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RENTA FIJA – ESPAÑA-

Fixed Income

Company Report

ACS CONSTRUCTION / Spain

10 December 2018 (10:53 h)

A disciplined leader Initiation of coverage

Investment recommendation

ACS Group, a global contractor

ACS is one of the world’s largest construction firms by volume of international contracts, and is the market leader in regions such as Spain, Germany, USA and Australia. The group divides its operations into three business units: Construction (Civil Works and Building Works), Industrial Services (Development, Energy and Industrial Infrastructure Construction and Maintenance) and Services (Facility Management activities). ACS holds a 50.41% stake in the German publicly listed firm HOCHTIEF, which in turn controls 72.68% of the Australian listed company CIMIC. Furthermore, the group will own 50% of the Abertis toll road operator via ACS and HOCHTIEF.

No surprises on the operating side

-Construction: We expect CAGR’17-21e growth of +3.3%, with

HOCHTIEF standing out as the chief driver thanks to the Americas and Asia Pacific divisions. In terms of profitability, we anticipate a small tightening in EBITDA margin from 5.9% to 5.7% in 2021 with the highest margin being posted by DRAGADOS (~7%).

-Industrial Services: We anticipate CAGR’17-21e of +2.6% with a near

double-digit EBITDA margin (~9.8%). The Support Services to Industry division will continue to provide recurrence and stability, while the Integrated Projects division generates stronger profitability.

-Services: This is set to remain the least important division although still a

core business for the group. We expect its growth will be +2.7% CAGR’17-21e.

-Abertis: The stake offers strong visibility in terms of operating cash

generation. The less cyclical profile of the business will benefit the group via dividends, meaning more stable cash generation.

Efforts have borne fruit

Deleveraging efforts in recent years both at the ACS parent company and the HOCHTIEF and CIMIC subsidiaries have had a significant impact, driving down NFD from €9.3 Bn FY11 to a small net positive cash position in 2018e. The chief mechanisms used to secure this have been: i) a focus on cash generation thanks to control over costs and accounts payable, with a considerable improvement in working capital, ii) restructuring, with the sale of capital-intensive assets that were not a good fit for the group.

Recommendation

Looking at trading levels for the ACS issue, we believe the same reflects the company’s risk profile. We therefore initiate coverage with a Hold recommendation against the Bloomberg Barclays EuroAgg Corporate 1-3 Year credit index.

As for the issue from the Industrial Services subsidiary (ACSSCE), following a recent correction we upgrade our recommendation to Overweight from Hold against the Bloomberg Barclays EuroAgg Corporate 7-10 Year benchmark (BBG Ticker: LEC7TREU), offering a pick-up of +105 bps in YTM with a shorter duration (6.7 vs. 7.7).

Source: Bloomberg

Iñigo de las Cuevas. Credit Analyst, caixabank.analisis@caixabank.com 91 557 69 41 The trading levels in this report were updated on 12/10/2018 at 9 am

ACS

Curve vs Bloomberg Barclays Euro-Agg Corp

Short (1-3y) Hold vs IG € Corp 1-3y

ACSSCE

Curve vs Bloomberg Barclays Euro-Agg Corp

Long (5-10y) Overw eight vs IG € Corp 5-10y

Company Profile

Bloomberg ACS/ACSSCE

Rating ( S&P / Moody's / Fitch ) ( BBB / n.a. / n.a. )

Outlook ( S&P / Moody's / Fitch ) ( Neg / n.a. / n.a. )

Amount Outstanding

Main isuues

Vol.

(Mns €) YTM

Z-Spread

(pb)

ACSSM 2 7/8 04/01/20 500 0.51% 71

ACSSCE 1 7/8 04/20/26 750 3.05% 250

Source: B loomberg

ACS Group P&L 2018e 2019e 2020e

Sales 36,776 38,237 39,290

Growth (%) 5.4% 4.0% 2.8%

EBITDA 2,388 2,472 2,494

Growth (%) 4.8% 3.5% 0.9%

Margin (%) 6.5% 6.5% 6.3%

Fuente: CaixaBank BPI Equity Research Source: CaixaBank BPI Equity Research

Financial data 2018e 2019e 2020e

Reported NFD -24 -851 -1,687

Reported NFD/EBITDA 0.0x -0.3x -0.7x

Adj. NFD 4,992 4,265 3,501

Adj NFD/EBITDA 1.9x 1.4x 1.1x

FFO Interest Coverage 5.0x 5.8x 6.1x

Fuente: CaixaBank FI Research, CaixaBank BPI Equity Research Source: CaixaBank FI Research, CaixaBank BPI Equity Research

ACSSCE P&L 2018e 2019e 2020e

Sales 6,507 6,670 6,804

Growth (%) 4.0% 2.5% 2.0%

EBITDA 498 496 507

Growth (%) 3.3% -0.3% 2.1%

Margin (%) 7.6% 7.4% 7.4%

Fuente: CaixaBank FI Research, CaixaBank BPI Equity Research Source: CaixaBank BPI Equity Research

Financial data 2018e 2019e 2020e

Reported NFD -602 -602 -602

Reported NFD/EBITDA -0.9x -0.9x -0.9x

Adj. NFD 297 322 348

Adj NFD/EBITDA 0.9x 0.9x 0.9x

FFO Interest Coverage 9.5x 9.6x 9.7x

Fuente: CaixaBank FI Research, CaixaBank BPI Equity Research Source: CaixaBank FI Research, CaixaBank BPI Equity Research

