:

 

I am expecting a share buyback program and an increase in the dividends to be announced either during Q4 results late February or during the annual assembly in May. I have made those and other recommendations to top management. I am also considering submitting two motions with one main shareholder in that regard and all shareholders vote on them. I am confident these two proposals will be upheld. This will boost the price substantially considering there are about 9 M shares short (6.5M on SNCAF OTC) and (2.5M on SNC) or 5% of 175.5m shares floated, and the daily volume is about 2,000 shares on SNCAF and 600,000 shares traded on SNC, 60% of which are swing and daily trading. So it would take shorts 35 trading days to cover, by buying every available share, day after day: 8,500,000 / 240,000 = 35.4 days. With a dividend increase to 0.10$ and a share buyback program of up to 500m or up to 20m shares, the squeeze can take the stock to 50$ because over 70% of the stock is held by CDPQ (20%), Jarilowski Fraser (17%), RBC GAM and other RBC funds (13%), IQ and a few funds and some long term shareholders like myself (20%).  So 9M shares to cover in addition to a 20M shares buyback and we have another BB.

On the valuation of SNC:

 

Suppose you have two buildings. Building A with 1M net revenue and B with - 1M net revenue that I am tearing down. The combined value is based on the market value of Building A minus what remains to be paid to get rid of Building B.

 

A-1. Engineering Services, had an EBIT over 600m in the last 2 years for a value of 6-9B (34$ to 50$ per share) considering growth, increasing backlog, leading technologies with an indeniable moat in Project management on multi billion dollar scale projects, nuclear with a load of proprietary technologies, digital 3D years ahead of competition, architecture, geotechnical eng'g and renewable technologies (offshore windmills).

 

A-2 Capital is work 12-15$ per share.

 

B. LSTK Construction Projects or BADCo. namely:

 

B-1: 100m of remaining resources LSTK as of 31/12 per my projections.

 

B-2: 1.8B of infrastructure LSTK projects. "Management said it many times : we expect a profit on these projects over their life cycle". AND it was confirmed to me lately by IR when I said you need to provide clarity on those. I was cut out and told "we said it that we expect to make a profit on Infra LSTK projects".

 

List of all the negatives of the three previous Q reports :

 

1. Tax adjustment re. the sale of the 407. There are as a substantial profit there, I see no issue whatsoever here.

 

2. Relatively minor price adjustment as a result of less traffic due to COVID on the 407. Same argument.

 

3. Abritrage loss of 55m as a result of a 10+ years LSTK project. Considering building B-1 is being torn with only 100m left in works, this is a one time event.

 

4. Minor losses in LSTK resources including restructuring (less than 200m in all);

 

5. Minor COVID related losses in Infra LSTK (less than 1% of all contracts), subject to claims. I checked and the Covid claim for Crosslinx is covered as force majeure. I downloaded from the GoO website and posted the contract.

 

On opportunities for SNC to head to 1B EBITDA/year :

 

OMERS is said to be weighting options for ERM (one of the largest Environmental Management firms) including selling it (hoping for 2.5B), while SNC holds a portion of the 407 that OMERS was interested in back in April 2019.

 

With SNC exiting construction to focus on services, I see a smart swap between ERM + 500m against the 6.67% remaining share in the 407 (valued at 2.5-2.7B based on the sale of 10.01% at 3.25B to CPPIB (2.165B) and higher NPV considering a lower discount rate).

 

Source on OMERS intentions as of November 2020:

https://www.bloomberg.com/news/articles/2020-11-17/omers-is-said-to-mull-up-to-2-5-billion-sale-of-erm-consultancy

 

This will help SNC focus on Engineering Services where it excels will swapping a very valuable asset (EBIT of 60m) fit for a fund, against an equally valuable asset fit for SNC, that feeds its EBITDA with about 120m and brings synergy (competitive edge) and growth, in addition to providing 500m for a 750m share buyback program to cancel about 25m shares.

 

The projected EBITDA of SNC would then stand at 850m for 2022 and put the 1B mark finally at reach in the next few years. ERM grew 12% last year.

 

That would command 100$ per share considering the float would have been reduced to 150m shares post buyback.

 

Looking forward to a heck of a ride.

Gabriel

 

 

[longlake95]

https://www.snclavalin.com/en/media/press-releases/2021/09-02-2021

 

SNC final sells oil&gas LSTK business. Actual cost to SNC ($200MM) appears to be much less than the market was anticipating. There will be more non-cash write offs.

