Sacyr SA

MAD:SCYR

Earnings Call Analysis

Company Reports Increased Revenue and Net Debt

The company reported revenues of EUR 3.244 million, a diversified mix with infrastructure and concessions being key segments. EBITDA reported was EUR 980 million. However, net debt increased by EUR 430 million and currently stands at EUR 7.96 billion as of September 2023. Significant investments in concession projects and other business activities contributed to this figure. Plans for the future include expecting to recover approximately EUR 80 million to EUR 100 million, improving working capital based on mature projects' completion, and new projects in Italy, U.K., Canada, and the U.S., focusing on evolving market share from initial targets. The company anticipates future asset contributions, with the possibility of rotating mature assets in Colombia and Chile to maximize value.

Strategic Shift and Asset Valuation Update

Sacyr, under the leadership of Chairman and CEO Manuel Manrique and CFO Carlos Mijangos, presented the financial results for the first nine months of 2023, highlighting the company's shift towards becoming a purely concession-focused entity. Following their divestment strategy, the company's valuation of concessional assets as of December 2023 stands impressively at EUR 3.254 billion, marking an increase of EUR 443 million from the end of fiscal year 2021. This growth is attributed to the consistent value creation from their concessional assets, which are anticipated to increase in value by approximately EUR 160 million per year.

Divestment and Portfolio Management

Sacyr continues to streamline its asset portfolio through strategic divestments, such as the sale of Valoriza Servicios Medioambientales for EUR 734 million—9.2 times EBITDA—and is in the process of selling its facilities activity for EUR 87 million. Concurrently, the company is exploring opportunities to reduce its presence in the Colombian and Chilean markets as part of their mature asset rotation strategy. This will facilitate a stronger focus on growth in Europe and the English-speaking markets, aiming to balance the portfolio and enhance value creation.

Financial Performance and Shareholder Remuneration

Financially, Sacyr noted several key achievements, including a 12% increase in EBITDA to EUR 980 million, a margin enhancement to 30.2%, 14% growth in EBIT to EUR 846 million, and a significant 36% surge in net income to EUR 92 million for the first nine months of 2023. The strategic shift to prioritize profitability is paying off. Shareholders have benefited from this focus, with the company paying 20% higher dividends compared to the previous year at EUR 0.136 per share, maintaining a strong dividend yield around 5%. Furthermore, initiatives are underway to conduct a transaction on the convertible bond without issuing new shares, which is expected to reduce the security's volatility and align with the interests of shareholders.

Resilience and Outlook

Despite macroeconomic changes, Sacyr has showcased resilience, adding EUR 443 million in asset valuation over two years. Positive effects of inflation, value accrued from asset rotation, and new project awards have contributed to this increase. The company acknowledges adverse factors like foreign exchange impacts and heightened interest rates but has managed to limit their effect due to a high proportion of assets tied to fixed rates. Going forward, Sacyr anticipates securing one project per year from 2021 to 2025 with prudent investment strategies, which have historically demonstrated consistent value creation and are not solely reliant on future expectations.

Earnings Call Transcript 2023-Q3

[Manuel Manrique Cecilia, executive]

Good morning. I'm Manuel Manrique, Chairman and CEO of Sacyr. Joining me today, as usual, is Carlos Mijangos, the company's CFO.

Thank you very much to all of you, analysts, media representatives and investors for attending this presentation of Sacyr's financial results for the first 9 months of 2023.

We are presenting these results as we did in the first half of the year with the services activities in 2022 and 2023 being accounted for as this continued due to divestment processes in which we are engaged. With the completion of the divestment of the services activity, subsides now 100% global companies specializing in the development, execution and operation of infrastructure under concession, in which value creation and profitability are paramount.

As a clear demonstration of this value creation, we are pleased to announce that we have updated the valuation of our assets that as of December 2023 stands at EUR 3.254 billion. That is EUR 443 million more than the EUR [ 2.880 ] million that we set at the end of fiscal year 2021. It is important to remember that to date, we have invested EUR 1.6 billion in our concessional assets. Using the discounted future cash flow valuation method, these assets increase in value over time by approximately EUR 160 million per year. In addition, there are other factors that increase the value that will be detailed later during this presentation.

