Empresas ICA: Construction

The Company

Empresas ICA (ICA) is the largest infrastructure, engineering, procurement and construction company in Mexico. The firm operates in government priority sectors that support the country’s economic development. ICA owns the strongest operative structure among national infrastructure developers, which allows it to participate in a large number of major projects. ICA’s operations are divided into four segments: construction (74% last 12 months sales); concessions that include highways, water projects, ports and prisons (13%); airports via its subsidiary Oma (12%); and corporate and others (1%), in which housing is included.

ICA wants to have major participation in oil and gas infrastructure projects stemming from the recently approved energy reform (see Energy chapter), specifically, projects to be included in the next tenders for rail projects in the country. However, ICA sees great potential in the energy sector per se, as well as in mining. In addition, the group has also targeted opportunities in other countries as part of diversifying their source of revenues. In the concessions segment, the firm has a young asset portfolio, with an average lifespan of 25 years, which generates good value. Over the next three years, all existing concessions will reach an operational stage, paying its own debt and creating higher profitability. There are a total of seven concessions not operating yet: three will be operational in 2014 (a highway, a water project and a port); three in 2015 (two highways and a water project); and a highway in 2016.

With a positive perspective related to the investment in infrastructure, ICA – with its large scale, long history, important assets and significant experience – will benefit from most of the projects tendered in the next few years. The company has identified several potential projects in 2014 worth $8bn, mainly in five sectors: highways (43%), water projects (40%), sea ports (12%), energy-related (3%) and social projects (3%). The estimated potential investment for 2015 is slightly more than $6bn, spread across the same five categories.

ICA’s funding range is diverse, with greater focus on strategic alliances or sale of mature assets. However, the last option is deemed to be the less expensive one: to recycle invested capital among some concessions, thus allowing the group to provide capital to new projects and reduce leverage, replacing temporary debt as a result. As of Q4 2013 some 37% of ICA’s total debt belonged to the concessions segment, while the majority relates to operating projects that are paying their debt with their own resources. Further, there are pending payments from several clients: $50m from La Yesca (a hydroelectric project); $189m from Line 12 of the Mexico City subway, with legal processes set to be resolved in the medium term; and $76m from the eastern discharge tunnel of the Mexico City valley drainage system, an essential project covering 62 km.

Development Strategy

Our estimates for 2014 include an increase of 9% in revenues and 13.2% in adjusted earnings before interest, taxes, depreciation and amortisation (EBITDA), with an EBITDA margin of 17.3%, up from 16.6% in 2013. Once the government’s infrastructure investment returns to its normal pace, which has been delayed with respect to the initial expectations at the beginning of the current administration, the construction segment will resume its growth. ICA has a significant backlog, $2bn, which is equivalent to 20 months’ work at the average rate for the full year 2013.

A positive outlook is likely for the concessions and airports segment, which translates into stable cash inflows for the company. However, ICA is also a high-risk investment option. Investors’ primary concern is the group’s high leverage ratio (7x as of Q4 2013). Although ICA’s leverage is difficult to reduce, much of this is comprised of a debt-project, which represents lower risk at the corporate level. We have a 2014 year-end target price of MXN29 ($2.25) for ICA.