Ferrovial SE

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Ferrovial SE is a global infrastructure operator involved in the design, construction, and maintenance of transport and other infrastructure, with a growing presence in the energy sector.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Ferrovial operates through four main business units:

  • Toll Roads (Cintra): This segment focuses on the development, operation, and management of toll roads globally. It’s a key driver of revenue and has historically been a source of stability for the company.
  • Airports: Ferrovial is involved in the operation and management of airports, including major hubs such as Heathrow Airport in London. This division is particularly sensitive to fluctuations in travel demand.
  • Construction: This area encompasses the engineering and construction of various infrastructure projects. Ferrovial builds its own infrastructure assets but also performs engineering and construction works for other clients.
  • Energy Infrastructure (Ferrovial Energy): This newer segment develops projects related to renewable energy and electrical infrastructure, representing a diversification into the rapidly growing energy transition sector.

Revenue Distribution

Ferrovial’s revenue is primarily derived from its toll roads and airport operations, with construction and energy projects contributing significant portions as well. The specific mix can change depending on the timing and progress of major projects.

  • Geographically, Europe and North America are significant markets. However, the company is expanding into other geographies, such as Australia.
  • Increased Government Spending: Governments worldwide are focusing on infrastructure improvements and upgrades. This trend increases the demand for Ferrovial’s construction and transport solutions.
  • Rising Travel Demand: Despite pandemic-related setbacks, there is a long-term upward trend in air travel volumes. This should benefit the airport division.
  • Energy Transition: Demand for renewable energy and electrical infrastructure is growing at a rapid rate due to global decarbonization efforts. This trend is supporting growth in Ferrovial’s energy segment.
  • Technological Advancement: Advanced technologies related to construction and data collection (e.g. digital tools for operations and data collection and traffic monitoring) are helping increase efficiency.

Margins

Ferrovial’s operating margins vary across segments. Airport operations are high margin while construction tends to be low margin due to the competitiveness of the industry. The toll road segment, which can have high barriers to entry, also has strong margins. New energy infrastructure projects, often in early stages, do not always provide a reliable profit margin and the company has stated they intend to expand them only if the profitability is good and at their desired levels.

Competitive Landscape

  • Toll Roads: The industry has high barriers to entry, due to high capital costs and concessionary agreements, making the market hard to penetrate. Competitors include major infrastructure operators.
  • Airports: This is a mature sector, where competitive advantage resides in the location of the airport, volume of passengers and the quality of the service delivered. Ferrovial competes with other big airport managers.
  • Construction: This is a fiercely competitive and fragmented market with numerous local and global players. Competitors range from small, specialized firms to large multinational construction corporations.
  • Energy Infrastructure: This is an emerging market, with rising interest and many new entrants. The level of competition is increasing rapidly.

What Makes Ferrovial Different?

Ferrovial’s global presence, decades of experience in infrastructure operation and development, and increasing integration of technology into their projects set them apart from other competitors. It is also their ability to win large contracts through the bidding process. This is an important point to consider in the moat analysis. The company also is one of a few big players that operate across all 4 of its segments. It means they have knowhow in different areas, and can deploy financial resources in different areas that need them, making the firm more versatile and resilient.

Financials Deep Dive

For this section, I’ve primarily utilized Ferrovial’s latest earnings release and report, along with data from various news outlets and SEC filings (form 6-k). The information is based upon the financial statements reported at Dec 31 2022 unless otherwise stated. For comparability purposes, numbers are shown in euros.

Income Statement

  • Revenue: Ferrovial’s reported revenue for 2022 was €7.21 billion. This is an increase from €6.75 billion reported in 2021. Revenue is driven mainly by the toll roads and airport segments, but construction and the new energy projects are becoming a larger part of the total revenue stream.
  • EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization for 2022 was €733 million compared to €718 in 2021. However, excluding the effect of a sale of an asset, EBITDA from business operations increased from €585 million in 2021 to €696 million in 2022. EBITDA was up across all sectors except construction which was stable, as the company has refocused on higher value added projects.
  • Net Income: While revenue and EBITDA were positive, net profit for 2022 was €73 million compared to a loss of €141 million reported in 2021. This was due to a large impact from impairment charges related to certain investments in airports. It’s important to note that a big chunk of this net income is from non-controlling interests, meaning that the profitability of Ferrovial’s operations is higher than this number.
  • Expenses: Cost of revenue was €6.56 billion in 2022, down from 6.26 billion, but due to the rise in revenues, was a smaller percentage. Operating expenses totaled €0.98 billion and it was slightly down from €1.01 billion from the previous year.
  • Profitability: Profit margins are not as high as one may expect for such a large company. The operating margin is about 12%, while the net profit margin is around 1%. This is mainly due to the capital intensity of the business.

Balance Sheet

  • Total Assets: Ferrovial’s total assets amounted to €31.32 billion in 2022, compared to 30.31 Billion in 2021.
  • Total Liabilities: Total liabilities stood at €20.03 billion in 2022, compared to €19.34 billion in 2021.
  • Equity: The company had total equity of €11.29 billion. This represents a small increase from 2021 (€10.97 Billion).
  • Cash and Equivalents: A key thing to note is that Ferrovial holds about €4.52 billion in cash, which is about 40% of its market capitalization, giving significant dry powder to execute on further investments.
  • Debt: Total debt was about €10.18 billion in 2022, which means the company has more debt than the cash it has, which may cause problems in the future.