This constant and recurrent creational value gives us a relevant present and future role in the sector worldwide. With assets that have a low level of demand risk and an average remaining life of 24 years. As part of this value creation approach, there is the dynamic management of the portfolio with divestments such as those made in Autovia del Eresma or N6 during 2023.

For next year, as part of the rotation of mature assets and also as a fundamental part of achieving an optimal risk balance in our portfolio, we are now starting an exploration process to reduce our position in the Colombian and Chilean markets by also rotating some of our assets.

Therefore, we'll be able to give you details of this process that we're starting now as we progress. As you know, at Sacyr, we intend to continue growing in Europe and the English-speaking markets to balance our portfolio. Sacyr also continues in 2023 to commission concessional assets that increase our value. For example, Rutas del Este in Paraguay, Ferrocarril central in Uruguay, Pamplona-Cucuta in Colombia and Pedemontana Veneta in Italy.

The driver we have already mentioned and that you are already familiar with and that we are using in order to become a fully concession group was the divestment of our services businesses. This is very weak. We closed the sale of Valoriza Servicios medioambientales for the company value of EUR 734 million, which represents 9.2x EBITDA, which is well above the latest transactions in the market. This deal was successfully and definitely closed last Tuesday, with a collection of EUR 420 million. Soon, we shall do the same with the sale of our facilities activity for EUR 87 million, which is 6.4x the EBITDA. If we take into account the contracts that are not included in the scope of the transaction as they include infrastructure, maintenance apart from facilities, the valuation of Sacyr Facilities would have stood at EUR 100 million.

The resources obtained from both transactions will serve to significantly reduce the company's net recourse debt, which is no longer a relevant issue. Regarding the future of our water division in the future strategic plan that we are now designing, we are committed to initiating a stage of growth with our own resources without considering the entry of new investors in the short term. In the last quarter and taking advantage of the stock market situation, we unwound the last options on [indiscernible] that we held, obtaining a significant positive result of EUR 31 million in cash inflows. In terms of growing shareholder remuneration, which is very relevant for our strategy. I would like to highlight that the 2 dividends paid out this year in January and July in the form of scrip dividends amounted to EUR 0.136 per share, which is almost 20% higher than last year's. The dividend yield is around 5%, which is our commitment to the market.

Regarding ESG, I would like to underscore 2 new milestones, namely the creation of our sustainable financial framework, which has been endorsed by Standard and Poor. And the inclusion of Sacyr in the new IBEX ESG index created by BME. Both masters are further evidence of our commitment to sustainable and responsible management of our activities. The construction activity reduced its activity by 11% following the risk limitation policy of the company. Until September, EBITDA grew by 12%, up to EUR 980 million, in the first 9 months, therefore, the gross margin reached 30.2% or 490 basis points higher than a year earlier. EBIT grew by 14%, up to EUR 846 million. The percentage of EBITDA coming from concessional businesses is 90%. Operating cash flow also grew by 29%, up to EUR 487 million. And finally, net income rose by 36% to EUR 92 million. These are, therefore, excellent results achieved, thanks to a strategic approach that puts profitability before volume, in line with the interest of our shareholders.

Also, for the direct benefit of our shareholders, the group is not working to carry out a transaction on the convertible bond in the very short term. without issuing new shares and thus reducing the volatility of this security. We believe that this is the best way to use as I say for the benefit of our shareholders, the liquidity earned by the company.

In conclusion, I believe that these are excellent results that perfectly reflect our commitment to profitability and long-term value creation as a concessional group.

Next, Carlos Mijangos will give you more details and specifics on the consolidated results and the business divisions.

[Carlos Gorozarri, executive]

Thank you very much, Mr. Chairman. Okay, we are going to start by talking about operating performance based on the asset valuation of Sacyr Concessions. These are the data that were disclosed on the Investor Day held in October 2021. Let's see what has happened over the past 2 years and how the valuation of our assets have evolved.

In the current scenario where macroeconomic conditions have been old, significantly we can see that there are different effects that have led to an increase in this valuation up to EUR 443 million. From a calculation methodology perspective, we are talking about a dividend cash flow discount. We have seen an increase of EUR 286 million in terms of rolling forward, we have to include the positive effect of inflation because these contracts are tied to inflation and therefore, in high inflation rate scenarios, usually, we report higher revenue.