ACS/ACSSCE vs IG €

€ 0.75 Bn

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ACS

ACSSCE

ACS

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INVESTMENT REPORT

10 December 2018

INDEX

INDEX ............................................................................................................................................. 2

Description ...................................................................................................................................... 4

Construction .................................................................................................................................... 4

Industrial Services (ACSSCE) ......................................................................................................... 7

Services .......................................................................................................................................... 8

Stake in Abertis ............................................................................................................................... 9

ACS Group financial position ........................................................................................................ 10

ACSCE financial position .............................................................................................................. 12

Ratings .......................................................................................................................................... 13

Trading prices ............................................................................................................................... 13

Recommendation .......................................................................................................................... 13

Financial appendices .................................................................................................................... 14

Risks ............................................................................................................................................. 15

Past recommendations ................................................................................................................. 15

ACS

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INVESTMENT REPORT

10 December 2018

Fuente: Estimaciones CaixaBank

1. - Hochtief and Cimic operating efficiencies

2 . - Financial optimization structure

3 . - Minorities repurchase

4 . - Non-core assets divestment

5 . - Free cash flow generation

6 . - Working capital evolution

www.grupoacs.com

Chairman Florentino Pérez CCO Angel Garcia Altozano

CEO Florentino Pérez IR Luis Cellier/ Teresa Ballester

GENERAL DESCRIPTION

ACS is one of the world’s largest construction firms by volume of international contracts, and is the market leader in regions

such as Spain, Germany, USA and Australia. The group divides its operations into three business units: Construction (Civil

Works and Building Works), Industrial Services (Development, Energy and Industrial Infrastructure Construction and

Maintenance) and Services (Urban Services, Facility Maintenance, etc.). ACS holds a 50.41% stake in the German publicly

listed firm Hochtief, which in turn controls 72.68% of the Australian listed company CIMIC. Furthermore, the group will control

50% of the concessionaire Abertis via ACS and Hochtief.

Revenues'17 By Activity Revenues'17 By Markets

MAIN DRIVERS TO TAKE INTO CONSIDERATION

Operating Profit'17 By Activity Operating Margin Evolution

NFD/EBITDA Rating Evolution

Australia 31%

USA 22%

Spain 14%

Germany 6%

Mexico 3%

Indonesia 2%

Canada

3%

RoW

19%

Construction

78%

Industrial

Serv ices18%

Serv ices

4%

-1

-0.5

0

0.5

1

1.5

2

2014 2015 2016 2017 2018e 2019e 2020e

6.0%

6.5%

7.0%

7.5%

2014 2015 2016 2017 2018e 2019e 2020e

Construction

70%Industrial

Serv ices27%

Serv ices

3%

05/17 07/17 09/17 11/17 01/18 03/18 05/18 07/18 09/18 11/18

S&P

BBB

BBB-

ACS

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INVESTMENT REPORT

10 December 2018

Description

ACS Group divides its activity into three business units: Construction (Civil Works and Building Works), Industrial Services (Development, Energy and Industrial Infrastructure Construction and Maintenance) and Services (Urban Services, Facility Maintenance, etc.).

As well as its head companies in Construction (DRAGADOS), Industrial Services (Cobra) and Environmental Services (Clece), ACS holds a 50.41% stake in the German publicly listed firm HOCHTIEF, which in turn controls 72.68% of the Australian listed company CIMIC. It likewise controls construction brands in the USA: Turner (Building Works) and Flatiron (Civil Works). The HOCHTIEF stake has a market value of €4,790 Mn. Finally, the group owns 50% minus 1 share in the Abertis concessionaire (EBITDA’18e ~€3.7 Bn) via ACS (30%) and HOCHTIEF (20%), following an operation that valued the concessionaire’s capital at ~€18 Bn. Chart 1.

ACS group structure

Source: ACS

In recent years ACS Group has made efforts to drive further structural standardisation and simplification, securing efficiencies and synergies with its listed subsidiaries. The group has transitioned from being an almost purely domestic operator to now standing as a global and diversified firm. Its sizeable international standing is a distinguishing factor in Europe, where the construction industry is depressed. However, while Europe is populated by economies such as Spain where deficit reduction is the order of the day and existing infrastructure is acceptable, there are other regions that need to replace obsolete infrastructure, such as North America, or develop infrastructure, including Australia, Asia and also South America. ACS Group has a robust local position in such markets thanks to its affiliates.

Construction

ACS Group is one of the largest global construction firms, with projects in more than 30 countries around the world, revenues’17 in excess of €27 Bn and an order backlog as per 3Q18 of ~€58 Bn. The construction activity is run via the DRAGADOS and HOCHTIEF group companies and their various affiliates: CIMIC in Australia and Asia; Turner and Flatiron in North America. Via these, the group chiefly operates in Civil Works (activities associated with infrastructure development, including highways, rail, maritime and airport facilities), Building Works (residential buildings, social equipment and facilities) and Mining (mining service contracts, as well as the

infrastructure required by the mining business). DRAGADOS DRAGADOS implements its Civil Works and Building Works projects under its own name and via other affiliates, specialised by regions and specific activities. It is leader in Civil Works and Building Works construction and runs international projects, with an important footprint North America as well as in Europe and Latin America. It is also expanding its areas of operation via the opening of the new DRAGADOS AUSTRALIA affiliate.

