Traffic And Margin Pressures Will Drive Toll Road Returns Lower Over Time

Catalysts

About Ferrovial

Ferrovial develops, finances and operates toll roads, airports and large infrastructure projects, with a heavy concentration in North America.

What are the underlying business or industry changes driving this perspective?

• Reliance on continued traffic growth from return to office policies and corridor congestion in North America leaves toll roads exposed to any reversal in work patterns or mobility trends. This could slow revenue growth and pressure EBITDA expansion if volumes normalize.
• The aggressive ramp up in dynamic and peak hour pricing on assets like 407 ETR and U.S. managed lanes may face political, regulatory or user pushback as congestion intensifies. This could limit future tariff increases and constrain revenue per transaction and margin growth.
• Heavy capital allocation into long duration concessions such as additional 407 ETR stakes, I 66 and new express lane bids increases balance sheet risk at what may be a late stage in the infrastructure investment cycle. This raises the chance of lower return projects that dilute earnings growth and compress net margins.
• New Terminal One at JFK and the broader airport strategy depend on timely openings and robust airline and passenger demand. Any construction delays, operational ramp up issues or softer international traffic could defer cash generation and weigh on group EBITDA and earnings.
• Expansion into data centers and digital capabilities to support construction and operations adds cost and execution complexity in a competitive segment. If pricing or utilization underperforms expectations, incremental IT and capability investments could erode net margins and limit free cash flow growth.

Assumptions

This narrative explores a more pessimistic perspective on Ferrovial compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Ferrovial's revenue will grow by 2.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 35.8% today to 3.9% in 3 years time.
• The bearish analysts expect earnings to reach €391.0 million (and earnings per share of €0.61) by about December 2028, down from €3.3 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €777.5 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 93.5x on those 2028 earnings, up from 12.1x today. This future PE is greater than the current PE for the GB Construction industry at 18.9x.
• The bearish analysts expect the number of shares outstanding to decline by 0.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.7%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent strength in North American traffic, supported by return to office mandates, congestion and successful demand segmentation on key assets like 407 ETR, I-66 and the Dallas Fort Worth managed lanes, could sustain high single to double digit revenue per transaction growth and robust dividend distributions, supporting group revenue and EBITDA rather than weakening them.
• The company’s solid balance sheet, characterized by a EUR 706 million net cash position excluding project debt, strong cash generation and ongoing divestment proceeds, creates flexibility to keep investing in high returning concessions and shareholder distributions, which could underpin earnings resilience and mitigate any pressure on net margins.
• A growing and higher quality construction order book of EUR 17.2 billion that is up 9.1% in like-for-like terms, with a larger share in core U.S. and Canadian markets and fewer risky large design and build projects, may translate into sustained or improving adjusted EBIT margins in construction and therefore support consolidated operating earnings rather than dragging them down.
• Progress at New Terminal One at JFK, with construction 78% complete, the project on budget, commitments from 21 airlines and long-term structural growth in air travel demand, particularly in a constrained New York gateway, could deliver a meaningful new EBITDA and earnings contributor over time instead of becoming a drag on profitability.
• Management’s disciplined but active capital deployment, including increasing its stake in 407 ETR, pursuing a pipeline of new U.S. express lane projects and selectively adding data center capabilities, may allow Ferrovial to compound cash flow from long-duration concessions and enhance long-run revenue and net margin growth rather than eroding them through poor investments.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Ferrovial is €41.05, which represents up to two standard deviations below the consensus price target of €55.66. This valuation is based on what can be assumed as the expectations of Ferrovial's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €67.0, and the most bearish reporting a price target of just €41.05.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be €10.0 billion, earnings will come to €391.0 million, and it would be trading on a PE ratio of 93.5x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of €56.36, the analyst price target of €41.05 is 37.3% lower.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.