ForEx has had a negative impact of EUR 41 million, but it shows the great resilience of our portfolio backlog because we have many assets denominated both in euros and U.S. dollars, for example, Latin America. We have obtained value from our assets in EUR 302 million as a result of the rotation of some assets, mainly in the case of Italy, where we obtained value through some financing in order to contribute value, in order to keep on growing in this market that is so important for us.

Interest rate have increased by 85% are tied to a fixed, rather for 15% are tied to a floating rate, even though interest rate hikes have been significant. The impact is only EUR 34 million, which is quite limited. We have also estimated the new projects that we might be awarded as of 2021, and that value creation, taking into account the estimates that we included in 2011 have accounted for an increase of EUR 165 million. And against this macroeconomic background, discount rates have gone up, and therefore, we have carried out an exercise by increasing such rates by 120 basis points on average. And as for future growth, we have factored in the fact that we have been able to grow and create value over the past 2 years, but for the rest of the contract's life, I will explain in a minute. All these effects are more positive than negative, taking into on the current macroeconomic background. And this has led to EUR 443 million in value creation in just 2 years.

If we now analyze the scenarios that we envisage going forward in terms of wood compared to 2021, we can say that according to our Investor Day in 2021, we believe that we're going to be awarded one project per year during the 2021, 2025 period. Each one will require an average investment in equity of EUR 150 million that would be disbursed over the following 3 years. The truth is that the contracts awarded in 2022 and 2023 and valued using exactly the same methodology as the rest of the assets and our portfolio totaled this valuation to EUR 361 million, EUR 196 million in future projects in 2021. And these projects have increased their value by EUR 165 million as a result.

So this growth scenario is the one that we have replicated going forward. Like to say we limit the company's growth to the same effect that we reported over the past 2 years. Taking into account that this is a prudent approach. Since the track record of the past decade shows that we have been awarded new projects constantly. Therefore, this value creation is not based on future expectations that might occur or not, but rather on our historical facts, which show that we are highly likely to achieve these figures. And we might even fall short of this because this means that we would be awarded only 5 contracts in the rest of the life of this company.

With regard to operational performance, revenue amounted to EUR 3.244 million, 56% corresponds change in our infrastructure, 39% to concessions, another accounts for 5% of such revenue figures. Regarding EBITDA, we reported EUR 980 million, 66% in concessions, 33% engineering infrastructure, which includes the concessions in Italy and 1% coming from other businesses. And as of every time, 90% of total assets correspond to this figure. If we now analyze net debt evolution since 2022, it has increased by EUR 430 million from the perspective of funds. We're talking about EUR 487 million, EUR 538 million is the result -- corresponds to financial results, EUR 577 million were invested in concession allowances and there are 3 transactions such as the closing of the Repsol derivative that has made some cash inflows. Then the Eresma and N6 assets with minus EUR 56 million, and then financing flow of ForEx and other accounting for minus EUR 63 million. Therefore, net debt stands at EUR 7.96 billion, as of September 2023.

After the transaction that we carried out last week, this -- that will be reduced by this amount. If we now take into account the recourse net debt evolution that went up by EUR 34 million over the past quarter from an operational perspective, EUR 24 million were obtained. The working capital effect of EUR 82 million. This is a negative figure corresponds to 2 concessional projects that are about to be completed. The Ferrrocarril in Uruguay with 99% of the project having been completed, the cost has been fully incurred by this time. And we are about to complete other projects. We have already requested a final reception of the Cucuta project last. We believe that this will, therefore, reverse some figures in the next quarter.

From the perspective of financial results. We're talking about EUR 21 million, net investment accounted for EUR 48 million coming from concessional assets. And then the Repsol derivative, ERESMA and N6 that account for 90% in cash approximately then the purchase of treasury stocks that we are going to use for the convertible bonds and then EUR 60 million coming from financing flow on ForEx and other. So again, we are talking about minus EUR 420 million, but this will be reduced through the sale of VSM.