Construction ServicesIndustrial

ServicesConcesiones

50,4% 100%100% 100% 100%

100% 72% 100%

EUROPA

ASIA

S. AMERICA

AUSTRALIA

ASIA

EUROPA

ASIA

N. AMÉRICA

S. AMÉRICA

EUROPA

AMÉRICAN. AMÉRICA

EUROPAASIA

N. AMÉRICA

30% 20%

50%

SPV

Abertis Holdco

98,7%

ACS

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INVESTMENT REPORT

10 December 2018

2015 marked a trend shift in terms of turnover, following seven years of consecutive declines, which saw domestic turnover plummet after 2007 (-80%). DRAGADOS’ shift towards international markets has been substantial, with 72% of the division’s turnover being secured outside of Spain in 2017, compared to 6% ten years previously. Activity seems to have bottomed out in Spain and we anticipate stable levels over the forthcoming years, despite the economic climate preventing the government from embarking on major infrastructure projects. As for the international market, CaixaBank BPI Equity Research estimates revenue growth of 7.2% FY18 and 2% in subsequent years. In terms of profitability, we expect a stable EBITDA margin at 7% for DRAGADOS. Chart 2.

DRAGADOS revenue performance by regions

Source: ACS, CaixaBank BPI Equity Research

HOCHTIEF

Following the sale of 23.86% of HOCHTIEF to Atlantia, as part of the deal to seize control of Abertis, ACS holds 50.41% of the German publicly listed company (market cap of €9.3 Bn), which in turn controls 72.49% of the likewise listed Australian firm CIMIC (market cap of €9.4 Bn). HOCHTIEF chiefly divides its activity into three major regional areas: HOCHTIEF Americas, HOCHTIEF Asia Pacific and HOCHTIEF Europe. Although the company’s headquarters are in Germany, 90% of revenues are generated outside of the country, making it one of the largest international contractors worldwide. In Australia it operates via its listed affiliate CIMIC and in the USA mainly via Flatiron in Civil Works and Turner in the Building Works segment. Chart 3.

Footprint of HOCHTIEF and its subsidiaries

Source: HOCHTIEF

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7,000

8,000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019e

Spain International

ACS

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INVESTMENT REPORT

10 December 2018

Below we evaluate the company’s various regional divisions:

HOCHTIEF Asia Pacific (40% HOCHTIEF revenues’17)

Via its majority stake in CIMIC (72.68%), HOCHTIEF is the largest construction firm in the Asia Pacific region. Following a series of disposals and activity restructuring triggered by the entrance of the ACS management team, the Australian firm reports its operations broken down into three business lines: Construction (57% revenues’17, including the firms CPB Contractors, Leighton, EIC and Pacific Partnership), Mining (24% revenues’17, Thiess and Sedgam) and Services

(17% Revenues’15, UGL).

Chart 4.

Activities of CIMIC and its subsidiaries

Source: CIMIC

The subsidiary’s restructuring has had an evident impact on results, with a stronger balance sheet, a simplified operating model and improved project execution. CIMIC is evolving very positively for the group, with 9M18 revenues expanding +11.4% YoY and all companies posting growth. Furthermore, operating cash generation has expanded +15.5% YoY, with EBITDA cash conversion of 86%, driving further balance sheet improvements and securing a net cash position of AUD 1.2 Bn (increase of AUD 0.3 Bn vs. FY17). It is therefore no surprise that S&P recently improved outlook to stable, while leaving the BBB rating unchanged. Prospects are also upbeat, with an order book amounting to AUD 35 Bn, equivalent to two years of works. As per 9M18, the company has secured projects worth more than AUD 11 Bn and will bid for at least AUD 80 Bn more, which will be tendered over the rest of 2018, and around AUD 330 Bn in 2019.

HOCHTIEF Americas (52% HOCHTIEF revenues’17)

The HOCHTIEF America division encompasses the group’s operations in the USA and Canada. The USA is the world’s largest construction market and HOCHTIEF is the leading Building Works contractor in the country via Turner. Both Turner and Flatiron (engineering) have recorded double-digit growth this year and improved margins, although these remain tight. This is chiefly due to Turner assuming little risk, subcontracting a large proportion of its works and having a low fixed cost base. However, the risk is very limited given the model of their contracts that result in a fee on the final cost of the work approved in the project (Cost-Plus). In any case, both have been highly active in their segments, driving order book growth of +30% YoY as per 9M18, up to €19.9 Bn.

HOCHTIEF Europe (7% HOCHTIEF revenues’17)

This is the region with the lowest weighting for HOCHTIEF. Following far-reaching restructuring, it now focuses operations on Building Works, Infrastructure Construction, Engineering and Concessions Development. 9M18 revenues for the division shrank at double-digit rates (-13.9% YoY), albeit with significant margins improvements. The order backlog stands at €3.6 Bn (2.3x revenues’17), with €1.2 Bn having been awarded year-to-date.

Overall, we expect HOCHTIEF revenues to expand at a CAGR’17-21 of +3.3%, driven by HOCHTIEF Asia Pacific and HOCHTIEF Americas. As for profitability, we anticipate a small tightening in EBITDA margin from 5.7% in 2018e to 5.5% in 2021e.

ACS

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INVESTMENT REPORT

10 December 2018

IRIDIUM

Via iridium, ACS is also the global leader in developing Greenfield infrastructure in terms of project numbers and by investment volume, with total anticipated investment in excess of €27 Bn and equity contributions of €731 Mn at year-end 2017. The majority of these projects are in initial operating stages and are consolidated by the equity accounted method, which is why they have a minor contribution to the group P&L account (<1% group EBITDA’18e). Dragados operates as the construction firm in the infrastructure value chain, invoicing for each project, while Iridium is the project developer that contributes equity. Once the project becomes operational, Iridium seeks to dispose of the same to an investor with lower risk appetite such as infrastructure investment funds or brownfield operators that do not want exposure to construction risk like has been the case in Abertis or Atlantia, as the new relation could provide some sinergies. From now on, Abertis could even assume part of the risk in Greenfield projects with Iridium.