[Dazel]

 

The sale will be a gain after The currency adjustment account is closed out when the deal is closed around the second quarter. The conference call is worth listening to if you are interested in SNC. Management made some big bold moves and I have to say they impressed me more than they have since they took over. I expect a capital program (dividend raise and buyback) now that the past looks to be fixed (or close to it)at SNC...it should be a cash cow with $3b in royalty assets not on the balance sheet as we have alluded to.

 

Anyone that listened here In the past short while have done well but this looks like a flight path up...hopefully Fairfax have listened and are accumulating as I said it’s a perfect target for them in their circle of competence.

 

It was a happy day for Gabriel (big gains-congrats) who took the time for a very valuable post here not too long ago.

 

 

[longlake95]

Yes, it would be very helpful to see a dividend and a buyback. I've heard the idea floated to sell the capital portfolio. I personally hope not, I think it would be nice inflation hedge going forward. Then get the services business humming and we could be back to $60 in a couple of years.

[Gabriel]

Buyback yes.

Management doing great job.

Shorts are welcome to keep price low.

Sailing up though. Above 30$ pretty soon, easy double from here.

Dividend increase from 2c to 10c makes 32c more per year. Not interesting compared to buyback at these ridiculously low prices.

Name change to Atkins Global once the covenant with CDPQ (no moving out and no name change) expires.

 

 

[Dazel]

 

SNC remains the single cheapest stock I see...and many have seen me on the Fairfax thread! Their new business model is a boring cash machine backed by the best asset in the world the 407.

 

I guess legacy (fear of more write offs), reputation and possible short manipulation are reasoning for the share price? It is so stupidly low compared to its competitors that a buy out (takeover) is not even close without a massive premium. Is because it looks like a value trap?

 

I have seen this only a handful of times in my lifetime...but I have never had the backing of an undervalued asset on the balance sheet like the 407 before. It usually is a hidden tax asset or bond gains (Fairfax) etc.

 

When this restructure is finished (maybe done now) the remaining business will trade at a “premium” because its nature is cash flow with little to 0 risk. I have seen assets trade at distressed prices in bear markets but this is the kind of mind altering situation where it is sooo cheap it’s hard to believe in a bull market?

 

WSP trades at a 50 PE....they must be chewing their arm off figuring how to steal SNC. They could pay 100% premium tomorrow and still get a crazy good deal!

 

I know I should not continue to shed light on this because I am still adding to my big position but it’s one of those wow situations and many here have helped with my process over the years.

 

 

[longlake95]

Agreed. It's a 9% position for me. It's a nice combo of hidden value (the concession portfolio) and hidden earnings power. Now the clouds are starting to dissipate...they seem to be making the right moves. I think having 3 shareholders holding 40% of the stock is a benefit right now. They still have to show the street earnings...so it's certainly not riskless. However, most of the issues are already/still baked into the price. I do worry someone will do a take-under...

[SharperDingaan]

Shush!

 

SD

 

 

 

[longlake95]

ya I know....lol...people are already catching on....

[LC]

Dazel, have you looked at ferrovial which owns the remaining public chunk of the 407 along with other heavy assets for which they maintain controlling ownership (50.1%) and the underlying service contracts?

[Gabriel]

LC,

 

Below are some comparisons and assessments.

The first portion of this post compares the market valuation of the 407 stakes of Ferrovial and SNC, and the second portion of the post assesses the value increase of the 407 stake owned by SNC in light of lesser borrowing rates by 407 ETR.

 

FERROVIAL vs SNC valuation of the 407ETR stakes

 

Ferrovial holds 43.23% (ref. 1 below) of the 407ETR for a value of minimally 3.25B * (0.4323/0.101) = 13.91B CAD (9.047 B euros based on reference 2 below and the 3.25B price paid by CPPIB in 2019 for 10.01% of 407ETR).

 

Ferrovial values its stake at 10-12 B  - see References 3 and 4, links below.

 

Other 3 main assets are all valued in Reference 4: Download the last file titled "Cintra portfolio valuation and financial models" and go to page 5. The rest is about 2.5B (2017).

Most importantly, check slide 7 which assumes borrowing rates for the 407 ETR double what they got in May (1.8% till 2025 and 2.5% for 2030 or so).

