Stalexport Autostrady SA: Polish toll road at a 20%+ FCF-yield

A reader whispered the name Stalexport Autostrady SA (WSE:STX) in my ear. This Polish company used to be an importer and exporter of steel products (hence the first part of the name), but in 1997 it obtained a 30-year concession to operate a 61KM stretch of the A4 as a toll road between Katowice and Kraków (respectively the 10th biggest and 2nd biggest cities of Poland). The steel business was sold more than a decade ago when Atlantia SpA (BIT:ATL) took a majority position in the company. Atlantia is an Italy-based operator of toll roads and airports in various countries with a €22.5 billion market cap while Stalexport Autostrady is worth just €225 million at the moment. Atlantia holds 61.2% of the outstanding shares, but it’s just a tiny tiny sliver of their overall business.

Toll road between Katowice and Kraków on Google Maps

Conceptually, understanding a toll road business is easy. The costs you have are mostly fixed: road maintenance and operating the toll booths. How much money you make is a direct function of how many cars use the road, and how much toll you ask. It’s usually a pretty good business to be in because most people have no real choice to use your road if they want to get quickly from point A to point B, and no-one is realistically going to build a competing  road in the same direction. In this case we know that the concession will end in March 2027, so this is the kind of situation that screams for a discounted cash-flow model to estimate intrinsic value.

Financials: the balance sheet

Before we start building a DCF-model it’s a good idea to first take a look at the historical financials, and especially the balance sheet. There are a couple of big items on there that are important to understand. I have color-coded them in one column:

Source: company data and author’s calculations

The assets colored red are basically the operating assets of the company, and the concession itself (the intangible assets). As you can see the value of the concession drops every year, and is expected to be zero in 10 years time. Maybe the physical operating assets will have some residual value, but this part of the balance sheet isn’t very important.

More important are the yellow colored cells. On the asset side these are mostly labeled “other non-current investments” while we have various provisions at the liability side. These two items cancel each-other almost out, and that is no coincidence. The investments are “cash reserved for capital expenditures” while the provisions are the estimated costs of mandatory capital expenditures (with the concession also came the obligation to maintain/upgrade the road). This is very handy for our DCF-model. We don’t have to worry about modelling capex: we can just assume that these balance sheet items will cancel each other out in 10 years time. To check that this is sort of reasonable we can compare the implied annual capex/year with historical capex levels. Total provisions are PLN412 million which would imply roughly PLN41 million of capex/year versus a seven year average of PLN46.5 million. This is a small gap to begin with, and it will be a bit smaller because the provisions are discounted while the investments will also generate a certain return (and we have some excess investments to begin with). I also think it makes sense to assume limited capex close to the end of the concession.

The green and blue cells are closely related, and basically represent how much excess cash/assets the company has at this point in time. They do have some debt, but they have been paying that down rapidly in the past years. Note that the “other non-current liabilities” also represent a very debt-like liability since they are concession payments that have to be made to the Polish state. This amount went down by a large amount compared to 2016, but that at the same time “trade and other payables” saw a huge increase. As a result net working capital turned negative, but this should be a temporary situation. They are basically paying down debt, and they now have roughly PLN60 million in excess cash while holding PLN60 million in positive working capital as well if we normalize the situation.

Financials: earnings and cash flow statement

Source: company data and author’s calculations

Looking at the income statement is useful, but we have to know what we are looking for. Earnings are sort of meaningless (except for the fact that they determine taxes) since we don’t care about the depreciation of the concession, or the variability in earnings because of lumpiness in roadworks. Stalexport Autostrady doesn’t really have a meaningful “cost of sales”. A large part of the cost of sales are the amortization of the concession and changes in the valuation of the provisions, and costs related to roadworks. Therefore, it doesn’t move based on revenue, and as a result higher revenues are resulting in higher operating margins. Because of that, the business is at the moment throwing off cash.

We mainly care about the amount of operating cash flow. The most important driver of the amount of operating cash flow has been the revenue, that has been growing at an average rate of 10% per year. If you dive in the companies annual reports you see that this growth is driven by a combination of higher traffic and higher tolls. The maximum amount of toll that the company can charge is capped in the concession agreement, but the rate for passenger cars can be increased by 40% before hitting it while the rate for trucks has 18.3% of upside left. Tolls from passenger cars represent roughly two-thirds of all toll revenue.

