Short-Term Woes Present Rebound Opportunity

BMI View: We remain positive towards Mexican infrastructure company Empresas ICA despite a poor set of first quarter 2013 results. Despite the negative investor reaction played out on the company's stock price over recent weeks, we maintain a more medium - term favourable outlook and therefore see room for recovery in the share price. The fundamental landscape in Mexico's infrastructure sector looks strong, with the outlook for concessions especially sanguine.

Despite disappointing headline results, there are bright spots in Empresas ICA 's Q1 2013 earnings release. Importantly, traffic volumes at the company's concessions have been improving, paving the way for further gains, and reinforcing our positive outlook for new concessions in the country. At the same time, construction order backlog remained relatively stable, indicating improved margins going forward.

ICA anticipates that its revenue should rebound in the latter quarters of the year, with a 9-12% increase expected over the year as a whole. At the same time, it is anticipating Adjusted EBITDA margin to remain at a healthy 13-15%.

Empresas ICA Q1 2013 Results, MXNmn (unless otherwise stated)
Q1 2012 Q1 2013 % Change y-o-y
*As of December 2012, **Average Daily Traffic Volumes, Source: Empresas ICA
Revenues 9,507 6,909 -27.3
Operating Income 817 595 -27.2
Operating Margin ( %) 8.6 8.6
Adjusted EBITDA 1,406 1,110 -21.1
Consolidated Net Income 986 263 -73.3
Construction Backlog 32,734* 30,346 -7.3
Concessions: Highway Traffic (ADTV**) 17,974 26,711 48.6
Concessions: Airports, Passengers ('000s) 2,896 3,029 4.6

The company was hit this quarter by a combin ation of cyclical pressures which severely dented revenues and profitability in the construction sector - the company's largest area of operations. The coinciding of a completion of existing projects and start up of new projects saw the construction unit's operating margin head into negative territory for the quarter. However, this should improve, as new projects get underway. The company has a healthy project pipeline and is anticipating revenue to recover in H2 2013.

Construction Weighs Down Operations
Revenues By Unit, MXNmn (LHS) And Operating Margin By Unit, % (RHS)

One area of concern is the transition period, which is currently taking place in Mexico's construction sector, leading to a period of low activity. Construction sector growth plummeted in the final quarter of 2012 and is expected to make a sluggish recovery in the first quarter of the year, before picking up in the latter nine-month period. In addition, new contract awards have been limited whilst the political transition takes place, and the new government (under President Enrique Peña Nieto) compiles its National Development Plan. With ICA so exposed to Mexico for contracts, any delays in contract progress will weigh on backlog.

Despite this concern, overall we believe that ICA is well placed to benefit from anticipated strong growth in Mexico's construction sector, as well as sporadic opportunities in Central America. The company's concessions units (including airports) have been a bright spot, and with Nieto expected to open up further opportunities for private operation of infrastructure assets we see this as a continued growth area.

With these fundamental strengths in mind, we maintain our long-term positive outlook for ICA's share price, which has been in place since October 2011 ( see our online service, 'Strong Fundamentals Support Our Optimism For ICA Over IDEAL', 14 October 2011). Consequently, we anticipate that ICA's share price should rebound and return to growth over the medium term. Despite the steep drop exhibited over recent weeks, the share price held a key resistance level at MXN31.2 and the daily Relative Share Index is in over-sold territory, indicating that the worst could be over for this sell-off.

Rebound On The Cards?
Empresas ICA, MXN
This article is tagged to:
Sector: Infrastructure
Geography: Mexico, Mexico, Mexico, Mexico

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