PINFRA Only A Passenger In Downturns, But The Value Here Is Appealing

The problem with "set it and forget it" businesses is that there's little-to-nothing that can be done by management to improve demand when business turns down, and often the cost structures don't lend themselves to meaningful short-term restructuring. That's basically the problem for PINFRA (OTCPK:PUODY) [PINFRA.MX] today, as this large Mexican toll road operator has no control whatsoever over traffic on its roads, and is basically in the passenger seat as the COVID-19 pandemic works itself out in Mexico.

The good news is that the pandemic won't last forever, and while it has done some serious harm to Mexico's already-weak economy, a large portion of PINFRA's most valuable toll roads are covered by concession agreements that contain clauses that extend the concession when traffic weakens. While delayed revenue and cash flow does impair short-term value, PINFRA isn't as vulnerable to this downturn as you might otherwise think. Moreover, Mexico's government has expressed an interest in adding even more roads, creating new long-term concession opportunities for the company.

These shares have not done especially well since my last update. While the local Mexican shares have basically kept pace with the broader Mexican market, the ADRs have been weaker (down 25%) on weaker currency. Although the recent performance underlines the reality that there is no such thing as a "safe" emerging market stock, I like PINFRA's leverage to an economic rebound and growth in Mexico.

 

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PINFRA Only A Passenger In Downturns, But The Value Here Is Appealing

PINFRA Undervalued As Weak Mexican Economic Data Has Spooked Investors

As something of a proxy for Mexico itself, or at least its infrastructure, I can’t say that the weak performance of PINFRA (OTCPK:PUODY) (PINFRA.MX) shares, flat since my last update, is wholly unreasonable. Mexico’s economic growth has been feeble after all, with GDP declines in the last two quarters and the full year expected to finish out at barely above flat. That has translated directly into weaker traffic for this leading Mexican toll road operator, along with weaker revenue and EBITDA results (net of an acquisition).

While the short-term response may be understandable, I think it still undervalues the long-term potential of this company. Mexico’s government has shown definitively in my view that they will respect the rights and needs of concession operators in the country and work to create “win win” situations where Mexican citizens get access to the infrastructure they need, while the companies building and maintaining that infrastructure earn reasonable returns. With potentially billions in new road and projects on the way, and a chance for some improvement in Mexico's economy in 2020, I think the double-digit implied return potential here makes this a name worth considering.

Investors should note that PINFRA ADRs are not particularly liquid.

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PINFRA Undervalued As Weak Mexican Economic Data Has Spooked Investors

With Mexico Looking Wobbly, PINFRA Looks Even More Attractive

Mexico’s economy doesn’t look all that strong now, with uncertainties regarding the trading relationship with the U.S. leading companies to defer/delay new investments and less activity from the government than expected in terms of supporting investments into improved public works. Against that backdrop, I believe Mexican companies with solid, less cyclical base business and strong overall financial positions will do better, and PINFRA (OTCPK:PUODY) (PINFRA.MX) definitely qualifies in my view.

Despite a weaker than expected first quarter and an initially worrisome change to a concession agreement, PINFRA shares are still up about 20% from my last article, as the shares have recovered much of what I thought had been panic-driven selling at the time. Although PINFRA isn’t immune to a weaker Mexican macro environment, I believe the shares are still undervalued enough to be worth consideration. I will note, though, that the ADRs are not particularly liquid.

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With Mexico Looking Wobbly, PINFRA Looks Even More Attractive

PINFRA Batted Around On Shaky Sentiment Towards Mexico

The honeymoon for Mexico’s new President Andres Manuel Lopez Obrador (often referred to by the acronym “AMLO”) and the relief investors felt immediately after the election didn’t last long, and the cancellation of the Mexico City airport project has certainly not helped. Investors are still struggling to figure out if AMLO is the next Lula, a “leftist” who proved to be quite pragmatic where Brazil’s economy was concerned, or the next Chavez, a leftist who turned Venezuela into a dumpster fire onboard a derailing train. With AMLO’s first budget due in two days (December 15), investors will at least get some sense of the real-world priorities of this new administration and some of the details about how they’ll pursue them.

PINFRA (OTCPK:PUODY) (PINFRA.MX), the second-largest toll road operator in Mexico, has had a tough year. The shares shot up about 15% in the two months after my last report (wherein I thought PINFRA was undervalued), only to give it all back as the market has turned decidedly more cautious on Mexico’s near-term economic fortunes. There is definitely elevated risk to the PINFRA story, but I really can’t believe that Mexico’s government will upend the concession system that has served the country reasonably well, and the system that will allow it to meet its opposing promises about building out/improving Mexico’s infrastructure without wrecking the company’s budget.

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PINFRA Batted Around On Shaky Sentiment Towards Mexico

PINFRA Punished As A Proxy For Mexico's Economy

As a bond proxy for Mexico, PINFRA (OTCPK:PUODY) (PINFRA.MX) hasn’t had a very good run since my last update on the company in January. Although the local shares have modestly outperformed the broader Mexican market, the Mexican market has been weak overall on worries about the upcoming presidential election and the renegotiation of NAFTA. Add in foreign exchange weakness, and the PINFRA ADRs have posted a nasty 17% drop since that last article.

At the risk of doubling down on a bad call, I still think PINFRA is worth a closer look. Although PINFRA doesn’t have the tariff revision mechanism that benefits airport operators like Grupo Aeroportuario del Sureste (ASR) or Grupo Aeroportuario del Pacifico (PAC), it does have a strong track record of building and operating toll roads, a deep portfolio of long-lived concessions, and a strong cash flow-generating model. The risk of a sharp turn in Mexico’s economic policy is real, but I think the current discount to fair value more than compensates for that risk, and PINFRA could be a beneficiary of the leading candidate’s pledges for greater infrastructure spending.

Readers should note that the ADRs offer lousy liquidity, and may want to consider purchasing/holding the much more liquid local shares.

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PINFRA Punished As A Proxy For Mexico's Economy

PINFRA Looks Undervalued, With A Healthy Growth Pipeline

Investors are clearly concerned about the future holds for Mexico, and I believe that has created a window of opportunity with Promotora y Operadora Infraestructura ("PINFRA") (OTCPK:PUODY), a major operator of toll roads in Mexico. With close to 30 toll roads in its portfolio and a high likelihood of adding more in the near future, not to mention opportunities in areas like ports, PINFRA generates very strong, repeatable free cash flows that I do not believe are as economically sensitive as the market fears.

I don't expect PINFRA to duplicate the remarkable growth it has shown over the last decade, but it doesn't need to in order to generate strong results for shareholders. Mexico needs to upgrade its infrastructure and I believe PINFRA's proven track record of execution leaves it well-placed to win bids sufficient to generate ongoing growth in the 6% to 7% range, supporting a fair value about 15% to 20% higher than today's price.

Investors should note that PINFRA's U.S. ADRs, though sponsored, are not especially liquid.

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PINFRA Looks Undervalued, With A Healthy Growth Pipeline