A small earthquake shook Sacyr on September 25, the day the Miami International Court (ICC) issued an award for claims of cost overruns incurred by the company during the works of the expansion of the Panama Canal. It was a slap with a stone name: basalt. The company and its partners (grouped in the Gupc consortium) had been in dispute for a decade because the properties of the basalt of the work, the main source with which the concrete (mixture of cement, sand and gravel) had to be elaborated for the construction of the third set of canal locks, did not provide the necessary level of quality due to the alleged bad data provided by its client, the Panama Canal Authority.
A previous award of the Dispute Arbitration Board gave the reason to the consortium in which Sacyr participated with 41% of the weight (they received 265 million dollars in compensation), but last day 25 the ball fell on the other side and Gupc will be forced to return 240 million. Although the sum of the two awards is positive for Sacyr, it sets a precedent – and so the market has read – that could affect the rest of the claims that the company expects to see fulfilled: one for labor overruns as a result of a change in legislation and another as a result of being forced to stop the works.
The punishment in the Stock Market has been important: the capitalization has fallen since that day by 250 million euros. But the experts do not seem to share the sentiment of the park: of the 12 analysts who follow the value, nine recommend buying and another two, keeping the titles. “Although it is true that it is now much less likely to receive income from the rest of the claims, we believe that it should not be ruled out charges for the more than 4,000 million dollars that still remain to be settled – and whose resolution could be extended until 2025 -“, Banco Sabadell points out in a report, which changed its advice from selling to buying.
The impact of the award, according to Bankinter analysts, was “about 10% of the total market capitalization”, but the punishment has been much higher despite the fact that, in the medium term, the analysts’ vision does not change: ” The impact of the sentence can be considered specific ”.
In recent times, Sacyr has also been the protagonist of other news outside its business, such as the wiretapping of Villarejo commissioned by BBVA to stop the construction company from taking control of the bank 15 years ago. But outside of the covers, his activity has undergone an important transformation. With more than 43,000 employees in the world (more than 29,000 in Europe), it has taken steps to become a concession company supported by two arms: a construction company and a service firm. 77% of the current operating profit of 348 million comes from the concessions. With a turnover until June of 2,079 million euros (4,170 million in all of 2019), its project portfolio at the moment does not stop growing and is close to 40,000 million, of which 27,600 are in concessions. Some contracts, they say in the company, that have formulas to mitigate the risks of falling traffic or demand in 90% of cases and that give them stability at a turbulent time for companies around the world.
Since 2014, the company chaired by Manuel Manrique has improved its profitability (from 8.7% in 2014 to 16.7% in this first half), is more international and has seen its operating profit skyrocket. It has also improved the quality of its debt (reducing recourse debt to 840 million and linking the rest to concession projects) and invests between 150 and 200 million in new concession businesses each year. The question is whether the virus will affect them, given that they have swung towards a model dependent on public procurement with a good part of their business in Latin America and the budgets of governments – especially in that continent – have been strongly pressured by the covid. “It is not foreseeable that any signed contract will be renegotiated or canceled, quite the contrary,
Nor do they think that the situation will impact their construction branch. Partly because 50% of the work carried out is for the infrastructures that Sacyr itself will later operate as a concessionaire, be they hospitals, roads, bridges or any other asset. At the end of this year, in addition, the company will add to its activity the Italian highway A3 that connects the towns of Naples, Pompeii and Salerno with a daily traffic of around 170,000 vehicles. The award, which took place at the end of last year, involves an improvement and exploitation contract that requires 390 million in works and will mean long-term income of 2,700 million euros for the consortium in which Sacyr participates with 49%.
The services branch has been more affected by the situation and, specifically, its restoration company that serves hospitals or public buildings, but it barely accounts for 1% of the company’s turnover.
What eaten for what is served
Another stone in the backpack has been the deterioration of its 8% in Repsol, a stake that forced it to record losses in 2019 of almost 300 million. Until June of this year, the group had a profit of 70 million and Repsol’s contribution subtracted 18. The company says that it has “completely covered” the risk of drops in the price of the oil company’s share, but in exchange it has to dedicate the dividends it charges from the company to cover its backs.
With low rates and a structure like the current one, expectations should be promising: “Let’s forget Panama”, insists the analysis of Sabadell. Despite the success of the work itself, Sacyr has paid dearly for the reputational cost of everything that has surrounded the canal project. Perhaps there is no other challenge as great as that of building the expansion of one of the greatest engineering gems in the world, but with highways, hospitals or trains under concession in diverse markets, Sacyr should breathe easy.