Industrial Services (ACSSCE)

The headline firms in this division, Cobra and Dragados Industrial, are among the top global competitors in applied industrial engineering, with projects in more than 50 countries. Their activities may be classified into two main business lines: (i) Support services to industry, (ii) Integrated projects. SUPPORT SERVICES TO INDUSTRY (53% of division revenues’17) This area focuses on maintenance and services contracts, as well as energy, industrial and mobility infrastructure operating services. It has recurrent revenues and encompasses three areas of activity: i) Networks, ii) Specialised Products, iii) Control Systems.

Networks (17% of 2017 revenues in Support Services to Industry): Electricity, gas and water

network maintenance services and activities.

Specialised Products (57% of 2017 revenues in Support Services to Industry): Construction,

installation and maintenance of high voltage electricity grids, telecommunications systems, railroad and electrical installations, and so on.

Control Systems (27% of 2017 revenues in Support Services to Industry): ACS has established

itself as the leading service provider in engineering, installation and operation of control systems for industrial and municipal support services, including traffic and transport control systems and systems for comprehensive management of public infrastructure.

INTEGRATED PROJECTS (47% of division revenues’17) This focuses on providing turnkey or EPC projects, including the design, supply, construction and commissioning of projects in the energy sector (traditional energy and renewable energies, assets related to the oil and gas sector) and engineering applied to industry. Also promotion and participation in concession assets such as wind farms, solar thermal plants, desalination plants, water treatment plants and hydroelectric power plants. This unit generates the widest margins. Via the Cobra brand, ACS is the industry leader in Spain and one of the top competitors worldwide, with a prominent position in Latin American countries such as Mexico and Peru, as well as a growing footprint in Europe and the Middle East. As with IRIDIUM, one factor that differentiates the company is its position throughout the value chain, seeing it develop, construct, maintain and operate energy and industrial infrastructure, in which also has agreements that reduce its investment and/or facilitate the final sale of the project as for example in:

Renewable energy: Cobra implements construction works. Bow Power (51% ACS and 49% GIP)

is a vehicle that invests in the equity of renewable energy projects, while the listed company Saeta Yield, of which ACS recently sold its 24.4% stake, stands as a natural potential buyer for said projects once they are operational, even if the RoFO is not yet in force. This is an optimal structure, diluting equity contributions via BOW to 51% and establishing good relations with a natural buyer for all projects.

Networks: Similarly, ACS has secured a deal with Canadian investment fund Brookfield to limit its

equity contributions in the development of Brazilian electricity transmission lines.

ACS

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INVESTMENT REPORT

10 December 2018

The proportion of the division’s revenues generated via international markets has progressively expanded over recent years, reaching 66% in 9M18 (vs. 61% in FY13). The sharpest growth has come in the Asia-Pacific region (+48.7% CAGR’13-17), to the detriment of Europe and the Americas. This ensures considerable diversification in terms of division revenues. Chart 5.

Geographic Revenue Distribution

Source: ACS, CaixaBank BPI Equity Research

At the close of 3Q18 the order backlog stood at €9.7 Bn (1.5x revenue’17). The growing internationalisation trend is set to continue, with 25% of revenues generated in Spain (vs. 31% in 2013), while the Americas account for a sizeable proportion (58% of the order backlog). There was also a strong recovery from the domestic market portfolio, with the award of a €1.1 Bn contract to build and operate photovoltaic plants of 1,550 MW, with the sale of 1,240 MW of the same already secured upon completion making easier its financing. However, over the last few years revenues have declined in Industrial Services (-3.0% CAGR’13-17), chiefly due to: i) changes to the consolidation scope following the sale of renewable assets in 2015, ii) the completion of major projects, iii) a slowdown in regions such as Mexico. Nonetheless, we expect a return to growth in forthcoming years (+2.6% AGR’17-21).

The Industrial Services area will further consolidate its position in countries where it already has a robust standing, combining this with sustainable growth in new geographic markets that offer strong growth potential, capitalising on synergies by partnering with other ACS Group companies. Bear in mind that the Support Services to Industry business is more recurrent and stable, while Integrated Projects offer wider margins as they are highly specialised and specific solutions provided to each client.

Although the reported EBITDA margin has declined during recent years, this was mainly due to the sale of renewable assets that reported wider margins, meaning margins have held stable like-for-like even amid fierce competition and pressure on prices in the industry, particularly in the energy sector. Going forward, we anticipate stable EBITDA margins at ~9.8% (vs. 10.1% in 2017 and 13.3% in 2014).

Services

Following the sale of Urbaser it is the least important Division for the group (3.3% of group EBITDA’18). The Services area runs Integrated Maintenance activities, chiefly in Spain via the Clece subsidiary. The affiliate structures its operations into three key areas: i) Services for individuals, ii) Services for buildings, iii) Services for the city and the environment. Its main activities are support services for public and private buildings (facility maintenance, energy efficiency, cleaning and auxiliary services), conservation and care of public spaces, and providing assistance and resources for specific groups, such as the elderly, dependent individuals, and so on. The services portfolio amounted to €2.5 Bn as per 9M18 (1.7x revenues’18e), having grown +22% YoY thanks to international expansion and organic growth in Spain. Even so, we estimate a stable performance both from revenues and margins. Finally, bear in mind that during the last two years ACS has disposed of two of its headline companies in this division (Urbaser and Sintax), and therefore it may likewise opt to sell Clece although it is considered as a core business. CaixaBank BPI Equity Research estimates an EV for the division of €606 Mn (8.1x EV/EBITDA’18e), with NFD as per 9M18 of €150 Mn.