 

At 20.55 euros/share, the market assessed value including market capitalization and net debt is 19.66B euros (market attributed equity of the asset + debt).

 

Assuming the 407 is worth 15% more post-pandemic (we found 50-70% below - second portion of this post -  if rates are locked 1% lower based on recent refinancing of the 407ETR), then the 407 stake is worth 10.4B euros.

 

With the other assets owned by Ferrovial we get to 13B. SNC however is still a much cheaper deal because even without the 15% "post-pandemic premium", you are still paying Atkins: 27$ - 13$ = 14$ to compare with 21$ per share that SNC paid to acquire Atkins in 2017 (4 years ago) despite its growth and the value of Nuclear Candu and other engineering services unit of ex-SNC.

 

No wonder CINTRA argued to get a stake of our 3.25B deal with the CPIBB for the 10.01% stake.

 

Reference 1:

https://www.407etr.com/en/highway/news/news-release/2021/news-release2021-02-11.html

 

Reference 2:

https://www.dailyfx.com/francais/eur-cad

 

Reference 3: Click on 407 ETR model and Go to sheet titled "Valuation" and then col. S for 2021.

https://www.ferrovial.com/en/ir-shareholders/share-information/toll-roads-valuation/

 

Reference 4:

https://www.ferrovial.com/en/ir-shareholders/share-information/analyst-recommendations/

 

___

 

Value of the 407. Substantially higher with lower borrowing rates by 407ETR

 

https://www.lelezard.com/en/news-19647912.html

Press release also available on 407ETR.com under Highway and Press Releases.

 

Revenue in 2019 was 1,505.3 million.

 

OMERS offered 3,250 million for 10.01% and CPPIB raised its ROFR (right of first refusal) and committed to same and settled during Q3 2019. Ferrovial / Cintra wanted in and sued, also based on ROFR but dropped its claim.

 

This puts the value of the 407 at 3,250 / 0.101 = 32,178m which means it was based on a 20 X projected revenue for 2020 of 1,608 million or 6.88% higher than that for 2020. This growth is consistent with the 7% annual growth in revenue of the 407.

 

That was before Covid.

 

Now rates are lower rates (about 2.14% on average versus 3.14% before) so 407ETR is borrowing at lesser rates so its revenue will be higher.

 

Discounted future earnings post-covid are higher in present value terms. Below are two simulations to make the case. Just to show the PV is substantially higher if you lock the rates long term.

 

My calculations show it is about 78% if we assume growth rate of 7% (as before), 1.5B revenue in 2021 and 2.14% average borrowing cost for the next 78 years (not a given :)

 

For those not familar, the present value, i.e. the value today of tolls collected in 10 years is those tolls divided by (1+ DR)^10.  If Discount rate (DR) or borrowing cost of 407ETR goes from 3.14% to 2.14%, your present value of the tolls in 10 years is increased by (1.0314/1.0214)^10 or 10.2%.

 

Over the next 78 years, a 1% difference has a devastating effect on the net present value of the tolls. T (n) is tolls, year n; and PV is the present value in 2021. g is the annual growth rate of revenue, 7% over the last 20 years or so as a result of the growth in the GTA Toronto Area, increased congestion on the alternative 401 and fare increase, surely to go higher with inflation roaring.

 

PV = T (2021) + T (2022) / (1+DR)^1 + .. T(2098)  / (1 + DR) )^77

 

PV = T (2021) + T (2021) ( (1+G)/(1+DR) )^1 + ... T(2021) ( ( 1+g)/(1+DR) )^77

 

ND = Net discount = (1+G)/(1+DR)

 

Multiply PV with ND on the left side and the right side.

 

ND^1  * PV = T (2021) * ND^1 + ... T(2021) ND^78

 

Substract left sides and right sides of the last two equations to eliminate intermediate values.

 

PV (ND -1 ) = T (2021) *  ( ND^78 - 1)

 

So PV = T (2021) * ( ND^78-1) / (ND -1)

 

 

Application :

 

With a borrowing rate of 3.14%

T (2021) = 1.5 B

g = 7%

DR = 3.14% see reference below - borrowing rate as of March 2019 before sale of 10.01% stake

ND = (1+G)/(1+DR) = 1.07 / 1.0314 = 1.0374

PV (before Covid lower rates) = 1.5B (1.0374^78-1)/(1.0374-1) = 663 Billion

 

Our 10.01% was theoretically value at 66 Billion based on a growth rate of 7% year over year).  Sure we need to account for lane capacity versus flow during rush hour because 3% of the increase in revenue is due to increase in toll prices and 3.5% due to traffic increase (1.035^78 = 14.6X means we would be above capacity of 2,000 vehicles per lane per hour if traffic today is higher than 137 vehicles per lane per hour during rush hours. Means we would need to pay for widening at some point (or increase fares even more to reduce demand).