Okay. This is the performance by business area. These assets are about EUR 3.250 billion, EUR 11 million corresponds to construction with 24 years of average on life with 58 assets already in operation. The risk of the contracts is lower and lower. There has been an increase of 18% in revenue. As you can see, this is mainly due to the contribution of new contracts that were awarded last year and the completion of other 6 contracts that were also commissioned last year. And then we also have revenue that are revenues tied to inflation.

In the case of construction, there has been a decrease because many large projects that were executed over the past 4 or 5 years are now being completed, like the Ferrrocarril central, Uruguay and the Pamplona-Cucuta in Colombia. In the case of the Water division, there has been a good performance, for example, in Spain, we have been awarding new contracts, EUR 1.6 billion of equity have been invested already, in essence, 1.463 infrastructure constructions and 121 in water concessions. And in this case, we have already discounted the N6 and Eresma projects. With regards to concessions and the commission of for concessional license in 2023, Pamplona-Cucuta is completed by 99%.

As for the Ferrocarril Central, we're now going through the test process. And in Pedemontana, it is estimated that once the final works are approved, we believe that before year-end project will be finally commissioned. Now the A31 tranche is being completed. That is -- so we believe that this project will be fully operational shortly. This is the performance by business area, broken by country, Chile, Colombia, Spain and Italia. The most relevant countries that account for 80% in terms of both revenue and EBITDA. And in the case of the number of assets. Here, you can see the breakdown of all countries. We are talking about EUR 880 million in EBITDA, so this accounts for 90% of the company's EBITDA in aggregate. As for Engineering & Infrastructure, there has been an increase of 11% in revenue due to what the Chairman said before because there has been a decrease in the risk of this activity, but margins went up considerably over the period compared to 2022, up 4.6%, mainly in the construction area by contrast with 3.7% in prior years.

As you know, we have to account for these assets in order to reflect our figures in the Construction division. Then we have 34 months of activity, and we have an increase of plus 52 in terms of the backlog for Sacyr concesiones. We are completing several projects in the Construction division, so the contracts were awarded. In Italy, one in Catania, in Burgos, another -- we were given a significant award, the Scottish Civil Engineering Awards due to satisfaction of the client with the final results.

This is the Engineering Infrastructure division. I have already mentioned the Catania project, the [indiscernible] project in Barcelona, other projects in Spain, for example, the Highway A-32 Linares-Albacete project and the modification route of the 5 North Vallenar-Caldera in Chile in the amount of EUR 57 million. Another project in Bilbao. The extension of the Catania Sacyr network amounted to EUR 532 million. The project in Chile, as I said before, is a relevant one. And that's all, Mr. Chairman.

[Manuel Manrique Cecilia, executive]

Thank you very much, Carlos, for your presentation. Now we shall be at your disposal to answer any questions that the analysts may have.

[Unknown Executive]

Good morning. We are now going to start the Q&A session. We're going to start with the questions coming in through the telephone line to be followed by the questions posted through the webcast chat.

Luis Prieto has the first question from Kepler Cheuvreux.

[Luis Prieto, analyst]

I believe that you can all hear me. I have 3 questions, if you could allow me. In the valuation, you include a contribution of future assets in the amount of EUR 361 million. So I would like to get more visibility as to the pipeline of relevant projects in the short and medium term taking into account the Anglo-Saxon market, what should we expect in terms of guidance in Puerto Rico, for example? Next, the Chairman referred to the rotation of mature assets in Colombia and Chile. I would like to relate this to what we knew so far, I believe that there was an announcement with regards to 49% transaction in Colombia, but apparently, this figure could reach 100% according to the news. So do you think that you could sell up to 100% of mature assets in both geographies? So if you could provide me with any color on this matter, I would appreciate it.

Next question is a follow -- we're actually asking for some help in order to understand how working capital will be used or improved for the rest of 2023 because I'm a little bit [indiscernible] in this regard.

[Unknown Executive]

Luis, please, if you would allow us a few seconds, and we will get back to you shortly.

