SMTPC: Toll Operator Trading at a 15% FCF Yield w/ Sketchy Terminal Value

SMTPC operates the Prado-Carenage motor vehicle toll tunnel and Tunnel Rege in Marseille. It offers financing, construction, operation and maintenance of facilities within the tunnels. Company was founded on February 2, 1989.

SMTPC trades at 10x earnings and 2.4x EBITDA. The company has zero debt, 50% pre-tax margins and generates 18.5% ROIC. The company hasn’t had a losing year in over 10 years. At the current price, you can buy this boring, durable business for a 15% free cash flow yield, 8.7% dividend yield and no debt. The company holds its concession contracts into 2025. There’s five years of runway until negotiations take shape.

Critical Drivers: Number of vehicles that pass through toll

2018: 16,643,765 (45,599 per day)

2010: 16,400,000 (45,000 per day)

1993: 7,300,000 (20,000 per day)

Vehicles per-day have increased 128% since 1993, or 5% per year.

Recent growth has slowed since 2016 where SMTPC reached peak traffic of 50,000 vehicles/day.

Main question: How serious is the drawdown in traffic? What’s the average vehicle/day figure that would justify this low stock price?

Before we get into those questions, let’s figure out where the toll road is and why it could stay around for the next five years.

High Traffic Toll Road Until 2025

Like we mentioned earlier, the company’s main revenue sources are its tunnels Prado-Carenage and Rege, in Marseille France. These tunnels were some of the first paid toll roads in France. It’s currently the highest-cost toll road in the country, but that doesn’t stop commuters from using the tolls. These are _high traffic _passageways. According to Wikipedia these tunnels experience continued rush-hour traffic during the weekdays.

Why is the toll road necessary? Marseille’s city center is known for its congestion. In fact, in 2014 the company ranked 6th on the World’s Worst Cities for traffic. In response, SMTPC’s toll is the only motor-way type lane to cross Marseille from north to east. Completely avoiding the city center. SMTPC has these toll road contracts until 2025. That gives them five years to generate high-margin cash flow and pay out that cash to shareholders via dividends. The company’s paid over 11M in earnings to shareholders over the last few years.

Back of the Envelope Valuation

This is a very rough approximation, so bear with me. The company did 20.4M euros in operating income in 2018. That’s roughly $1.20 in operating income per vehicle that passes through the tunnel. Like I mentioned, this is a rough estimate, but traffic _is _the main driver of the company’s profits.

According to SMTPC’s 2009 annual report, the company did 43,305 cars per day (or 15.806M). If we take that number and divide it by their 2009 operating income, we get roughly $1.11/car in operating income.

So the company’s making close to $0.10/car more in operating income yet trades at the same price it did when it generated $0.10/car less. The company’s improved since 2009 beyond their operating income. They have zero debt and higher margins. Yet the stock hasn’t gone anywhere.

Shares are down over 30% since 2017. This coincides with a three-year decline in annual traffic and cars per day. Is this a sign of things to come? Or is the decline a mere cyclical blip on the long-term radar? Another thing to think about is how far margins can compress. Toll operators raise prices along with inflation, and there’s not too much push-back from consumers. If they’re going to use the road, they’re going to use it even if prices increase every year.

Slow Growth in Traffic

Let’s assume the company grows traffic 2% per-year for the next five years. Let’s also assume an average of 2.28 euros/car in revenue. By 2023 the company’s running 50,330 cars through their tolls for close to $42M in revenue. Assuming historical 54% operating income margins we get 2023 operating income of 22.7M.

After taxes we’re left with 15M euros in NOPAT. The company spends about 5%/year in cap-ex and 22% of revenues on D&A. Subtracting cap-ex and adding back D&A gets us 22M euros in FCF (>17% yield). If we take the sum of our FCF’s we get 82M in PV and 198M in terminal value for a combined EV of 280M euros. After adding back cash we’re left with 310M euros in market cap (>120% upside).

