Empresas ICA: Viva La Infrastructure

Leading Mexican engineering and construction company, Empresas ICA, S.A.B. de C.V. (ICA), is well-positioned to benefit from large, multi-year infrastructure program. We are initiating coverage with a BUY rating.

INVESTMENT THESIS

• Mexico President Calderon unveiled a comprehensive National Infrastructure Plan [NIP] in July 2007, with over 300 key projects slated for bidding through 2012. As Mexico’s largest engineering and consulting firm, ICA is well-positioned to capture significant business due to this initiative.
• Projects will be managed through public-private partnerships and are expected to generate opportunities worth nearly Ps. 2.4 Trillion ($235 Billion), according to US ambassador to Mexico Tony Garza.
• Focal areas of the NIP include 5 new seaports; 3 new airports; 11,000 miles worth of highway work; 50 water-related projects; and up to 40 energy-related projects.
• With core competency in civil and industrial construction, highway and airport operation and maintenance, and housing, we expect ICA to be a significant beneficiary as projects become reality.

RISKS

• In many cases, project starts depend on “rights of way” or other similar land titling. This process has historically been slow and cumbersome.
• Raw materials costs could impact profitability of projects.
• Our estimates assume projects are put out to bid without significant delays, which could impair their ability to be completed during the current presidential term.

At long last Mexico appears to have the political leadership and financial wherewithal to effect significant improvements in its national infrastructure. Foreign direct investment continues to climb, with US outsourcing of manufacturing operations to Mexico representing one example of the trend. In addition, trade activity continues to be strong, with NAFTA serving as an important catalyst. In order to maintain this momentum, and faced with a long-running need for major infrastructure improvements, President Calderon unveiled a comprehensive National Infrastructure Plan [NIP] in July 2007.

This plan represents a significant catalyst for multiple industries, as aggregate investment could reach as high as $235 Billion, or Ps. 2.4 trillion at current exchange rates.

Bid proposals for over 300 key projects are expected to be announced over the next five years in multiple areas:

• Seaports - Five new seaports are expected to be built, along with expansion or modernization of another twenty-two existing ports. Private investors are anticipated to provide roughly $6.6 Billion of the funding for seventeen of the upgrade projects.
• Airports – Three new airports are expected to be built while an additional thirty-one will be modernized. The new airports will be in the Riviera Maya, Puerto Penasco, and Ensenada.
• Highways – Roughly 11,000 miles of roads, both highways and rural, will be either built or refurbished with an aggregate earmark of $26.6 Billion.
• Energy – Over $110 Billion is budgeted for energy projects. Of the total, $76 Billion is slated for up to forty projects tied to hydrocarbon capacity, exploration, refining, and production. An additional $35 Billion is expected to be spent on electrical infrastructure.
• Environmental – In order to insure an adequate supply of potable water, $14 Billion is allocated for fifty water-related projects. This includes three new aqueducts, seven wastewater treatment plants, and upgrades to thirteen existing treatment plants.

We feel that ICA is well-positioned to be a primary beneficiary from this significant investment in infrastructure.

ICA is Mexico’s largest engineering, construction, and procurement company, with expertise in multiple key areas including civil and industrial construction, highway and airport operation/management, and housing. In Mexico, the construction market is very fragmented, with ICA garnering roughly a 6% share. The contract bidding process in Mexico is very fair and transparent, and offers no incumbent or domestic advantages. As a result, competition for business is stiff, with engineering and consulting firms worldwide recognizing the opportunity to win contracts.

Nonetheless, while the process itself favors no one, domestic firms with a history of experience on their side certainly have an incremental advantage in preparing their bids. With many projects bid in phases, in cases where ICA was the contractor for earlier work, such as the Mexico City subway, it possesses a decided informational advantage.

On the whole, ICA is focused on larger projects and expects to win roughly 25% of the contracts it bids on. With the NIP opening an immense number of projects to bid, we expect ICA will have no shortage of opportunities to participate.

Comments

[MexCom:]

Not much comment or analysis here making investment results more spectacular when expose coverage hits. I added to my position today.

My interest comes from recent news on a major oil discovery in the Gulf of Mexico. ICA's work covers oil drilling platforms and petro-chemical plants. When the oil starts flowing - look for dividends and great long-term growth.

The Carlos Slim empire supports them to the hilt. A no fail enterprise, IMHO.

Sep 15 11:18 AM