Cash Flow

  • Operating Cash Flow: Ferrovial generated €1.21 billion of net cash from operations in 2022, a large improvement compared to €138 million from 2021. The increase is largely driven by increased revenues and improved operational efficiency.
  • Free Cash Flow: While the overall operating cash flow increased dramatically, the free cash flow before investments and dividends was just €561 million in 2022, but much better than the negative free cash flow of €457 million in 2021. The reason for this difference is that the company is focusing on long term investments.
  • Dividends and Repurchases: Ferrovial paid out approximately €199.6 million in dividends to its shareholders in 2022 and announced a share buy back program.

Key Takeaways from Financials

  • Ferrovial experienced solid growth in revenue and EBITDA, partially due to a recovery from COVID restrictions.
  • The large improvement in operating cash flow in 2022 is a great sign of the performance improvements in the company.
  • The company is not generating significant profits as a whole due to high capital expenses and recent investments, even though their operational performance is improving.
  • The company’s balance sheet has solid assets and liabilities, however, it still requires a great deal of management of debt.

Moat Analysis

Moat Rating: 2/5

While Ferrovial does possess certain advantages, they are not particularly strong to warrant a rating above 2. Here’s a breakdown:

  • Switching Costs: The toll road and airport businesses often have moderately high switching costs. When a company develops an asset such as a road or an airport, it is hard to replace it, as these are long-term contracts or concessions that are hard to replace. This creates a layer of customer lock-in, as operators are unlikely to leave them for other options because of their nature. Score: 3/5
  • Economies of scale: The company benefits from the economies of scale in its construction sector, as it is a global player able to handle projects at a vast scale, that most other players cannot compete with. However, economies of scale are limited as they are not the determinant factor in profitability, but more like a prerequisite. It is not one of the main moat sources. Score: 2/5
  • Intangible assets: Ferrovial builds long-term relationships and a strong reputation. This is particularly strong in its construction business. The company is known for its quality of work, having completed projects successfully and safely. However, their brand does not provide an edge when it comes to pricing. Score: 2/5
  • Network effects: Only somewhat applies to airport businesses where more users increase the network of customers. Score: 1/5
  • Cost advantages: Some cost advantages are present in terms of a company’s overall size, global knowledge and experience, which is not the typical cost advantage related to geographical location, low labor costs etc. Score 2/5

Why This Rating?

While Ferrovial is an important infrastructure player and has considerable scale, which provides some stability, the moats are not wide enough. The construction business is a low-margin, and highly competitive business. Even the toll road industry is susceptible to government regulations. The lack of pricing power and susceptibility to competition and regulatory actions gives the firm less predictability over the long run, making it harder to defend against competitors. Finally, although they have a good reputation as a reliable player, this is not enough to command higher prices than competitors. Thus, this is a company with narrow moats.

Risks to the Moat and Business Resilience

  • Regulatory Risk: Changes in government regulations, especially related to concession renewals, toll prices, or environmental standards, can have a big impact on profitability.
  • Political Instability: Operations in certain countries expose Ferrovial to political and social instability, creating the threat of expropriation, protests and unrest, as well as other non predictable operational risks.
  • Economic Downturns: The airline business is particularly sensitive to economic conditions. A major global recession could negatively impact airport traffic and, consequently, revenue. A recession also impacts construction activity.
  • Competition: Particularly for the construction sector, increasing competition could put downward pressure on prices, leading to lower margins.
  • Technological Disruption: Rapid developments in technology could render the company’s methods less competitive. For example, autonomous vehicles might drastically change the needs for new roads and toll systems.

Business Resilience: Ferrovial has been affected by the COVID pandemic which significantly reduced air travel, however, it has recovered, and also proved to be resilient in the other areas that were not affected. The company has had issues with profitability but is slowly improving that, although recent investment and expansion initiatives are putting a drag on profitability for now, however, management is taking active measures to solve the issues.

Understandability Rating

Understandability: 3 / 5

  • Ferrovial operates in relatively straightforward industries: construction, operation of toll roads and airports, and energy production. While the nature of the projects may be complex, the underlying concepts are relatively simple.
  • What makes it harder to understand is their financial statements. Due to their global and complex operations, their income statement and balance sheet are hard to make sense of. It’s important to have deep knowledge of accounting and finance to fully grasp the inner working of the financial statements and the management discussion and analysis.

Balance Sheet Health

Balance Sheet Health: 3 / 5

  • Strengths:
    • The company holds a large cash position, giving the firm great flexibility for future growth.
    • The value of intangible assets on the balance sheet has been increasing for the past few years which is a good sign.
  • Weaknesses: * The company is highly leveraged, especially when considering debt-to-equity and debt-to-assets ratios. This is something that the management needs to focus on.

In general, the company has a decent balance sheet. But the fact that the company is highly leveraged and the lack of clarity with their liabilities and deferred taxes makes me place their health lower than a 4 or 5.

Conclusion

Ferrovial is a large, complex business that is difficult to fully understand, yet it operates in mostly understandable industries. Its financial statements are complex and hard to grasp, and its balance sheet is not particularly strong due to high levels of debt. However, the company has been able to generate consistent revenue growth while slowly improving its operating margins. Although, their moat is not very strong due to susceptibility to competition and regulatory actions, it has a solid foundation for future performance.