 

 

With a borrowing rate of 2.14%

T (2021) = 1.5 B

g = 7%

DR = 2.14% see reference below - borrowing rate as of March 2019 before sale of 10.01% stake

ND = (1+G)/(1+DR) = 1.07 / 1.0214 = 1.0476

PV (after Covid lower rates) = 1.5B (1.0476^78-1)/(1.0476-1) = 1,185 Billion

 

1,185 B / 663 B = 1.78. 407 is worth 78% more as a result of the reduced rate from 3.14 to 2.14%

 

 

Borrowing rate of 407ETR was 3.14% in 03/2019 just before offer to purchase from OMERS

https://www.407etr.com/en/highway/news/news-release/2019/news-release2019-03-04(2).html

 

Borrowing rate of 407ETR was 1.8% to 2.59% in 05/2020

https://www.407etr.com/en/highway/news/news-release/2020/news-release2020-05-14.html

 

This said, I truly hope we can get more than 2.5B considering my previous post on the valuation, whether we assume 7% year over year increase in revenue for the next 78 years or even 3% the result is about the same.

 

If we consider a growth of 3.14% only in revenue (and not 7% as in the past) we still increase the Present value of the 407 by 50% (176/117) - see below.

 

With a borrowing rate of 3.14%

T (2021) = 1.5 B

g = 3.14%

DR = 3.14% see reference below - borrowing rate as of March 2019 before sale of 10.01% stake

ND = (1+G)/(1+DR) = 1.0314 / 1.0314 = 1

PV (before Covid lower rates) = 1.5B * 77 years = 117 Billion

 

With a borrowing rate of 2.14%

 

T (2021) = 1.5 B

g = 2%

DR = 2.14% see reference below - borrowing rate as of March 2019 before sale of 10.01% stake

ND = (1+G)/(1+DR) = 1.0314 / 1.0214 = 1.01

PV (after Covid lower rates) = 1.5B (1.01^78-1)/(1.01-1) = 176 Billion

 

1,185 B / 663 B = 1.78. 407 is worth 78% more as a result of the reduced rate from 3.14 to 2.14%

 

 

Borrowing rate of 407ETR was 3.14% in 03/2019 just before offer to purchase from OMERS

https://www.407etr.com/en/highway/news/news-release/2019/news-release2019-03-04(2).html

 

Borrowing rate of 407ETR was 1.8% to 2.59% in 05/2020

https://www.407etr.com/en/highway/news/news-release/2020/news-release2020-05-14.html

 

 

[Gabriel]

Jarilowski Fraser added shares recently:

https://www.dropbox.com/s/948up0gm0ir1zv5/Jarilowsky.pdf?dl=0

 

[LC]

Appreciate the response.

 

Let's talk about the 407 valuation. Certainly the 407 is more valuable the lower the fixed debt. Basic finance and all. But doesn't the valuation of the equity seem rich?

 

The 407 earned 575MM CAD in 2019.

 

SNC's stake entitles them to 40.5MM of those earnings. Even using the proposed debt financing charge of 2.14%, that values SNC's stake at about 1.9B CAD. And one would think equity financing to be more expensive.

 

Put another way, take the 32.5BB valuation from 2019. With 575MM of earnings, that's a hefty valuation if you ask me.

56x earnings!

 

So really the question is, how confident are you in achieving your growth rates and for how long?

The growth rates for the last 10 years are certainly impressive but how much longer can they continue?

 

BTW I own SNC :D

[Gabriel]

Thank you LC.

 

The revenue on the 407 have been growing at more than 7% year over year since the signing of the concession as a result of the GTA population growth (3 to 4%), the increasing congestion on the alternative 401, deviating an additional congestion-induced traffic from the 401 to the 407, and the increase in tolls (3% or so), all of which compound (all three).

 

There cannot be another alternative highway really at a more competitive cost. The only option to increase capacity is to widen this highway and develop transit systems. As long as the three-component compound rate is above the borrowing rate (now 2-3%), then the value of the 407 is above 50B as shown below.

