Slim Poised to Beat ICA for Mexican Highway Projects (Update3)
March 08, 2010, 4:40 PM EST(Adds closing share price in 11th paragraph.)
By Crayton Harrison
March 8 (Bloomberg) -- Billionaire Carlos Slim’s construction company is poised to win the biggest of three toll- road contracts in Mexico, beating Empresas ICA SAB, the nation’s largest builder, Credit Suisse Group AG said.
Impulsora del Desarrollo y el Empleo en America Latina SAB, the finance arm for Slim’s Carso Infraestructura y Construccion SAB, will probably win a competition to build the Pacific South highway after staying away from more expensive contracts at the end of Mexico’s economic expansion in 2008, according to Pablo Riveroll, a Credit Suisse analyst in Mexico City. The 8.52 billion peso ($673 million) project is the largest of three toll-road deals the government will start auctioning tomorrow.
“It’s a typical Slim investment: When everything is quite expensive and the bull market is there, projects are coming out and they just let them go,” Riveroll said in a telephone interview. “Now things are more reasonable and they have the cash.”
Slim’s Mexico City-based financing company, known as Ideal, will probably increase sales this year at triple the pace of its competitor, ICA, Riveroll said. Ideal shares climbed 151 percent in the past year, more than double the gain for ICA. Ideal won contracts such as the 3.22 billion-peso offer in October for the Pacific North project, which topped an ICA-led consortium’s bid.
Third-Richest Man
Slim, 70, the world’s third-richest man according to Forbes magazine, is boosting his investments in infrastructure projects as he bets on Mexico’s recovery from its worst economic slump since the 1930s.
Mexico’s three toll-road contracts and a fourth highway maintenance deal to be auctioned will require an overall investment of 19 billion pesos, according to the Communications and Transportation Ministry. Ideal, a four-year-old company, may compete for at least three of them, Miguel Angel Martinez, the company’s investor relations officer, said in a conference call on Feb. 25.
ICA, based in Mexico City, will vie for at least two, Alonso Quintana, the company’s chief financial officer, told analysts on March 2. The company is most likely to win the Mitla-Tehuantepec project to improve an existing highway in the state of Oaxaca because the contract requires the government to participate in investment through quarterly payments, Riveroll said. The government plans to accept bids for that 7.4 billion peso contract on March 23.
Slim’s Business
In Slim’s construction business, Ideal usually bids for contracts that are then completed by his Mexico City-based builder known as Cicsa. Toll-road builders pay for construction and then charge vehicles a fee to use the highway.
“With each project, we’ve been able to learn,” Ideal Chief Executive Officer Alejandro Aboumrad said in a telephone interview from Mexico City on March 4. “We’ve been able to be more efficient, and that process continues.”
Aboumrad declined to discuss the company’s bidding plans. Luciana Garcia, ICA’s general counsel, declined to comment.
Ideal shares, which have underperformed Mexico’s benchmark Bolsa index the past four years, are up 30 percent this year, compared with a 2.2 percent increase for ICA and a 1.2 percent rise for the measure. Ideal shares fell 2 percent to 17.35 pesos at 4 p.m. New York time today. ICA rose 1.4 percent to 31.17 pesos.
‘More Cautious’
Riveroll forecasts Ideal shares will climb 9.5 percent in the next year. The stock has surged 57 percent since Riveroll recommended buying it in August.
Riveroll projects ICA will jump 28 percent in the next year. That rally will be jeopardized should the company increase its debt by winning projects other than the one in Oaxaca, he said. The company’s net debt to earnings is at a six-year high, and ICA needs to conserve cash as its works through its current projects, Riveroll said.
“ICA will be more cautious in the projects that it enters,” Riveroll said.
ICA and Goldman Sachs Group Inc. defeated Slim in August 2007 on a 44.1 billion peso contract to operate four toll roads in western Mexico. ICA’s borrowing surged since then, with its ratio of net debt to earnings excluding items such as interest and taxes, a measure of liquidity, rising to 5.11 in the fourth quarter, the highest since March 2004, according to data compiled by Bloomberg. Ideal’s net debt to earnings fell to 7.05 from a peak of 8.07 in 2008.
Stake Sale
In October, ICA and New York-based Goldman Sachs sold a 32 percent stake in their toll-road project to an infrastructure trust fund, raising 6.55 billion pesos.
ICA may still be competitive in the bidding and may win the Pacific South contract, said Christian Papayanopulos, an analyst at Ixe Grupo Financiero SA in Mexico City. It will take a “more cherry-picking approach to the projects,” said Papayanopulos, who recommends buying the shares. “They can’t just start bidding indiscriminately as maybe they were able to do before.”
ICA’s sales probably will increase 13 percent this year, with operating profit climbing 60 percent, Riveroll said. That trails the 44 percent increase he’s forecasting for Ideal’s revenue and the almost doubling in earnings that he projects.
Ideal “has the balance sheet to continue investing in some of these projects,” Riveroll said. “I would expect them to be as disciplined as they have been in the past.”
Mexico’s Bolsa stock index rose 2.5 percent last week to 32,436.53. Grupo Aeroportuario del Pacifico SAB advanced 7.3 percent after saying it plans to pay 1.9 billion pesos in dividends. Grupo Modelo SAB fell 3.9 percent after Anheuser- Busch InBev NV Chief Executive Officer Carlos Brito said in Brussels that Modelo’s claims against the company in an ongoing arbitration case are without merit.
The peso gained 1.1 percent last week to 12.6308 per U.S. dollar.
Yields on Mexico’s benchmark peso bond due 2024 fell two basis points, or 0.02 percentage point, to 7.93 percent last week from 7.95 percent a week earlier, according to Banco Santander SA. The bond’s price increased 0.19 centavo to 117.9 centavos per peso.
The following is a list of events in Mexico this week:
--Editors: Eric Martin, David Papadopoulos
To contact the reporter on this story: Crayton Harrison in Mexico City at tharrison5@bloomberg.net
To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net