Valuation

Now that we sort of know the current state of the business, and understand what is important, we can use that to make some predictions about the future. I have made a very simple cash flow model based on the trailing twelve month operating cashflow. I have adjusted this number for changes in working capital, and also deducted the dividends paid tot non-controlling interests (and assumed that this amount will remain the same in the future). The value that the models spits out depends on four major assumptions:

  1. Incremental revenue drops directly down to the bottom line (after 20% taxes are paid).
  2. Revenue continues to grow with an average rate  of 10% per annum (not so conservative).
  3. No additional cash is required for maintenance capex above the amount currently provisioned (with the PLN164 million in net tangible assets on the balance sheet providing an additional buffer).
  4. We use a 10% discount rate (I think this is pretty conservative).

The interaction of the first two are really the crucial ones. Because we don’t model increases in costs and overhead while revenues grow the amount of operating cash flow that the business generates the next ten year will just explode. If you look back at the historical results that doesn’t seem to too crazy: this is exactly what we see happen in the past results.

Without further ado, the model:

Source: company data and author’s calculations

If these assumptions are reasonable, we find that Stalexport Autostrady should be capable of generating roughly PLN3.2 billion of operating cashflow with a net present value of PLN1.9 billion using a 10% discount rate in the next 9.5 years. Since the current market cap is just PLN945 million this gives us a large margin of safety, and if we increase the discount rate to find the same present value as the current market cap we need to use a whopping 27.4%.

If we input zero revenue growth in this model we get undiscounted cash flows of PLN1.7 billion for a discounted value of PLN1.1 billion. So basically the market is pricing the toll road as if revenues will suddenly stop growing, something that I think is unlikely to happen with an asset like this that has so much pricing power. And even if that turns out to be the case, getting paid 10% per year is nothing to sniff at in today’s low interest rate world.

Conclusion

To cut directly to the chase: Stalexport Autostrady seems to be valued very attractively compared to its expected cash flows in the next 10 years. According to my, admittedly very crude model, the stock should be trading at roughly twice the current level. It’s quite possible that a 10% revenue growth rate will turn out to be a too aggressive assumption, but since expected returns are adequate even with a zero growth rate I think there isn’t a whole lot that can go really wrong here. A toll road (concession) must be one of the more stable assets one can own, so I’m pretty excited to be able to buy this at such a high yield.

Disclosure

Author is long Stalexport Autostrady

60 thoughts on “Stalexport Autostrady SA: Polish toll road at a 20%+ FCF-yield

  1. Investingideasonly

    Interesting. What will they do with the cash generated? If they dividend it (which I guess he majority shareholder might prefer), then the tax leakage reduces the discount to NAV considerably.

    Reply
    1. Alpha Vulture Post author

      They paid a dividend (for the first time) earlier this year, and I suspect/hope that more will follow. Even if you have to pay the full 19% tax it’s not so bad (but for me personally I expect the tax leakage to be minimal).

      Reply
        1. Alpha Vulture Post author

          Maybe, but since the tax is just 19% and I can use the first 15% as a tax credit I’m not worried about the last 4%. I’ll of course try if I can reclaim it, but isn’t very material.

          Reply
  2. Drornac

    I didn’t checked that company specifically, but am familiar with the PPP/BOT concept. Usually, when the concession end’s the concessioner need to return the asset (Toll road) for free.
    If you get 10% annualy (before taxes) for 10 years and get nothing more after those 10 years (not even your initial investment) – I suspect this is not a good deal.
    Usually, projects like that are being held by an SPC/SPV and the accounting show clearly that after the end of the concession the balance sheet is zero, P&L zero and cash flow zero – basicaly, the SPC is dead. (Not sure, but I think IFRIC 12)
    Exception to that are cases when the concessioner is not obligated to run the project through SPC. In that case you will see other assets/revenue streams, but still – the intangible asset will go, for free, when the concession pass.
    I’ll be happy to hear that this is not the case, but strongly recommend that you double check it.