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ACS

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INVESTMENT REPORT

10 December 2018

Stake in Abertis

After ACS Group and Atlantia acquired Abertis for €18.2 Bn, the latter company is set to represent a considerable source of revenues via dividends for the group. Below is an overview of the operation and the results of the same: ACS will directly control 30% of the Holdco, which controls 98.7% of Abertis, while HOCHTIEF owns a further 20%. The remaining 50% plus one share is held by Atlantia, which in turn acquired 23.86% of HOCHTIEF from ACS. The Holdco was capitalized with €7 Bn equity injection from shareholders and debt for the rest needed to buy 98,7% of Abertis. Chart 6.

Abertis control structure

Source: ACS Abertis is one of the largest infrastructure operators, standing as the world leader in toll road management with more than 8,300 km of roadway across 14 countries in Europe and America. The company is the national leader in Spain and Chile, although France makes the largest contribution to financial statements. Brazil and Italy also account for a large proportion of revenues. The company’s regional diversification therefore allows it to offset the various economic cycles of each region. Given the nature of the industry, Abertis offers strong visibility and stability in terms of operating cash generation. This more minor cyclicality will benefit ACS and HOCHTIEF via dividends, meaning more stable cash generation for the group. We expect the stake to contribute with €326 Mn in 2019 and a +9.4% CAGR’19-21. Looking at the operation, we find it very significant that ACS financed a major proportion of the same via the sale of a stake in HOCHTIEF valued at €2.4 Bn. Thus, the cash outlay from the parent company stood at €587 Mn and that for the total group at €1,067 Mn. Furthermore, as it does not hold a majority, the group avoids consolidating Abertis NFD (~€14 Bn) or the Holdco new debt. Table 1.

Cash outlay on the operation

Source: ACS One concern is Atlantia’s intentions with regard to the HOCHTIEF stake, which we would not rule out being sold sooner or later. Nor can we exclude ACS showing interest in further reducing minority interests in its German and Australian subsidiaries. HOCHTIEF market value stands at ~€8.9 Bn vs CaixaBank BPI Equity Research valuation of ~€11.7 Bn and vs ~€10.1 Bn at the price of the stake sold to Atlantia. At current prices we would see any increase in HOCHTIEF stake adding value to ACS.

ACS Parent Co HOCHTIEF ACS GROUP

HOCHTIEF Capital Increase -920 920 0

Equity Injection in Holdco -2,100 -1,400 -3,500

Sale of HOCHTIEF stake to Atlantia 2433 2433

TOTAL -587 -480 -1,067

ACS

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INVESTMENT REPORT

10 December 2018

ACS Group financial position

Significant deleveraging efforts have been made both at the ACS parent company and the HOCHTIEF and CIMIC subsidiaries, reducing NFD from €9.3 Bn at year-end 2011 to an anticipated small positive net cash position at year-end 2018. The chief mechanisms to secure this have been: i) A sharp focus on cash generation thanks to strict control over costs and accounts payable,

securing a considerable improvement in working capital (and margins). We now expect ACS and its subsidiaries to deliver a neutral working capital change at year-end.

ii) A restructuring process focused on cost reductions and the sale of capital-intensive assets that

were not a good fit for the group structure (Airports, Services, Real Estate, and so on). Chart 7.

NFD performance and financial expenditure (€ Mn)

Source: ACS, CaixaBank BPI Equity Research

This exercise has had evident results, with ROCE improving to 19% in FY17 (vs. 6% in 2011) thanks to a significant decline in capital employed (-66% vs. 2011). However, efforts to streamline the company structure continue: in 2018 we estimate a reduction of -15%, with the majority of this effort already complete but we expect a stable evolution due to the Abertis deal. Chart 8.

ROCE performance (after taxes)

Source: ACS, CaixaBank BPI Equity Research

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ACS

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INVESTMENT REPORT

10 December 2018

At year-end 2017 ACS posted NFD of €153 Mn (vs. €1,214 Mn in 2016), putting leverage at 0.1x NFD/EBITDA’17, chiefly thanks to high operating cash generation, which we expect to remain stable over the coming years. Even after the Abertis deal, we expect the group to close 2018 with no NFD. Although rating agencies increase the DFN when evaluating their ratios significantly restricting access to the Group's cash and penalizing factoring, guarantees, etc ... the ratios continue to demonstrate a solid financial position (36,9% FFO/NFD’18e adjusted of 37%, 5.6x EBITDA’18e interests coverage). Table 2.

