What is the stock?
GetLink (GET FP) – formerly known as Eurotunnel.
How long have you held the stock?
Two years – we increased our position on the back of Brexit price weakness.
What do you like about it?
Getlink operates the 50km channel tunnel between the UK and France, offering shuttle services and freight operations as well as providing the infrastructure to the rail operator Eurostar. Our investment thesis is premised on the following positive attributes:
- Getlink holds a strong long–term concession agreement (to 2086) signed between the UK and French governments.
- Significant spare capacity to support future volume growth and options to further improve capacity.
- A unique monopoly asset which has a competitive advantage over alternative transportation links, including ferry and air transport, which is playing out through a growing market share.
- Pricing freedom on shuttles, supports growth beyond capacity limits as they can balance pricing with volume elasticity.
- Attractive growth drivers including:
- Rationalisation of the ferry market,
- Capacity utilisation and optimisation,
- New Eurostar routes being launched, including London/Amsterdam this year – Getlink earn a flat fee per passenger indexed to inflation.
- Dividend growth anticipated as FCF builds – DPS grew 15% YoY in 2017 and Getlink has guided for ongoing increases.
We balance these positives against certain risks to the GET story including
- Single asset dependence.
- Forex – 50% GBP and 50% Euro with some volatility inherent.
- Brexit – sentiment hurting in short-term with GBP weakness.
On balance, we believe, at this price, the positives outweigh the risks and as an investor we are accessing a very high-quality asset that is fundamentally under valued.
How is it better than its competitors?
Getlink is a unique asset and doesn’t really have any direct global comparisons.
In terms of operational competitiveness Getlink competes with the ferry operators and air services in the region. To this end:
- Getlink has a monopoly on the tunnel crossing.
- In the Short Straits channel crossing market, Getlink competes with the ferry operators for both truck and passenger shuttles. We believe it has a competitive advantage in terms of:
- Travel time – tunnel crossing takes 90 minutes (all in) versus 3-3.5 hours on the ferry.
- Departure frequency – the shuttle service runs more frequently and runs every day of the year.
- Reliability – shuttle service unaffected by sailing conditions and therefore is not weather dependant.
- In the passenger rail market (Eurostar), the tunnel competes with air and benefits from competitive advantages including:
- Departure and arrival destinations are inner city so that passengers can avoid travel time to/from airports.
- Lead time to departure is much lower than airport security measures.
- Baggage limitations are more relaxed.
- UK airports have significant capacity issues.
- Reliability – weather factors again have little impact on Eurostar services relative to air traffic.
What do you like about its management?
Getlink has had a tough history with significant historical leverage issues. The current management is responsible for turning the business around and making it first solvent and the viable, cash generative, dividend paying story it is today.
What is your target price?
This is not a hard number – it’s based on an IRR of at least 8% – if the annualised return falls below 8%, we would be a seller.
At what point would you sell it?
There are a number of scenarios where we could look to reduce, or sell, our position including:
- When its valuation falls below our benchmark return.
- Something fundamentally changes in the investment thesis to see the value or quality of the asset portfolio or company deteriorate (e.g. continued market share losses).
- Geopolitical risk – if the political environment in France or the UK deteriorates to the point that we do not feel these countries are acceptable investment destinations, or we feel the assets are at risk, we would reduce exposure to assets in these countries.
- We re-position our portfolio for a shift in strategic direction, which could see us reduce exposure to “user pay assets” such as Getlink, which are correlated to macro-economics – e.g. if we see the macro environment deteriorating, we will reduce our exposure to user pay assets and increase our exposure to regulated utilities.
How much has it added to your overall portfolio over the last 12 months?
The total return for Getlink over the last 12 months has been +35.3%.
Where do you see value?
High quality concession operator, which is under-valued at current prices, based on our analysis, which includes:
- Assessment and modelling of attractive concession terms and pricing freedom.
- Strong monopoly position with competitive advantages over their ferry and air peers, which is seeing them gain market share.
- Management team that is executing well.
- Positive macro environment.
- Growing yield.
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