    Reply
    1. Alpha Vulture Post author

      Yes, that is the case here as well and the assumption I have used to calculate value. After the concession ends there is no residual value, or any future cash flow.

      Reply
  3. Alan

    Thanks for sharing this idea, very interesting. Couple of questions if that’s okay:

    1. Are you concerned about the majority ownership, and potential for minority interests to be treated badly? If not, why?

    2. For the 10% revenue growth assumption, do you have a view as to the split between volume & price? In terms of pricing power, don’t know if you have looked at alternative routes etc. I thought the initial screenshot you had showing a different route taking only 21 mins extra didn’t seem hugely inconvenient. Also, do you know if the current price is significant to users? I know in the UK the M6 Toll is quite a significant expense if using regularly, whereas in some other countries appreciate toll roads can be a minimal fee type arrangement.

    Thanks again.

    Reply
    1. Alpha Vulture Post author

      1. No, I actually think it’s a positive. I think minorities are mostly at risk when the majority shareholder is for example the CEO and it represents this persons main source of wealth. In that case it might be attractive for the insider to siphon off value by increasing salaries, putting money in friends projects etc. Having a large “professional” majority owner can act as a balance against management, and they will most likely also pressure the company to payout cash so they can upstream it to Atlantia.

      2. The growth assumption is just extrapolating past results. They have been able to grow like this in the past, so apparently they do have good pricing power. In the past 10 years the growth in revenues from cars was almost a 50/50 split between higher traffic levels and higher tolls, while the growth of revenues from trucks was basically higher tolls only (still good for a 10%+ annual growth rate, but since it’s now close to the cap not that much room left for growth).

      I guess the toll is quite expensive if you use it every day, but not crazy expensive. Toll rate for cars is 10PLN which is less than E2.50. But you have to remember that Poland has a lower GDP/capita than the “developed world”, and you can’t compare this to M6 toll prices in London.

      Reply
  4. Pogonific

    Interesting – I looked at Stalexport briefly and decided I should spend more time on it..and then never did 🙂

    If you’re looking at Poland, have you looked at Unimot? It seems incredibly cheap – almost too cheap.

    On the infrastructure side, there’s a tunnel concession in Marseille that seems to trade at a low PE – Societe Marseillaise du Tunnel Prado-Carenage SA (SMPTC) – that might be worth a look (again, I havent’ spent the time.

    Finally, I know you like your CVRs – have you looked at NewStar Financial (NEWS)?

    Reply
    1. Alpha Vulture Post author

      Thanks for the ideas, will take a look at them :). And yes, I do like my CVRs. I recently bought a position in NEWS, after the announced the date of the EGM. Think this makes it very likely that the deal will close this year (which is good for the value of the CVR).

      Reply
        1. Alpha Vulture Post author

          If they manage the merger this year the CVR should be worth around $1/share. If they don’t, it might be worth zero with the new tax legislation. Since the EGM is being held on 21 December 2017 I think it highly likely that they will be able to complete the merger this year.

          Reply
  5. pietje

    How did they increase revenue the past years? I assume by a combination of more traffic and increasing costs .. ? I haven’t checked the numbers but if you assume the split is like 5%/5% then truck pricing hits the price cap in ~3 years (rev. rowth declines to ~8.5%) and car pricing hits the cap in ~7 years (rev. growth declines to 5%). Shouldn’t you take that into account? Mostly happens in the later years so will not invalidate the thesis but should be significant.

    Reply
    1. Alpha Vulture Post author

      Yes, see also my reply to Alan above. The model could certainly be improved by trying to estimate more accurately how revenues will grow, and especially revenues from trucks will probably slow down since they are getting close to the price cap (and historically there hasn’t been traffic growth in that category). But I admit; the model is very crude, but I think sufficient to capture the main drivers of value and get a ballpark figure of what I think it should be worth.