[Manuel Manrique Cecilia, executive]

Regarding those EUR 361 million in our pipeline, we are now analyzing new investments in Italy, U.K. and Canada as well as the United States. We are always trying to continue evolving in terms of 1/3 of the market that we are obtaining. Our initial target is 49%, but now we are going to follow more or less the same process as we followed with services. We're going to carry out an in-depth analysis of the market, and we'll see what will be to the best interest of the company.

Services that accounted for 49% eventually reached 100% [indiscernible] 0 in the past. So now based on the best opportunities that we may find we shall act accordingly. And with regard to working capital evolution, you know that over the past quarter -- well, usually, this is the best, and therefore, many collections take place over this period. We have more than EUR 75 million that are pending certification and collection. Actually, they have been already approved. Therefore, we expect to recover a significant amount over the next quarter before year end. We believe that we shall recover about EUR 80 million to EUR 100 million.

[Unknown Executive]

The following question comes [indiscernible] from Santander Bank.

[Unknown Analyst]

Thank you very much, Alberto. I have 2 questions, Alberto. And going back to the sale of assets in Colombia. I understand that your goal is to maximize value. Usually, these assets should wait for some time in order to be maximizing value. I think that this is a slightly different to the services business because right now, you have a structured balance sheet. You are not in a rush, I would say to get a higher fit-in besides the 49% with the fees, I got into my calculations in order to carry out future projects.

Because I think that this applies to new projects. But what about the allocation of capital. Because if you said 100% of the assets in Colombia, we are talking that, that result in over EUR 500 million. So I would appreciate if you could throw some color at this to help me sort it out. And then I have another question in terms of the strategic plan. What about the timing of your strategic plan?

[Unknown Executive]

Okay. We are going to get back to you in a minute.

[Unknown Executive]

Going back to Colombia. To date, we don't know whether this is going to be 49%, 70% or 100%. But in our asset rotation policy, we will try to maximize value creation with the ultimate goal of striking the balance between the weight of Latin American countries and English-speaking countries as well as European countries, including Spain. That's our strategic goal while maximizing value. As for the strategic plan and talking about timing, we believe that this will be submitted to consideration by the AGM next week around Easter's week.

We are now working thoroughly and we expect to come with a decision by that date.

[Unknown Executive]

The next question is by Miguel González from JB Capital.

[Miguel González Toquero, analyst]

I have 3 questions for you. The first question is the following. In terms of the valuation of assets that you have reported, I believe, you will report more on this when you disclose your strategic plan next year during Easter week. But what about the impact of the valuation of assets by country. For example, in Chile, you said that you have factored in 120 basis points with regard to the inflation rate. So do you have any other inflation rate assumptions? Have you applied the same assumptions as in 2021? And the next question is a little bit more theoretical. Talking about EBITDA this quarter, it came down. I understand that partly this is due to the commissioning of several highways.

Now going forward, do you think that this trend might occur once again next year because I believe that you have 60 out of 62 assets already operational? Therefore, perhaps the business coming from the operation of those highways will not offset the drop in these operational assets. And the next question is, why is that you have changed your mind with regard to the water division? Do you think that there is an appealing pipeline in this segment, and therefore, you want to keep it all?

[Unknown Executive]

Okay. Please, if you could allow us a few seconds. We will get back to you in a minute.

[Unknown Executive]

Miguel, I will answer your question. with regard to the valuation by geography, of course, we're going to report more thoroughly on this when we present the strategic plan. But we have already said that our key countries are Italy, Spain, Chile and Colombia. And of course, English-speaking countries are having some weight already, but we are at an early stage. As for inflation rates, we have updated deflation rates. For 2020, 2023, we have used projections for 2024 and 2025 based on the information provided by the authorities report on such projections, and we have applied the same approach as of 2026 onwards.

So we will have to see whether the current macroeconomic context remains over time. In 2023, we have used; however, the same projections as for 2024 and 2025, the same as for 2026. As for -- we have a seasonal aspect in the concessional activities because there are some contracts that are paid at specific times of the year, and therefore, we have more concessional activity in the second quarter compared to Q3. By contrast with the Construction segment, where the last period is usually the best. However, we -- the maximum peak of EBITDA is reached whenever our assets become operational.