Group cash flow and financial ratio estimates

Source: ACS, CaixaBank BPI Equity Research, CaixaBank FI Research, S&P

2016 2017 2018e 2019e 2020e 2021e 2022e

Sales 31,975 34,898 36,776 38,237 39,290 39,555 40,389

EBITDA 2,023 2,279 2,388 2,472 2,494 2,504 2,517

EBITDA Margin 6.3% 6.5% 6.5% 6.5% 6.3% 6.3% 6.2%

Net Financial Result -363 -283 -268 -271 -258 -225 -192

Tax payments -177 -181 -266 -363 -400 -453 -441

FFO 1,484 1,815 1,854 1,838 1,836 1,826 1,885

Change in WC -21 192 -101 -47 -36 -8 -31

CFO 1,463 2,007 1,752 1,791 1,800 1,818 1,853

Capex net -621 -643 -2,374 -424 -415 -423 -432

FOCF 841 1,364 -622 1,368 1,385 1,395 1,421

Dividends & Equity instr. -326 -351 474 -493 -496 -500 -548

DCF 515 1,013 -148 874 889 895 874

Dividends received net 435 257 250 576 600 606 677

Dividends to minorities -162 -277 -309 -313 -325

Change in Perimeter 582 0 0 0 0

Fx y otros 465 -209 -345 -345 -345 -345 -345

-Change in NFD 1,415 1,061 177 827 836 843 881

NFD reported 1,214 153 -24 -851 -1,687 -2,529 -3,410

NFD/EBITDA 0.6x 0.1x 0.0x -0.3x -0.7x -1.0x -1.4x

Agencies Adjustments to Cash Flow

Tax & Interest dif -252 -323 -300 -300 -300 -300 -300

Operating Leases Cost 252 253 267 277 285 287 293

Dividends Received 435 257 250 576 600 606 677

Adj. EBITDA 2,459 2,466 2,604 3,025 3,080 3,097 3,187

EBITDA Margin 7.7% 7.1% 7.1% 7.9% 7.8% 7.8% 7.9%

Dif Interest & Tax -200 -230 -230 -230 -230 -230 -230

Adj. FFO 1,719 1,772 1,840 2,161 2,191 2,189 2,324

Agencies Debt Adjustments

Operating Leases Present Value 776 751 791 823 846 851 869

Pensions 277 240 240 240 240 240 240

Factoring, etc 785 1,150 1,729 1,798 1,847 1,860 1,899

Debt held for sale 223 40

Financial Guarantees 450 450 450 450 450 450

Cash limitations (Structure & Operational) 2,000 2,000 2,000 2,000 2,000 2,000 2,000

Non Recourse Debt -202 -195 -195 -195 -195 -195 -195

Adjusted Debt 5,073 4,589 4,992 4,265 3,501 2,677 1,853

Adj. NFD/EBITDA 2.1x 1.9x 1.9x 1.4x 1.1x 0.9x 0.6x

Adj. FFO/NFD 33.9% 38.6% 36.9% 50.7% 62.6% 81.8% 125.4%

Interest paid (Lease incl.) 595 489 465 450 426 402 377

Adj. EBITDA Interest Coverage 4.1x 5.0x 5.6x 6.7x 7.2x 7.7x 8.5x

Adj. FFO Interest Coverage 4.3x 4.5x 5.0x 5.8x 6.1x 6.4x 7.2x

ACS

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ACSCE financial position

Following the April 2018 issue via the ACS Servicios Comunicaciones y Energía subsidiary (ACSSCE), which encompasses the Industrial Services division, we now evaluate the debt performance of the same separately. However, it is worth pointing out that we assume full access for the parent company to the cash generated by ACSSCE, meaning the main driver for deleveraging will be the division’s organic growth. We therefore estimate that the funds raised from any disposal and cash generation will be channelled towards the parent company. Thus, in 2018 we estimate that both funds generated from the sale of Saeta (€241 Mn) and cash generated by the business (€219 Mn) will be transferred to the parent company. Even so, we estimate that leverage will be cut by -0.1x NFD/EBITDA to -0.9x, while net cash holds at close to €600 Mn. However, we also believe that the parent company would back the subsidiary should it need to. Furthermore, we believe the division benefits from belonging to ACS Group when seeking financing, and in particular the group’s backing when bidding for new projects.

Table 3.

ACSSCE cash flow and financial ratio estimates

Source: ACS, CaixaBank BPI Equity Research, CaixaBank FI Research, S&P

To adjust leverage we take into account client advances (€847 Mn), factoring and provisions for liabilities, which we estimate add an additional €400 Mn to debt. We thus find a net debt position of €605 Mn at year-end 2017, putting adjusted leverage at +0.9x NFD/EBITDA’17. Despite these adjustments, is also important to point out that the area had close to €1.4 Bn in certified works pending payment at year-end 2017.

