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Vehicles travelling eastbound on the 407 Express Toll Route (ETR) just before the exit for the 400 Highway. (Louie Palu/The Globe and Mail)
Vehicles travelling eastbound on the 407 Express Toll Route (ETR) just before the exit for the 400 Highway. (Louie Palu/The Globe and Mail)

Vox

Ferrovial is a sweet drive for value investors Add to ...

If you regularly drive Ontario’s 407 toll road, know that there’s a man in Memphis, Tennessee, who loves you.

That man is Mason Hawkins, leader of the investment firm Longleaf Partners and one of the more closely watched value investors east of Omaha. Two of his funds are major holders of Ferrovial SA, the Spanish company that owns nearly half of the 407.

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The Ontario toll road, according to the recent annual report from Mr. Hawkins’ firm, is one of “the best infrastructure assets in the world” because of “pricing power … toll tariffs have risen an average of over 10 per cent per year for the past 11 years.”

So if your frustration over your commuting costs now threatens to boil over into an all-encompassing rage, consider this: Might it be time to consider purchasing Ferrovial shares, to get back some of your cash?

In fact, that might be a fine idea even if you’ve never wheeled down the 407.

Ferrovial, which trades on the Madrid Stock Exchange, offers a nifty dividend yield of 5.4 per cent, and its current share price of about €9 ($12) is a significant discount to its asset value, argue a number of analysts.

The market tends to see Ferrovial simply as a construction company headquartered in Spain, which raises fears that the company is vulnerable to contagion from the European economic slowdown. To some degree, that’s true: Spanish construction revenue dropped more than 17 per cent in 2011, driving a worldwide 6.2 per cent drop in construction revenue for the company.

Increasingly, however, Ferrovial is not a construction company, but an owner and manager of global infrastructure. The 407 is one of a number of toll roads the company owns around the world. In addition, Ferrovial is the dominant partner in a consortium that owns BAA Ltd., the privatized British Airports Authority that runs Heathrow and five other U.K. airports.

Because Ferrovial owns pieces of these various ventures and is entitled to some, but not all, of the profits, putting a value on the company can get tricky. Rather than rely on traditional earnings multiples, analysts often use net asset values or sum-of-the-parts methods.

Bosco Ojeda of UBS believes fully one-third of Ferrovial’s value of roughly €9-billion comes from its 43 per cent stake in the 407. (The company’s overall Motorways business contributes more than 40 per cent of its value.) Its piece of BAA represents about 25 per cent of its value, with an international services business that ranges from ambulance service in Spain to street maintenance in Birmingham, England, providing another 21 per cent, Mr. Ojeda estimates. Construction is just 9 per cent of the company’s value, he figures.

Mr. Ojeda ultimately places a €12.3-a-share valuation on the company. Even setting his target price at a 10 per cent discount to net asset value, he arrives at €11.10 a share.

Jaime Rowbotham of Morgan Stanley notes that a recent sale of 5.9 per cent of BAA to infrastructure investors Alinda Capital Partners LLC implies a value of €5.5-billion for all of BAA, something not reflected in Ferrovial’s valuation. (Mr. Rowbotham estimates Ferrovial at a more-conservative €10.5 a share, with the Motorways group representing fully half the company’s value.)

How’s the cash? In his year-end letter, Mr. Hawkins’ Longleaf Partners said they believe the 2012 forecast free cash flow represents a yield of 8.7 per cent on the shares. (Free cash flow – generally cash from operations, minus capital expenditures — can be expressed as a percentage of market capitalization, helping to identify companies that generate excellent cash for their price. How much of it gets passed along as a dividend is a separate, but related, matter.)

Ferrovial got €133-million in dividends from the 407 in 2011, up from €100-million the year before. And BAA begins paying a £120-million dividend this year. “With scope for that to grow, we see much improved dividend cover,” Mr. Rowbotham says. And while management suggests it will reinvest cash this year, “returns of cash to shareholders should not be ruled out, in our view.”

For drivers of the 407, that could be a true return of the cash that disappeared in tolls.

Special to The Globe and Mail

 
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