Highway 407, north of TorontoTibor Kolley/The Globe and Mail
SNC-Lavalin's stake in Toronto's 407 toll highway is likely worth a lot more than some analysts are giving the company credit for, which argues that there is a good reason for SNC to look at a spinoff transaction to bring that value to light.
Speculation that SNC will look to do something to show investors there is more value in the infrastructure concessions is still bubbling following SNC's disappointing earnings release last week.
Analysts at firms such as Desjardins and RBC Dominion Securities have put the value of the 16.8 per cent stake at $10 a share, based on the last sale of an interest in the highway. The thing is, that last sale took place two years ago. In the interim, operating income has risen by 20 per cent, debt costs have come down and valuations for infrastructure assets have surged.
The analysts by and large are being conservative, but there's a good case to be made that the value on the open market today would be something more like $13 to $14 a share for SNC.
And speaking to people in the infrastructure business, who do toll road valuations for a living, they say that with a few aggressive assumptions on population growth in Toronto and truck traffic, and the potential value even jumps from there quite quickly.
Here's a walk through the numbers.
Back in late 2010, Canada Pension Plan Investment Board bought a 10 per cent stake that valued the highway at $9-billion, and valued SNC's 16.8 per cent portion at $1.5-billion.
In 2010, the road produced earnings before interest, tax, depreciation and amortization (EBITDA) of $500-million, resulting in an EBITDA multiple of 18 times.
Last year, EBITDA rose to $608-million, and provided shareholders with some nice dividends. Even using the same multiple, that puts the valuation of the highway at $10.9-billion. That produces a value of $1.84-billion for SNC's stake, or $12 a share.
But there's a good argument for cranking up the multiple, as infrastructure assets have appreciated significantly since 2010.
Another way of looking at the 407 is as a giant piece of real estate for whose use people pay rent – so capitalization rates become a useful benchmark. Using 2010 figures, and the CPPIB purchase valuation, the cap rate on the highway was 5.55.
What if you use a 5 cap rate? That's not unreasonable, considering what top real estate is selling for. When Dundee REIT and H&R REIT teamed up in May, 2012, to buy skyscraper Scotia Plaza, a Toronto landmark, the cap rate was 5.2 per cent. A 5 per cent cap rate also equates to a 20 times equity/EBITDA multiple.
At 5 per cent and using 2012's profit numbers, you are now at a $12-billion valuation for all of the 407.
Put 5 per cent on the $645.8-million that analysts at Altacorp have estimated 407 will earn this year, and voilà, $13-billion here we come. And at that level, the SNC stake tops $14 a share.
That's where analysts at Altacorp put the number late last year, using similar logic.
Altacorp points to growth in EBITDA that should take the operating income to $645.8-million, and then looked at what yield stocks such as REITs and telecom shares have done since the CPPIB deal. Altacorp, based on that, put the value of the SNC 407 stake at $14.18 a share.
But here's where it really gets fun. Some folks in the infrastructure business say that a 25 times EBIDTA multiple, or a 4 per cent cap rate, is within the realm of possibility if you are optimistic about the Toronto region's economy and growth. That's $16-billion for the 407, or $2.7-billion for SNC's stake. That's almost $18 a share. There's no doubt that's aggressive, but it still bears thinking about.
If there really is another $4 a share hiding in the 407 stake, that's a significant kicker for a stock trading in the low $40 range.