      Reply
  6. Arne

    Nice work. An analyst report says the dividends do not to go to Stalexport shareholders in their entirety. Rather, an unknown share goes to the Polish treasury. If true – no reason to suspect otherwise – the share price would imply the consensus guess on the equityholders share of fcf and divs. This assuming that everyone more or less agrees on the financials 2017 to 2027, which is not unreasonable since this is a toll road, duh, and the discount rate of the future provisions are gov bond rates, meaning the uncertainty in the flows is low.. Anyways, their target price says 50% upside to last px, and that would correspond to half of the divs going to the govt and half to equityholders, since your dcf says upside 100 %. Sorry for bad spelling, the ipad is not easy to write on.

    Link – google translate helps:
    https://www.bankier.pl/wiadomosc/DM-BZ-WBK-rekomenduje-kupuj-Stalexport-Autostrady-z-cena-docelowa-5-85-zl-akcje-7538187.html

    Reply
    1. Alpha Vulture Post author

      I have seen that report (there exists an English version) and I think they are simply wrong (and I have seen no other sources that confirm their story). There is nothing in the financial statements that suggest a part of the dividend needs to be paid to the Polish treasury, even though there is a section titled “information about the concession agreement” that has details on stuff a lot less material than something like that (and also has some information about when dividend payments are allowed).

      Additionally, you can see in the financial statements how they have been up streaming cash from the SAM subsidiary (and paying shareholders a dividend earlier this year as well) without accruing any kind of balance sheet liability. My guess is that it’s some sort of misunderstanding, and the only money the Polish treasury gets are the dividend taxes.

      Reply
      1. PSDFinancier

        Alpha,

        Out of curiosity, how do the operations split between Stalexport Autostrada Malopolska, S.A. and VIA4 S.A.? It seems like these are the two operating subsidiaries, and it looks like we own 100% of the former but only 55% of the latter. I can see the financials for VIA4, but was just curious what the operating difference between the two entities is.

        Best,
        PSDFinancier

        Reply
        1. Alpha Vulture Post author

          VIA4 does the day-to-day operation of the motorway while the SAM entity collects the tolls, and is also responsible for the investments in the road based on the concession agreement (and generates almost all revenues).

          Reply
  7. Arne

    I left out the part that the analyst estimate of revenue cagr is smaller than your 10 % estimate, but that does not change the picture drastically since the div distribution ratio is the big issue. A sound assumption might be that the toll road fees will be maxed at some point in the next 10 years, so this should be a timing question when that happens. Uncertainty still remains in how many vehicles pass the collection points, but as said, half of fcf going away is more important. I am thinking this security is something like fixed income (Poland 10 yr gov bond + 5-8%) with some but not a lot of room for revenue increase. Defintely the zloty fx rate matters more than in ”normal” perpetual stocks since this at least currently has a finite life.

    Reply
  8. Arne Ottelin

    Ok, did you try asking the analyst? Seems very unusual the local guys would get this so wrong, especially since they report seems very legit otherwise (read it but thought free internet info might make more sense to paste here).

    Side note: the Marseille tunnel co seems to have a high fcf and div yield but a new road has been been in operation for some time and the revenues are now falling slowly for the tunnel license co as a result. I think they are trying to connect the old tunnel to a new part, might help a bit.

    Reply
      1. PSDFinancier

        Alpha, have you reached out to management/IR regarding this topic? I’ve been through the financials myself, and have searched for this topic, and I see no mention of additional payments to State Treasury besides the concession payments being made related to the EBRD loan (which is already covered by cash on the balance sheet).

        Another supporting point on this is that management allocated PLN 48.8M for the dividend this year. 4.3M went to the non-controlling interest and 44.5M went to shareholders, and the 44.5M divided by 247M shares outstanding gets you to the 0.18/share dividend that was given to shareholders. No evidence of anything related to the dividend either being paid to Treasury or being accrued as a liability to pay to Treasury in the future.

        Reply
        1. Alpha Vulture Post author

          I have reached out, but no reply (yet). But think it’s really really unlikely that that other report has it right. Just doesn’t make sense that there would be zero evidence of something that significant in the financial reports, especially now that they have started paying intra-company dividends, and dividends to shareholders.

          Reply
      1. PSDFinancier

        Good news indeed lol. Just can’t understand how the analyst is allowed to make that statement without confirming with management…

        Reply
        1. Alpha Vulture Post author

          I think he was talking about the dividend split percentage, based on what the company just told me there is certainly some kind of profit split…

          Please be informed that in accordance with the concession agreement the concessionaire is obliged to share profits with the State Treasury, however the mechanism of profit sharing as constitutes a part of the concession agreement is confidential.

