Is Acciona SA (BME:ANA) Cheap For A Reason?

Acciona SA (BME:ANA) has been on my radar for a while, and I’ve been consistently disappointed in its investment thesis. The biggest risks I see are around the sustainability of its future growth, the opportunity cost of investing in the stock accounting for the returns I could have gotten in other peers, and its cash-to-debt management. Whether a company has a good future, in terms of its business operation and financial health, is an important question to address.

Acciona, S.A. engages in the development and management of infrastructure, renewable energy, water, and services in Spain and internationally. Started in , it operates in Spain and is recently valued at €4.08b.

The first thing that struck me was the pessimistic outlook for ANA. A consensus of 13 ES electric utilities analysts covering the stock indicates that its revenue level is expected to decline by -9.70% by 2021, however, future earnings are expected to grow. On average, ANA’s bottom-line should see an annual growth rate of 2.40% over the next couple of years, leading to an unsustainable margin expansion driven by a mix of falling sales from core activities and possibly cost-cutting. When revenues are declining and earnings are growing, there’s a big question mark around the sustainability of its current operations.

BME:ANA Future Profit June 20th 18
BME:ANA Future Profit June 20th 18

ANA’s financial status is a key element to determine whether or not it is a risky investment – a key aspect most investors overlook when they focus too much on growth. Two major red flags for ANA are its debt level exceeds equity on its balance sheet, and its cash from its core activities is only enough to cover a mere 7.02% of this large debt amount. Furthermore, its debt-to-equity ratio has also been increasing from 164.92% five years ago, and its EBIT was not able to sufficiently cover its interest payment, with a cover of 1.77x. This induces further concerns around the sustainability of the business going forward. ANA has high near term liquidity, with short term assets (cash and other liquid assets) amply covering upcoming one-year liabilities. ANA has managed its cash well at a current level of €1.49b. However, more than a fifth of its total assets are physical assets and inventory, which means that in the worst case scenario, such as a downturn or bankruptcy, a significant portion of assets will be hard to liquidate and redistribute back to investors.

The current share price for ANA is €71.00. With 57.02 million shares, that’s a €4.08b market cap – which is too high for a company that has a 5-year cumulative average growth rate (CAGR) of 1.88% (source: analyst consensus). With an upcoming 2018 free cash flow figure of €406.00m, the target price for ANA is €32.43. Therefore, the stock is trading at a premium. Furthermore, comparing ANA’s current share price to its peers based on its industry and earnings level, it’s overvalued by 44.96%, with a PE ratio of 18.31x vs. the industry average of 12.63x.

A good company is reflected in its financials, and for ANA, the financials don’t look good. This is a fast-fail analysis, which means I won’t be spending too much time on the company, given that there is a universe of better investments to further research. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I’ve taken my data from.