However, since we have been awarded new projects along the way, this is somehow offset. But the EBITDA, the financial asset is not really key, but rather our cash flow, we are generating more cash flows once our projects are completed and commissioned. That's why our operating cash flows have gone up by 30%. And therefore, this year, we are going to close off the year with much more operating cash flow compared to last year and next year even more because we will have 4 assets that will become operational year in 2023.

Regarding the Water division, we have not changed our mind. In October 2011, we said that we were going to explore 2 segments in services and water. Then along the way, we decided that in the short term, we were -- it was better not to do much because during a growth period the strategy of a shareholder or a fund could conflict with our own. Therefore, we decided to grow alone based on the strategy that we have, which is a very clear cut, and then we'll wait and see.

[Unknown Executive]

The next question is by Fernando Lafuente from Alantra.

[Fernando Lafuente, analyst]

Could you please provide more information about the corporate debt by year-end? And what it would include apart from the sale of Valoriza, I believe the euros including the sale of the services activities. Now what about the dividends coming from concessions? And what about the outlook for both this year and perhaps the guidance for 2024? And the third question is concerned with the strategic plan. I would like to hear from the Chairman about the company's dividend strategy in the medium term. So far, the strategy has been focused on the scrip dividend and the shareholder remuneration. Could you please give us some color as to what we should expect going forward?

[Unknown Executive]

We'll get back to you Fernando in a minute.

[Unknown Executive]

Okay, Fernando, with regard to the corporate debt by year-end, no doubt it's going to be much lower year-on-year because everything is going as planned. We are going to formalize the sale of the facilities business. Therefore, we're going to have additional inflows. The final number will depend on the evolution of working capital over this quarter. At any rate this figure will be manageable by the company. In the normal course of its business, it's difficult to tell because somehow we depend on the administrations who need to pay off what they owe to us. They still owe some EUR 5 million, therefore, depending on how much we're able to collect, the picture will be nicer or less nice.

And anyway, this money will not be lost. It will be recovered in 2024. So this is just temporary. As for dividends coming from concessions, so far, we have reached 80% in November and December with the closing of the year and in complying with our ratios, dividends coming from our concessions are above. And we are going to reach EUR 200 million. This is a recurring figure that we expect in 2024 as well. Right now, we are updating all of our forecasts, and we shall report on them when disclosing our strategic plan. In along the lines of the strategic plan, we are drafting this plan as we speak.

However, with regard to dividends, I can say that all assumptions have been factored in. Everything is now being discussed. But there are many other factors that we need to take into account, so a good -- kindly ask you to be patient. But payment in cash and the payment or the growing payments, everything has now been on the table.

[Unknown Executive]

So I would just kindly ask that you bear with us for a while. There are no further questions coming from the conference call. Therefore, now I'm going to read the questions coming through the webcast. This question is [indiscernible]. I believe that some of these questions have already been answered. He's asking whether we will continue to pay scrip dividends. The Chairman has confirmed that all possibilities are open and that we are analyzing all probabilities. Another question is what about our plan for the convertible bond? I believe the Chairman has already addressed that question. The Chairman made very clear that we're working on it. There are no additional questions through the webcast. Well, Luis Prieto, apparently, he wants to ask another question over the telephone line. Therefore, Luis, please go ahead with your question.

[Luis Prieto, analyst]

Yes. This is just a follow-up on the question that has just been asked. And going back to what the Chairman said regarding the convertible bond? Are we talking about a repurchase? I'm sorry for pointing this out. Are we talking about a full repurchase. This year or are you considering other scenarios in terms of amount and timing?

[Unknown Executive]

Okay. We are going to answer in a minute, please...

Speaker 1.

[Unknown Executive]

Luis. I would also like to ask for your patience a little bit less than what I have asked for Fernando. This is something that we are now analyzing, it's still open to discussion, but we shall report on this in just a few days. And my apologies for not giving you a precise answer at this point.

[Unknown Executive]

Okay. There are no further questions over the telephone line nor through the webcast lines. So now let me turn back to the Chairman.

[Manuel Manrique Cecilia, executive]

Well, if there are no further questions, once again, thank you very much for attending this results presentation and for your interest, and we look forward to meeting you again at the next presentation when we'll be reporting all of the fiscal results of the company's full fiscal year 2023. Thank you very much.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]