          Reply
          1. Chmith

            Hi – thanks for a good post as usual. Interesting – so they did come back to you and confirm a profit split? Strange that it doesn’t seem to have shown up in accounts so far.. unless it is part of the growth in ‘other liabilities’.. did they give any more colour?

          2. Alpha Vulture Post author

            No other info, but asked if they could add some more colour. I’m pretty sure it’s not part of other liabilities, that is just normal debt that is growing linearly because the discount factor is being unwind.

          3. Mr. Skeptical

            Come again?

            Isn’t the profit sharing arrangement rather extremely important? (bearing in mind this is an extremely high margin asset). What percentage of profit must be “shared with the State Treasury” and when must such profit sharing payments start to be made? And how to define “profits”?

            Further, that a publicly listed company can keep such material details “confidential” gives one serious pause.

          4. Mr. Skeptical

            It is not so “confidential”. Suffice to say, it’s material to your undervaluation calculation. FWIW.

          5. PSDFinancier

            It’s pretty irritating that management didn’t disclose the profit sharing more explicitly in their own financials.

            Don’t know if anyone has tracked down the exact percentage. But from Autostrade/Atlantia’s Annual Report regarding Stalexport: “The concession arrangement envisages a profit sharing scheme, with the share of the profits to be passed on to the State rising in line with increases in shareholder returns.”

            Oh well. Thanks again for the idea, Alpha! Still really appreciate it.

          6. Alpha Vulture Post author

            That fits with what I heard from someone else. Apparently another Polish toll road has a 20% profit share above a 10% real shareholder return and a 50% profit share above a 15% real shareholder return. Maybe Autostrady has something similar, and would also explain the lack of a balance sheet liability (if they haven’t hit the 10% (or some other percentage) shareholder return yet).

          7. Chmith

            Found a good summary of the other profit sharing deal here: http://www.jemi.edu.pl/uploadedFiles/file/all-issues/vol3/NSAR_Vol3_2007_Article3.pdf

            There are clearly some significant differences between the projects (‘our deal’ was initially funded by government, but the other deals have more explicit government gtees on the debt). I don’t know what that means in terms of impact on a profit sharing deal. I suppose it would be possible to look at the initial investment and maintenance spend and reverse engineer the IRR on the initial equity to come up with where they are currently (government seems to have modelled 8-20% IRR range for private capital on the other projects) .

  9. blades

    AV, really interesting find, thank you! Am I correct in believing the dividend last spring was .18z, compared to a current price of 3.95z for about 4.5%?

    I like that majority owner is Atlantia. Maybe they would be interested in someday buying the 39.8% of the company they do not own!

    The article referring to a “partly confidential concession agreement” gives a bit of pause. Do you think the company would respond to an email inquiry? Or perhaps you have confidence the financial reports could not possibly be issued without referring to such an agreement and disclosing material terms?

    Reply
    1. Alpha Vulture Post author

      Atlantia has been slowly increasing it’s stake the past few years, so perhaps they are interested in acquiring the remaining shares.

      I haven’t tried contacting the company, but perhaps I will. But I’m pretty confident that something so material would be in the financial reports, especially since they offer a pretty good level of disclosure of everything.

      Reply
  10. Tom

    AV,

    Very interesting situation. Do you have any sense of management’s plans? I understand that the endgame is 10 years away, but it would be great to know that management is in their 50s and will get big bonuses in 10 years if this all works out for the shareholders rather than worrying about them trying to manipulate the situation.

    Best,

    Tom

    Reply
    1. Alpha Vulture Post author

      No idea really. In the annual report there is some mention of potentially investing in other Polish toll road concessions if they get the opportunity. But I’m not too worried about what they will do, I think having Atlantia as a 60% shareholder will keep management in check.

      Reply
  11. AVI

    Appreciate the write-up. I looked many years back but never dug into the accounting so missed seeing the potential at the time. A few accounting questions:

    – Up until 2015, were they essentially pre-paying capex via the non-current deposits line in investing cash flows? And they started out with a large liability (“reserves minus provision”) at neg 300m+ a few years ago, but now they have caught up?

