Top-Rated Mexico Stock Pinfra Poised for Rebound in Public Works

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The Mexican toll-road operator known as Pinfra is defying government budget cuts and public-works scandals battering the infrastructure industry to become the country’s top-rated stock.

Buoyed by low debt levels and cash at a record, Promotora y Operadora de Infraestructura SAB boasts a better average recommendation from analysts than competitors including Empresas ICA SAB, according to data compiled by Bloomberg. It’s also favored over names such as America Movil SAB, Mexico’s biggest company by market value.

Pinfra is positioned to take advantage when infrastructure projects start to pick up, said Casa de Bolsa Ve Por Mas SA analyst Marco Medina. Builders’ shares tumbled last year after Mexico canceled a contract with China Railway Construction Corp. amid reports a partner in the deal built a luxury home for the president’s wife. The stocks took another hit in late January after an oil rout led the country to cut spending.

“If we compare Pinfra with others in the sector the difference is huge,” Medina said in a telephone interview. “The company is generating cash, while others are in need of cash for investments and financial costs, and that limits them from participating in new projects.”

Medina is one of 13 analysts that recommend buying the stock, pushing its rating to 4.56 out of 5, the highest among 35 companies on Mexico’s IPC Index, according to data compiled by Bloomberg. Three analysts recommend holding the shares; no one says sell.

Toll Roads

Pinfra’s cash from operations including toll roads rose 50 percent in the first quarter from a year earlier. Its cash and equivalents reached 10 billion pesos from 3.3 billion a year earlier, more than either ICA or OHL Mexico SAB de CV, according to data compiled by Bloomberg.

Free cash flow was 1.4 billion pesos ($90 million) at the end of March. Pinfra has amassed more cash than competitors due to lower debt costs and strategic bids on highways with steady traffic, such as one near the site of Mexico City’s new planned airport, Medina said.

Pinfra saves on costs by contracting builders to carry out its highway projects, avoiding the expense of owning and transporting heavy equipment, Medina said.

Usually, “Construction risk requires very large capital investment,” he said. With its business model, “Pinfra doesn’t have to make such large investments.”

ICA participates directly in portions of construction, while OHL often subcontracts to its parent company, Spain’s Obrascon Huarte Lain SA, said Hugo Mendoza, an analyst at Invex Casa de Bolsa.

Reducing Debt

The savings have helped Chief Executive Officer David Penaloza Alanis reduce Pinfra’s net debt to negative 0.7 times earnings before interest, taxes, depreciation and amortization in the first quarter, Bloomberg data shows. That compares with net debt levels of 9.3 times Ebitda for ICA and 2.6 times for OHL.

“Pinfra has a strong balance sheet that allows it to grow in different scenarios of the economy,” Chief Financial Officer Carlos Cesarman said in an interview in Mexico City, where the company is based. “Pinfra can grow by purchasing or bidding on projects coming into the market in the next year.”

The main driver for growth will be new infrastructure projects, Cesarman said, though the company will consider buying assets from companies and the government.

Spokesmen for OHL and ICA didn’t respond to requests for comment.

Pinfra was little changed at 173.88 pesos at the close of trading Tuesday in Mexico City. The shares increased 4.6 percent in the three months ended last week, while OHL gained 8.6 percent and ICA fell 13 percent.

6,400% Surge

Pinfra trailed OHL and the 8.9 percent gain of the IPC because it’s hard for the stock to keep climbing after a surge of more than 6,400 percent since being relisted in December 2005, Mendoza said. Booking a new project will trigger a rally, he said.

The company continues to impress shareholders by pre-paying debt, and it’s well-positioned to bid on two highways that the government is expected to tender in coming weeks, according to Jose Helue at Interacciones.

“There are many points about Pinfra that we really like,” Helue said. “It’s a bet that’s relatively low risk due to its balance sheets and debt, and it keeps showing a capacity to grow and correctly choose what it will invest in.”

The rise of Pinfra marks a comeback for the company after the collapse of predecessor Grupo Tribasa SA, which missed a bond payment in 1999 and was delisted from the Mexican stock exchange in 2001.

Following a 2003 agreement with creditors, Pinfra changed its name and was relisted in 2005, according to a regulatory filing with the U.S. Securities and Exchange Commission.

Public works in Mexico will get a boost from extra revenue the government announced last week, Medina of Ve Por Mas said.

Mexico’s central bank will send 31.4 billion pesos to the government from a 2014 operational surplus after setting aside reserves as required by law, the Finance Ministry said April 28. President Enrique Pena Nieto’s administration said it would propose channeling the funds to joint infrastructure investments with the private sector next year.

Take Time

Even so, a public works rebound may take its time to materialize, according to Javier Gayol, an analyst at Corporativo GBM SAB. The government pared this year’s outlays by 124.3 billion pesos, or 0.7 percent of gross domestic product, and will reduce spending by an additional 0.7 percent of GDP next year, the Finance Ministry said March 31.

Mexican infrastructure stocks slumped after news website Aristegui Noticias reported in November that a unit of Grupo Higa, one of the high-speed train bidders with China Railway, built and holds the title of a home for First lady Angelica Rivera. She has said she will sell her rights to the house, and the president’s office has denied any conflict of interest.

Gayol of GBM said that even if public projects remain sluggish for the next year and a half, Pinfra stands to gain as it can put up more capital in partnerships with the government.

“The spending issue will affect the government sector in 2015 and 2016,” Gayol said. “That will actually help Pinfra.”

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