Atlas Arteria: On the road again

About the author:

Nathan Lead
Author name:
By Nathan Lead
Job title:
Senior Analyst
Date posted:
19 October 2021, 7:30 AM
Sectors Covered:
Infrastructure, Utilities

  • Upgrade from HOLD to ADD. 12 month potential return is c.11% and 5 year equity IRR is 8.6% pa.
  • 12 month target price lifts to (login to view), with a recent lift in spot FX partly offsetting beneficial changes to forecast local currency asset performance and valuation assumptions.
  • Key data releases are imminent - Q3 traffic and France October CPI.

Event

We adjust our DCF valuation approach to concession-based assets, and also update our modelling for spot FX, traffic, and valuation roll-forward.

Analysis

We previously assumed a constant cost of equity for calculating the present value of the local currency cashflows from ALX’s toll road investments. We have since refined this approach by adjusting the discount rate to reflect an asset’s NPV gearing (hence varying across time and across assets).

This, combined with a 50 bps reduction in the €-based risk-free rate assumption we apply to the APRR, increased our valuation by 23 cps. 

Roll-forward of the timing of our valuation by six months to CYE-22 increased our valuation by 6 cps.

Unfortunately key spot FX rates (AUDEUR=64c, AUDUSD=74.2c) have moved against our ALX A$ equity valuation since our last note. Updating our FX assumptions based on these spot rates reduced our valuation by 21 cps.

Uncertainty on the shape of traffic recovery and its ultimate steady state remains. However, publicly disclosed peer road traffic data in France (Abertis, VINCI) indicates French traffic strengthened in Q3 (and may actually be running stronger than the 2019 pcq).

This cross-checks against ALX’s indication that the APRR’s traffic had been averaging >5% more than 2019 and 2020 levels during the European summer. We upgrade our forecasts for 3Q21-2Q22 to assume traffic aligns with the 2019 pcq, and then ultimately recovers to trend by 3Q22. This lifts our valuation by 6 cps.

Forecast and valuation update

No changes to local currency forecasts (EUR, USD). Downgrades to A$-translated values (including DPS forecast) due to higher AUDEUR and AUDUSD assumptions. 

Given the steps above, our valuation in aggregate increases by (login to view target price). We set our 12 month target price based on this valuation.

Investment view

ADD given c.11% potential TSR at current prices, including a yield forecast over the next 12 months of 6.7% (predicated on traffic rebounding to trend by 2022).

We assume ALX’s distribution recovers from 11 cps in FY20 to 28 cps in FY21F and >40 cps from FY22.

However, our valuation peaks at $6.77 in 2024, then commences decline through to the end of the APRR’s concession in 2035. This dynamic is captured in our equity IRR calculation – we forecast the five year IRR (buy now-receive forecast distributions-sell at our October-26 valuation) is 8.6% pa.

Price catalysts

Q3 traffic data on 20 October.

France CPI for October (feeds into the APRR’s 2022 toll escalation calculation) – we assume CPI of c.1.2% but recent monthly CPI data suggests this may be too low.

Risks

Traffic growth and toll escalation.

Capital investment activity, including M&A and capital/debt restructuring of the Dulles Greenway.

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Disclaimer: 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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