    – Now that this is built up, where is the normal PP&E capex coming from (39.093m)? I’m having a hard time tying this number to either the PP&E or intangible footnote.. Is there some regular amount of capex that won’t be flowing through the provision line?

    – Isn’t there a risk then that they underestimate the amount of capex necessary? The intang amount is adjusted every year (changes in estimates, changes in discount rates, etc) – couldn’t they get stuck with a big bill along the way which would require material add’l capex build-ups?

    – Do you know why the amount of the future concession payment due (206.7m in 2016) is increasing each year?

    – Have you reconciled the implied tariff rates which what’s discussed in the annual reports? The 2016AR says the car rate went from 9 to 10 in March 2015. Yet 34,069 ADT in 2016 x 366 days = ~12.4m cars generating 199.6m in revenue = 16/car? Why the difference?

    Finally, isn’t the big risk in capital allocation that the company recycles the cash proceeds into another, potentially bad economic concession, instead of returning to shareholders? Any indications that mgmt plans to pay out a substantial portion of the money?

    Reply
    1. Alpha Vulture Post author

      * Correct. They went from having a large liability for future capex, to having a small net reserve.

      * I’m not sure if you can totally decompose how the reported capex relates to various items on the balance sheet and the income statement. They report relative large amounts of capex, but the amount of PP&E (or other assets) barely grows over the years. I think most of it disappears by simply decreasing the amount of provisions while some part flows through the income statement as cost of sales.

      * I guess it likely that costs will not be exactly as budgeted, but I don’t see a reason to believe that they would be off by a large amount. The closer we are getting to the end of the concession, the lower the amount of uncertainty.

      * Unwinding of the discount factor of this liability

      * I think the ADT includes trucks, hence the higher average rate.

      * Sure, it can happen. They could also recycle the cash in a potentially great economic concession. Anyway, think with Atlantia as a majority shareholder we don’t have to worry too much about this. I’m sure they will have a say in this, and they do know the toll road business.

      Reply
      1. GB

        Nice find, looks interesting. I think AVI has a point though re the reconciliaiton. According to the management report, tolls should be averaging PLN10 for cars, and PLN16.5 & 26.5 for trucks, depending on class. Report claims 34,069 cars/day travelling and PLN10 trip, I can’t work out how that creates PLN199.6m revenue from cars alone as claimed in the report.

        The other issue you might want to sanity check is the implied growth rate in traffic volumes over the next ten years. If revenues are to grow 10% and toll per user say 3%, it leaves say 7% pa to come from volume growth. I know they’ve achieved that in recent years, but it implies a doubling in traffic over a decade. The two important questions here are whether the demand will be there, and whether the road itself is able to accommodate that sort of traffic, particularly at peak times. Have you ever seen any discussion from management on capacity?

        Thanks for sharing an interesting idea

        Reply
  12. Ben's Jamin

    I agree this seems like a no brainer at first, but more thought ought to be given to the political vicissitudes that monopoly toll roads attract (see Noida bridge company, whose highway connects New Delhi to Noida and generated 70% margins). Of course, Poland and India have different cultures and politics, but the discount probably appropriately reflects these vicissitudes, given that Poland does have its history with consumer riots against tolls etc and when sh!t hits the fan, many things correlate with the people’s angst. That said, it’s also possible that a half price discount is sufficient safety margin.

    Reply
    1. Alpha Vulture Post author

      If you start worrying about these kinds of things you can probably not invest in anything. I’m sure there is some political risk, but to expect that it reduces half the value of the company…

      Reply
      1. Ben's Jamin

        No, there are facetious worries. This isn’t one of those. This is, as Munger notes, avoiding asininity. I highly encourage reading into Noida and what’s gone wrong at some other toll roads, politically speaking.