Negative Growth in Traffic

For this example, we’ll assume the current traffic decline trend continues for the next five years. By the end of 2023, average cars per day plummets to 37,178, or 13.57M. At our pre-determined price of 2.28 euros/car that’s 30.94M euros in revenue and 16.7M euros in operating income. Subtracting our taxes leaves us with 11M in NOPAT and 16M in free cash flow by 2023. 16M free cash flow is still at 12.6% yield.

Adding our FCFs up over the next five years gives us PV of 68M euros and an Enterprise Value of 215M euros. Adding back our cash gives us 245M in market cap (93% upside).

What Mr. Market’s Anticipating

If the main driver is cars-per-day through the toll, at what point would the average cars-per-day justify the market price? Turns out it’s close to 15,000 cars (5.45M cars annually). That’s a 67% decline in average cars per day in five years. In this scenario, you’d end 2023 with 12.43M euros in revenue, 7M in EBIT and 6M in free cash flow (4% yield). If SMTPC _doesn’t _lose 67% of their traffic over the next five years, the current share prices represent an extremely attractive price point.

Major Risk: The Rocade L2

If there’s one thing that can take SMTPC under is The Rocade L2. The “L2” as its referred, is a toll-free route that competes with the company’s Prado-Carenage tunnel. The L2 opened in 2016, perfectly coinciding with STMPC’s revenue decline. The worst case scenario is more toll-free roads open to the point where the tunnels aren’t needed. This is probably overblown given the massive traffic problem in Marseille. The question remains, how much will the L2 impact traffic count over the next five years.

If traffic doesn’t decline 20%/year for the next five years, the business should be worth more than Mr. Market’s quoting. The company offers an 8%+ dividend that’s well covered and management owns 33% of the business. If anything, a steady decline in traffic could see a take-private from management at higher prices. In the meantime, we’ve got no debt, solid cash flow, high margins and ample runway for dividend payments to shareholders.

If the company can’t renegotiate its contract with its current toll tunnels, there’s zero terminal value with the name beyond 2025. However, it’s a small position and I’m happy to receive the dividend and wait around until a (potential) deal works out.

3 thoughts on “SMTPC: Toll Operator Trading at a 15% FCF Yield w/ Sketchy Terminal Value

  1. many thanks for the interesting idea. can you comment on what you think a renegotiated deal could look like? surely there is clearly a need for the road (given the current traffic picture) and thus its a question of what is an acceptable/negotiable level of return. have there been any previous re-negotiations of the contract in the past? if so, how did these turn out? if not, how have other French toll road renegotiations gone? has the incumbent operator ever lost the contract?

    basically the only way to lose meaningfully on this investment is if they lose out on the terminal value completely, so this seems like this most important thing to think about.

    finally – any thoughts on management and what they plan to do with their 33% stake? presumably they would take it private at current levels if the renegotiation on current terms was a done deal. alternatively they probably wouldn’t own 1/3 of it if the renegotiation seemed a massive source of risk.
    thanks again

    Like

    1. Hey Raper —

      Thanks for the comment. This might sound weird but I’m stoked that you read my blog. I’ve been a fan of yours for a while now — so I’m geeking out a little.

      Anyways, I tried researching SMTPC’s negotiations in the past and haven’t found much of anything. This could be my lack of ability, language barrier with (really) old annual reports, or something else. What I do know is that the French gov’t handed the keys to the country’s roads to private companies and haven’t looked back.

      Also, when SMTPC was bidding for their second toll tunnel, they were the only one bidding — no competition. I take that as a good sign.

      You bring up a good point about the insider ownership. It’ll be interesting to see what the insiders do over the next five years. If they start selling out as we get closer to 2025 — that should tip our hat that negotiations failed. But if they hold on, that would be a very good sign.

      I think they’ll eventually take this private. Right now it’s super cheap and if they can re-negotiate another 10 year contract the valuations get ridiculous.

      There’s a lot of unknowns. It’s a small position for me (around 1.50%) because I don’t know a lot after 2025. Until then it feels like a “Heads I win, tails I don’t lose much” situation.

      Like

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