2016 2017 2018e 2019e 2020e 2021e

Sales 6,256 6,260 6,507 6,670 6,804 6,940

EBITDA 630 633 658 656 669 682

EBITDA Margin 10.1% 10.1% 10.1% 9.8% 9.8% 9.8%

Net Financial Result -63 -59 -65 -65 -65 -65

Tax payments -85 -93 -95 -94 -97 -100

FFO 482 481 498 496 507 517

Change in WC 118 -190 103 14 11 11

CFO 600 291 601 510 518 529

Operating Capex net -36 -65 -65 -70 -51 -52

Expansion Capex -75 -248 -248 -248 -248 -248

FOCF 489 -22 288 192 219 228

Disposals 92 158 347 0 0 0

Cash to parent co -727 -236 -635 -192 -219 -228

-Change in Recourse NFD -146 -100 0 0 0 0

Recourse NFD -702 -602 -602 -602 -602 -602

NFD/EBITDA -1.1x -1.0x -0.9x -0.9x -0.9x -0.9x

Agencies Adjustments to Cash Flow

Operating Leases Cost 49 69 71 73 75 76

Adj. EBITDA 678 702 729 729 744 758

EBITDA Margin 10.8% 11.2% 11.2% 10.9% 10.9% 10.9%

Adj. FFO 530 550 569 569 582 593

Agencies Debt Adjustments

Factoring & Confirming 146 206 214 220 224 228

Clients prepayments 1,173 821 847 864 882 899

Provisions 168 180 186 190 193 197

Adjusted Debt 784 604 645 671 697 723

Adj. NFD/EBITDA 1.2x 0.9x 0.9x 0.9x 0.9x 1.0x

Adj. FFO/NFD 67.6% 91.1% 88.2% 84.9% 83.5% 82.1%

Interest paid (Lease incl.) 109 105 111 111 111 111

Adj. EBITDA Interest Coverage 6.2x 6.7x 6.6x 6.6x 6.7x 6.8x

Adj. FFO Interest Coverage 9.3x 10.1x 9.5x 9.6x 9.7x 9.9x

ACS

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INVESTMENT REPORT

10 December 2018

Ratings

S&P (26/06/2018) left its ACS Group rating at BBB stable, assuming that FFO/NFD will decline momentarily to 25%-27% in 2018, while this should recover to over 30% next year including dividends from the Abertis Holdco. The agency expects the group operating performance to improve further over the coming years thanks to its focus on cash generation and discipline in terms of working capital. It also believes ACS is committed to a conservative financial policy. As for ACSSCE, the agency assigns the same risk as applied to the parent company. ACSSCE has always financially supported ACS via dividends and intragroup loans, while the agency believes it will be backed by the parent company if necessary. As S&P believes the division is core for the group, it allocates the same rating as to ACS Group.

Trading prices

Charts 9 and 10.

ACS and ACSSCE vs Peers

Source: Bloomberg

BMK: Bloomberg Barclays Euro Aggregate Corporate Total Return Index

Despite being a sector with lower leverage, exposure to the economic cycle means construction and engineering firms trade somewhat wider than the benchmark. ACSSM 2 7/8 04/01/20 is trading very much in line (+16 bps in Z-spread) with the issue from its German affiliate HOTGR 3 7/8 03/20/20. We see similar risk for both, despite ACS having reduced its weighting in capital following the sale of 23.86% to Atlantia. There is no question that management of the German company will remain very much shaped by ACS. Looking at ACSSCE, it is trading considerably higher than the benchmark partly due to: i) poor oil price evolution, ii) the tragedy in Geneva involving the collapse of an Atlantia bridge in the late summer and iii) completion of the Abertis acquisition. However, we believe that yields are attractive, perhaps avoiding the stability in revenues and margins of the division thanks to its geographical and business diversification, compensating the cycles of the different sectors.

Recommendation

In conclusion, we are upbeat on the following aspects of the issuer: i) its leading position in the sector, ii) regional & business diversification that partly offsets its exposure to the cycle, iii) the ongoing deleveraging efforts and cost controls that we anticipate, iv) lower leverage. Looking at trading levels for the ACS issue, we believe the same reflects the company’s risk profile. We therefore initiate coverage with a Hold recommendation against the Bloomberg Barclays EuroAgg Corporate 1-3 Year credit index. As for the issue from the Industrial Services subsidiary (ACSSCE), following a recent correction we upgrade our recommendation to Overweight from Hold against the Bloomberg Barclays EuroAgg Corporate 7-10 Year TR Index benchmark (BBG Ticker: LEC7TREU), offering a pick-up of +105 bps in YTM with a shorter duration (6.7 vs. 7.7).

-1

0

1

2

3

4

5

6

7

8

0 1 2 3 4 5 6 7 8

YT

M (

%)

Adj dur

BMK

ACS

ACSSCE

0

0.5

1

1.5

2

2.5

3

3.5

0 1 2 3 4 5 6 7 8

YT

M (

%)

Adj dur

HOT

ACS

ACSSCE

TECHNIP

FLUOR

FERSM

BMK

ACS

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10 December 2018

Financial appendices

Table 4.

