Atlas Arteria: No major surprises

About the author:

Nathan Lead
Author name:
By Nathan Lead
Job title:
Senior Analyst
Date posted:
27 August 2021, 7:00 AM
Sectors Covered:
Infrastructure, Utilities

  • With toll revenues already know, there was no major surprises in the 1H21 result.
  • We think DPS guidance of 15.5cps is the start of rapid DPS growth over coming years as the Atlas Arteria's (ASX:ALX) traffic recovers. Target price (login to view target price).
  • HOLD retained, as we think the share price adequately reflects NPV headwinds. 

Event: 1H21 result

Toll revenue was pre-released alleviating a key risk going into the result. As such, the focus was on cost and capital management.

Key result details

APRR (ALX 31.1%): EBITDA increased +23% on pcp (revenue +19%, margin +230bps, but traffic still -17% below 2019 pcp), beating our forecast due to lower operational taxes than expected.

Operating leverage was evident in consolidated NPAT being up +50% (albeit this was slightly diluted by a c.2x increase in consolidation adjustments). EBITDA still has some way to go to exceeding the €935m achieved in 1H19, albeit ALX reported traffic during the European summer has averaged >5% above 2019 and 2020 levels.

Dulles Greenway (ALX ~100% economic interest): EBITDA increased +5% to US$20m (revenue +2%, margin +230bps, traffic -41% below the 2019 pcp) in line with forecast; 1H19 was US$36m.

The DG has US$79m of cash locked up that would otherwise be available for distribution if lender debt tests were met. Unfortunately, we don’t expect those tests to be passed until 2027/28, given step-up in debt service from FY22.

ALX is seeking legislative reform to allow for distance-based tolling, partly dependent on Virginian general elections in November. This, and potentially restructuring the debt (using asset and corporate cash), is ALX’s strategy to achieving sustainable distribution releases from the asset.

ALX: Corporate cash exited HYE-21 at A$133m and we think it could end FY21 at c.A$153m. We think this gives ALX >$100m of excess capital over one year’s working capital. Fund level costs have stepped up towards $30m/yr, due to higher insurance and investment in capabilities.

Distribution guidance

ALX guided for a 15.5 cps distribution to be paid in 2H21 (ultimately paid from the NPAT of the APRR), which was 2.5 cps ahead of our expectations. Distributions from the APRR will continue to be the primary distribution funding source.

Forecast and valuation update

Local currency forecast changes are minor. We update our spot AUDEUR and AUDUSD assumptions, which have reduced since our last ALX research note. Our June-2022 valuation increases 11 cps to $6.44/sh, with +4 cps from the forecast changes and +7 cps from the FX update (ALX has naked FX exposure).

Investment view

We expect DPS to grow rapidly over coming years, if our forecast of APRR traffic recovery proves correct (driven by border re-openings, easing of movement restrictions, and high vaccination levels in Europe) and legislated French company tax rate cuts through to FY22 remain unchanged.

Given the current ALX price, we expect the forward yield to lift from 4.8% over the next 12 months to c.8% by FY24.

While the DPS outlook will likely attract income-oriented investors, we think investors need to consider the potential for their total return to be impacted by the decay in the valuation of the APRR (c.84% of ALX’s valuation) caused by its concession expiry in 2035 drawing closer (a major package of capital works that could generate returns to offset this decay is unlikely to be agreed with the French State until after the presidential elections in 2022).

We think this trade-off is appropriately captured in the share price trading close to our valuation.

Price catalysts

Traffic improvement, with indications from traffic data released by peer road networks in France and ALX’s Q3 data on 20 October.

Risks

  • Traffic growth and toll escalation.
  • M&A activity.

Find out more

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Disclaimer: Analyst may own shares. The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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