 

This means your rent is increasing by more than the discount (or borrowing) rate. In other words, the present or discounted value of my next year's rental revenue is higher than this year's rental because it increases by more than the borrowing or discount rate.

 

In addition, even assuming as you do, that interest payments are the same for the remaining 78 years of the concession, then the PV of the concession is above 78 * 575MM or 45B CAD and SNC's share would be above 3B (6,76%) because of the above.

 

However, using the net earnings in 2019 as a basis assumes interest payments are the same for the remaining 79 years (2019 to 2098). The 407ETR debt is about 8B CAD only.

 

So we need to discount before interest payments and then reduce by the debt of 8B. That is the correct way and your valuation doubles. No wonder CPPIB raised its right of first refusal and threw OMERS out. And CINTRA Ferrovial contested in court.

 

Look at Ferrovial's Excel sheet: https://www.ferrovial.com/en/ir-shareholders/share-information/toll-roads-valuation/

 

As Dazel puts it, this is the best asset in the world. He is right. I lead Independent Engineering teams for major consulting firms to identify lucrative and technically feasible (etc.)  infrastructure investments in the world and this one is the crown jewel.

 

My own analysis is on this link (sorry for the typos, done by French assistant but under my supervision) : https://91800060qi.securevdr.com/d-s2656021ce36d48729687d457818a1974

 

All input data is referenced including dividends received by SNC of 154.3 million in 2018 (when they had 16.67% of the shares).

 

 

[LC]

However, using the net earnings in 2019 as a basis assumes interest payments are the same for the remaining 79 years (2019 to 2098). The 407ETR debt is about 8B CAD only.

 

So we need to discount before interest payments and then reduce by the debt of 8B. That is the correct way and your valuation doubles.

 

This is the 2019 P&L modified to include your proposed IR of 2.14%

 

EBITDA: 1,309 *2019 reported EBITDA

Capex:  (100) *Ferrovial estimated 100M of capex in 2019

Taxes: (275) *26.5% rate (from Ferrovial) and using 172M as the interest payment (e.g. 8B outstanding debt * 2.14%)

 

Pre-Interest Income: 934M

 

That looks reasonable to me but let me know if you disagree.

 

It's been a while since I sat here modelling cash flows, but from a 934M figure, how do you want to get to the types of 40B, 50B+ valuations you are discussing?

[Gabriel]

However, using the net earnings in 2019 as a basis assumes interest payments are the same for the remaining 79 years (2019 to 2098). The 407ETR debt is about 8B CAD only.

 

So we need to discount before interest payments and then reduce by the debt of 8B. That is the correct way and your valuation doubles.

 

This is the 2019 P&L modified to include your proposed IR of 2.14%

 

EBITDA: 1,309 *2019 reported EBITDA

Capex:  (100) *Ferrovial estimated 100M of capex in 2019

Taxes: (275) *26.5% rate (from Ferrovial) and using 172M as the interest payment (e.g. 8B outstanding debt * 2.14%)

 

Pre-Interest Income: 934M

 

That looks reasonable to me but let me know if you disagree.

 

It's been a while since I sat here modelling cash flows, but from a 934M figure, how do you want to get to the types of 40B, 50B+ valuations you are discussing?

 

Thank you LC. The present value (PV) of 934M increasing by a substantial and solidly grounded growth rate made of : 1) diverted traffic from the increasing congestion on the 401 which has reached capacity, 2) separate and additional growth rate of the GTA population and 3) separate and additional toll increase least as high as inflation (these compound to multiple the numerators of the PV equation);  and discounted (at the denominator level) by rates in those very low ranges (2 to 3%) (lesser than the above-compounded growth rate) equate to a larger figure than : 78 years * 934M or 72 Billion. This because the numerator factor is higher than the denominator factor in the summation of the yearly PVi for each year "i".

 

We finally have to remove 8.5B debt and 22% taxes so the net present value is about 50B. OMERS paid 3.25B for 10.01% so they assessed the concession at 32.5B. Now we have lower rates and the effect is substantial per previous posts, just to say the remaining portion of 6.76% is worth north of 2.5B or 14$ per SNC share. Based on the closing price of 27$, Atkins and ex SNC engineering services and they are something let me tell you, and Nuclear Candu are valued at 13$ per share or 2.3B. Atkins was paid 3.5B or so (21$ per share) and has grown since. Plus ex SNC engineering services + Nuclear Candu.

