OHL Mexico Rebounds From Scandal to Post Best Stock-Market Surge

  • Shares have risen 37% this year, the most on the IPC index
  • Accounting probe remains a risk for the toll road operator

OHL Mexico SAB recorded its biggest annual decline last year amid allegations of paying off judges and picking up luxury hotel tabs for public officials. This year, investors are signaling that the worst is past.

The toll road operator is surging to the best gain on the country’s benchmark stock index even as it awaits the results of government investigations and an accounting probe by the nation’s securities authority. While the regulator fined the company’s auditor, the penalty was only 4.2 million pesos ($235,000).

The cloud hanging over OHL Mexico for almost a year didn’t prevent it from winning a recent toll increase on its biggest expressway. The company is also forging ahead with 5 billion pesos of investment in existing concessions and may bid on new highways being tendered this year, according to Chief Executive Officer Sergio Hidalgo.

“The market is recognizing we’re carrying on with our business plan and we continue to deliver on our commitments,” Hidalgo said in an interview in Mexico City. “Our base of knowledgeable investors have remained with us in spite of the complications we had last year.”

The securities regulator said last year it was investigating "the correct publication of information from OHL to investors" without making specific allegations. The company’s Spanish parent, Obrascon Huarte Lain SA , said it stood by its accounting practices.

Biggest Gain

Shares have climbed 37 percent this year, 12 times the increase in the IPC index of 37 Mexican stocks. Analysts’ average target price for the stock is 29.65 pesos, compared with the current price of 24.68 pesos, implying that the rally has another 20 percent to go.

The gain signals a bet by investors that OHL Mexico will mostly sidestep penalties, toll reductions or lost business after federal and state officials conclude probes of the company. One sign of improvement came last month when Hidalgo said the road operator won a 5 percent fare increase on a Mexico City-area highway that accounted for 63 percent of its toll revenue last year.

“The fundamentals for OHL Mexico are improving,” Pablo Monsivais, an analyst at Barclays Plc, said in a report Feb. 23. “OHL Mexico offers an attractive portfolio of assets that are exposed to favorable economic and demographic dynamics, and traffic growth is showing signs of improvement.”

YouTube Videos

The positive outlook marks a reversal from last year when shares tumbled after recordings emerged on YouTube purporting to show executives discussing ways to inflate toll rates, bribe judges and pay for a state official’s Christmas-week stay at a swanky Caribbean beach hotel.

OHL Mexico said the recordings were illegally taped and maliciously edited.

Some investors say the risk is that last year’s scandals will flare up again. One source of concern is the inquiry into OHL Mexico’s financial reporting by the securities regulator, known as the CNBV. The company warned last year it might face a fine. It denied any shortcomings in its accounting.

“We continue to believe that the results from the CNBV’s audit could be crucial,” Javier Gayol, an analyst at Corporativo GBM SAB who recommends selling the shares, wrote in a report Feb. 24.

This year’s stock surge has been helped by fourth-quarter earnings that topped analysts’ estimates as well as last month’s fare-increase announcement.

“It seems the market is trusting the result of the CNBV’s investigation will be somehow favorable for OHL,” Vector Casa de Bolsa analyst Gerardo Cevallos said by telephone. “Why would they allow them to raise tolls if they’re in big trouble?”

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