        Reply
  13. Pogonific

    AV,
    Thanks for taking the time to write this up. I’ve spent a bit of time looking at it, and to cut a long story short I think I’ll buy it as I like the thesis. That said, your article omits an important point which may be too theoretical to be of use, but it’s worth a mention:

    Essentially your thesis is the NPV of the cashflows is significantly higher than the market cap. Your NPV makes the explicit assumption of rev growth of 10%, but it also makes the implicit assumption you get all of the FCF exactly as it is generated or that the share price tracks the NPV perfectly over the next decade in case the cash is hoarded. This second assumption is as significant as the first and likely not that realistic – if the company hoards the cash as a bank deposit (something they may well do given they’re now hoarding 10 years worth of capex in a bank deposit!) then you will get all that juicy FCF in year 10, when your discount factor is down to 0.35 – with your FCF model that would make today’s NPV PLN1194m, and if you tax that at the 15% for dividend withholding you’re essentially getting the market cap as NPV even though you’ve had 10% growth. Clearly reality will come out somewhere in between as the market will adjust – no way to know how efficiently though.

    A second point (and this gets religious quickly, so I won’t dwell on it) is sensitivity to the discount rate – as 10% feels a bit extreme to me. At 5% your FCF-as-it-comes NPV is PLN2.5bn, while my FCF-at-the-end NPV is PLN2bn. If we assume zero growth in the TTM FCF the FCF-at-the-end-NPV is PLN1.1bn while the FCF-as-it-comes PLN1.4bn. Worth bearing these sensitivities in mind, but I agree with you it’s hard to see anyway through to paying 1PLN for more than 1PLN in this.

    Thanks again for writing this up.

    Reply
    1. Alpha Vulture Post author

      That’s why take a look at both the value of (un)discounted cash flows with 10% growth, but also (un)discounted cash flows with 0% growth. Gives you an idea how things change with different growth and discount rates, and what kind of returns to expect.

      About the implicit assumption that cash flows are paid to shareholders when they are generated; that’s true, and probably not how it will go in reality. But assuming somewhat capabel capital allocation of management it doesn’t have to be so negative that it is dead money till the end of the concession. It does have the optionality to be reinvested attractively in another concession for example, and given that they have started paying a dividend this year I think it’s pretty save to assume that more will follow regularly in the future. Part of the reason that they have build up so much cash (for future capex) is that the concession agreement limits paying dividends when the reserves aren’t sufficient.

      Reply
  14. Zimbo

    I travelled A4 with Google maps guy. The road looks great. There are no holes and road sides are neat. Google has four road works marked which is a lot for a road this new and short. Hard to tell what they are doing.

    Thanks for the idea! I am in.

    Reply
  15. John

    Hi, Did you consider the profit sharing that kicks in next year? seems to be undisclosed the amount but probably substantial.

    Reply
    1. Frantzen

      Hi John

      Can you elaborate? How do you know that profit sharing starts next year?

      Any info would be much appreciated!

      Reply
      1. John

        its in some research reports and subject to confidentiality agreement with the government so not disclosed by the company. Apparently kicks in when the concession payments are repaid in 1 or 2 years.

        Reply
  16. Richard

    Interesting spot Mr. Vulture, thank you.

    I do think though that your 10% revenue growth per year assumption is quite a stretch. OK that has been achieved in the past, influenced I imagine by low fuel prices, recovery from the financial crisis, and car ownership growing by 3.4% per year in Poland. Also the tariff, at c. £2 for an 80km motorway does seem good value to save 20 minutes of driving..

    But car ownership is now at the same level in Poland as in Germany and Austria at c. 540 cars per 1000 inhabitants, oil prices seemed to be on an upward trend, and I imagine there will be a global economic slowdown / recession sometime in the next ten years.

    And infrastructure use is sensitive to the economy. I was in the parking business during the financial crisis and car park revenues fell c. 20% peak to trough.

    Good luck, Richard

    Reply
  17. Pingback: Weekly Update December 10 2017 | REPERIO CAPITAL- EMERGING MARKETS SMALL AND MID CAP VALUE

  18. Julioj4be

    Have you been able to check with the company how the profit sharing scheme works with the Polish government? This is mentioned in both the broker report and in the Atlantia 2016 Annual Report pg 151 “The concession arrangement envisages a profit sharing scheme, with the share of the
    profits to be passed on to the State rising in line with increases in shareholder returns.”

    Reply

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