[rb]

LC,

 

A few comments. The 26.5% tax. That's the headline tax rate. They're not paying that. It's more like around 22 or 20.

 

CAPEX will be lower in the future than in the past because they highway now is close fully built out. That also means that there will be more price increases in the future than in the past. It remains to be seen how much price the market can bear. Now the price is around 22-25 cents per km and people are bitching but 12 years ago it was around 7 cents and people were bitching back then and now a lot more ppl use it. I'm sure there is a limit, but who knows.

 

I owned this like like 7 years ago and made a lot of money. Back then I figured that 407 was worth at least 30x but I was using higher discount rates than you guys. I don't know if it's worth 50x (for most part I don't think anything is worth 50x). But it truly is a magnificent asset. Unfortunately I don't share the positive view you guys have on the rest of SNC so I don't have a position here.

[Cigarbutt]

^For the toll road valuation, a reference had been suggested on the third page of this thread.

Here's an updated version:

https://mfgam.com.au/insights/what-is-a-toll-road-worth1/

The economics of the business are unusual.

[Dazel]

 

 

LC,

 

I did look at ferrovial during the spring...I did not love the rest of the company for the price. Have not looked recently...but I see the price is about the same.

 

I like the business of the new SNC model...its predictable and trades at a premium.

 

Dazel

[Dazel]

 

 

the 407...has a lot to do with the growth of the Toronto region...

 

But the great part as the greatest investor of all time says...it’s not close. I don’t have to be precise on my

407 and other capital projects they own...there is such a wide discrepancy in the sum of the parts at SNC...the valuation can be low and they win big.

[Dazel]

“In an inflationary world, a toll bridge would be a great thing to own because you’ve laid out the capital costs. You built it in old dollars, and you don’t have to keep replacing it.”

 

Warren Buffett

 

Here is the quote I am referring to when I weigh what the 407 exact value is...it’s enough to create a lot of room for the value of SNC as a whole and there is a lot of room for error on the low side...on the high side well I don’t have to worry about that.

 

“When you build a bridge, you insist that it can carry 30,000 pounds, but you only drive 10,000-pound trucks across it. And that same principle works in investing.”

— Warren Buffett

 

 

 

[LC]

The present value of 934M increasing by a substantial and solidly grounded growth rate made of : 1) diverted traffic from the increasing congestion on the 401 which has reached capacity, 2) growth rate of the GTA population and 3) toll increase least as high as inflation, and discounted by rates in those ranges (lesser than the growth rate) equates to a larger figure than : 78 * 934M or 72 Billion.

We have to remove 8.5B debt so the net present value is 64B

 

Thank you for clarifying. I should clarify as well - my questioning relates to trying to understand how "sensitive" a 30B/40B/50B valuation is to growth rates.

 

Toll rate increases are (I assume) part of the concession agreement and therefore quite certain. Traffic growth rates are less certain. What if traffic in the GTA begins to decrease permanently (more work from home etc.)? Particularly if as you say, the 407 has benefitted from all incremental traffic increases as the 401 has been "tapped out". Therefore if the reverse occurs, one would expect traffic on the 407 to decline just as precipitously.

 

The link posted by Cigarbutt (merci) illustrates this:

 

 

Comparing valuations under static discount rates, the difference between appropriate EBITDA multiples for a growth vs. no-growth is quite extreme, particularly as the length of time remaining under the concession agreement increases.

 

All that said, I agree with Dazel's conclusion here:

 

the 407...has a lot to do with the growth of the Toronto region...

 

But the great part as the greatest investor of all time says...it’s not close. I don’t have to be precise on my

407 and other capital projects they own...there is such a wide discrepancy in the sum of the parts at SNC...the valuation can be low and they win big.

 

The point being at these prices I don't think we require 7+% growth assumptions for the investment to appear attractive.

 

A couple of other notes: TY Dazel for the tax rate clarification. And also, I did not fall in love with the remainder of Ferrovial's projects. Particular their construction segment and other lingering one-offs.

 

[Gabriel]

Thanks LC.

 

Absolutely we do not need 7%.

 

All you need is a compounded growth rate above the borrowing rate of 2-3% today and 78 X becomes a theoretical conservative figure.

 

The threshold has been substantially lowered.

 

Toll increases are unconstrained. They are established solely by what the market is willing to pay and elasticity estimates.