ACS Group

Source: ACS, CaixaBank BPI Equity Research

P &L 2014 2015 2016 2017 2018e 2019e 2020e 2021e 2017-21e

Sales 34,881 34,924 31,975 34,898 36,776 38,237 39,290 39,555 2.5%

Growth % -0.8% 0.1% -8.4% 9.1% 5.4% 4.0% 2.8% 0.7%

EB IT D A 2,466 2,409 2,023 2,279 2,388 2,472 2,494 2,504 1.9%

Growth % -12.9% -2.3% -16.0% 12.6% 4.8% 3.5% 0.9% 0.4%

EB IT 1,598 1,542 1,445 1,626 1,781 1,857 1,859 1,863 2.8%

Growth % -2.6% -3.5% -6.2% 12.5% 9.6% 4.3% 0.1% 0.2%

EB T 782 1,287 1,002 1,417 1,632 1,895 1,917 2,081 8.0%

Growth % -48.1% 64.5% -22.1% 41.3% 15.2% 16.1% 1.2% 8.5%

N et P ro f it 717 725 751 802 900 905 913 999 4.5%

Growth % 2.2% 1.1% 3.5% 6.8% 12.3% 0.5% 0.9% 9.4%

M argins

EBITDA 7.1% 6.9% 6.3% 6.5% 6.5% 6.5% 6.3% 6.3%

EBIT 4.6% 4.4% 4.5% 4.7% 4.8% 4.9% 4.7% 4.7%

Net Profit 2.1% 2.1% 2.3% 2.3% 2.4% 2.4% 2.3% 2.5%

B A LA N C E SH EET 2014 2015 2016 2017 2018e 2019e 2020e 2021e 2017-21e

Net Intangibles 4,620 4,854 4,589 4,431 4,431 4,431 4,431 4,431

Net Fixed Assets 3,315 2,447 1,760 1,537 3,337 3,146 2,925 2,706 12.0%

Net Financials 3,459 4,279 3,994 3,236 2,854 2,932 2,993 3,177 -0.4%

Inventories 1,522 1,468 1,407 1,020 1,075 1,118 1,149 1,156 2.5%

ST Receivables 11,611 10,916 10,988 10,753 11,331 11,782 12,106 12,188 2.5%

Other Assets 6,334 3,201 3,188 3,017 2,907 2,829 2,782 2,750 -1.8%

Cash & Equivalents 8,459 8,115 7,475 7,886 7,975 8,388 8,806 9,228 3.2%

T o tal A ssets 39,321 35,280 33,400 31,881 33,910 34,626 35,193 35,636 2.3%

Equity & M ino rit ies 4,898 5,197 4,968 5,164 6,718 7,401 8,067 8,850 11.4%

M LT Liabilit ies 9,535 10,689 7,934 7,903 7,935 7,935 7,935 7,935 0.1%

o.w. Debt 5,978 7,382 4,907 5,161 5,161 5,161 5,161 5,161 0.0%

ST Liabilit ies 24,888 19,393 20,498 18,813 19,257 19,289 19,190 18,851 0.0%

o.w. Debt 6,204 3,363 3,782 2,879 2,791 2,377 1,959 1,538 -11.8%

o.w. Payables 13,962 13,923 14,864 14,279 14,811 15,257 15,576 15,658 1.9%

Equity+M in. + Liabilit ies 39,321 35,280 33,400 31,881 33,910 34,626 35,193 35,636 2.3%

N et D ebt -88 -1,093 -1,415 -1,061 -177 -827 -836 -843 -4.5%

Capital Employed -1 0 0 0 6,694 6,550 6,381 6,321 -847.3%

Capex -1,070 -393 -621 -643 -2,374 -424 -415 -423 -8.1%

Working Capital -571 625 -21 192 -101 -47 -36 -8 -153.0%

ACS

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INVESTMENT REPORT

10 December 2018

Risks

Macroeconomic risk: (growth, energy prices, interest rates…).

Fx risk: significant exposure to non-euro currencies.

Execution risk: exposure to construction and associated execution risks. Working capital: operating fund requirements for projects could potentially rise.

Past recommendations

Short (1-3y) Medium (3-5y) Long (5-10y)

11/24/2018 Iñigo de las Cuevas Overw eight

ACSSCE vs Bloomberg Barclays Euro-Agg Corp

ACS

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INVESTMENT REPORT

10 December 2018

Javier Marín Head of Rates and Credit Research

+34 91 557 69 41

Strategy & Interest Rates Corporate Credit Research Financials Fernando Murillo

Market Strategy

Iñigo de las Cuevas

Construction & REITS, Infraestructure, Pulp & Paper

David Fernández

Banks & Insurance

Beatriz Villafranca Strategy

Iciar Gómez Oil & Gas, Autos, Consumer

Borja Gamoneda Fixed Income Public Sector

Borja Pagoaga

Telecoms, Utilities

caixabank.analisis@caixabank.com

Disclaimer

Recommendations are for a timeframe of between six months and one year. Recommendations are based on reasonable assumptions regarding diverse variables as per their respective dates of publication. The subsequent performance of these variables (for example: sudden changes to interest rates, exchange rates, cost of capital and other variables that may be either specific to a company or general to a sector) could lead to recommendation changes via the issue of new analysis reports. This document has been created by CaixaBank based on specific methodologies and with the sole purpose of providing recipients with general information as per the publication date. In general terms, five different recommendations are offered. These factor in each issue’s rating, adjusted duration and subordination. Recommendations on debt issues are relative to a benchmark index or another issue stipulated in the report. The index used as a benchmark for the recommendation will be specifically stated on the title page of the report. Overweight: We recommend holding a larger exposure than the benchmark index or the issue stated in the report, as we expect it to offer a higher absolute yield. Hold: We recommend holding the same exposure as the benchmark index or the issue stated in the report, as we expect a similar absolute yield. Underweight: We recommend holding less exposure than the benchmark index or issue stated in the report, as we expect it to offer a lower absolute yield. Under Review: The recommendation has been suspended due to market events or in compliance with prevailing regulations preventing recommendations from being made on the issuer or its issues. No Coverage: The CaixaBank Research team does not provide consistent coverage of the issuer and therefore does not provide recommendations on its issues.

The chart below shows the proportion of recommendations issued during the past twelve months, as well as the proportion of issuers to which significant investment services have been provided:

As per the date of this report, CaixaBank Research Fixed Income, Fx & Strategy has issued 91 recommendations on 36 issuers. Additionally, CaixaBank or companies within its group have provided or currently provide commercial and investment banking products and services, including financing, to all companies on which CaixaBank authors reports, in the normal course of its business.

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Overweight Hold Underweight

43% 41% 16%

Rating Distribution

0%

10%

20%

30%

40%

50%

Overweight Hold Underweight

ACS

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INVESTMENT REPORT

10 December 2018

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Contacts information

Fixed Income Distribution + 34 91 5576979 DCM: + 34 91 700 56 08 / 09 / 10

Ana Alvarez Gaona aalvarez@caixabank.com

Severine Pires spires@caixabank.com

Blanca Selgas baselgas@caixabank.com

Juan Pizcueta japizcueta@caixabank.com

Alberto Diez Hart adhart@caixabank.com

Asier Barrondo abarrondo@caixabank.com

Laura Martinez laura.martinez.m@caixabank.com

Jorge Bento jmbento@caixabank.com

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Ainhoa Landa, CFA alanda@caixabank.com

Lorenz Altenburg lbaltenburg@caixabank.com

Miguel Lafont, CFA mlafont@caixabank.com

Antonio Sanz-Pastor asanzpastor@caixabank.com

Álvaro Aguilar araguilar@caixabank.com

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Natalia Garcia natalia.garcia@caixabank.com