Atlas Arteria: APRR traffic emerges from COVID

About the author:

Nathan Lead
Author name:
By Nathan Lead
Job title:
Senior Analyst
Date posted:
21 April 2022, 10:00 AM
Sectors Covered:
Infrastructure, Utilities

  • Good Q1 traffic numbers on the key asset APRR bodes well for a strong lift in ALX’s DPS paid in 2H22 and beyond.
  • HOLD retained, given limited potential returns at current prices.
  • 12-month target price unchanged at (login to view), with no changes to forecasts.

Event

ALX released its March quarter 2022 traffic and toll revenue data. Focus is on the APRR's performance, given it delivers the cashflow supporting ALX's distribution and accounts for c.85% of our ALX equity valuation.

Analysis

APRR (ALX 31.1%) - Both light and heavy vehicles c.3% above the pre-COVID pcq (we were targeting c.1% above pre-COVID) and total traffic c.25% above the 2021 pcq. With the operating and financial leverage in the asset, this bodes well for distribution growth from the asset to ALX and from ALX to its investors.

ALX cited easing of COVID-19 related restrictions in France and a good holiday ski season for the strong traffic. Our analysis indicates light vehicles have effectively returned to trend. Heavies were more resilient than light vehicles during COVID, but their recovery to trend growth is not as obvious.

Dulles Greenway (ALX c.100% economic interest) - traffic volumes (+19% vs 2021 pcq, -36% vs 2019) were distorted by significant snowfall across the region combined with delays in mass return to office-based work arising from COVID.

Volume was 14% below our 1H22F assumption, which was set in line with 2H21A. Our confidence in the shape of traffic recovery and its long-term growth potential is low, given multiple phases of traffic decline in the asset’s life.

Forecast and valuation update

No meaningful forecast changes. Across FY22-26F, we forecast 3-4% compound annual growth in APRR traffic, leveraging into 5-6% pa EBITDA CAGR, and ultimately 12% pa DPS CAGR. Don’t expect the Dulles Greenway to start contributing cash distributions to ALX until FY27 (maybe an overly bullish outlook).

Our forecast is for ALX to pay a cash distribution of 43.5 cps over the next 12 months. At current prices, this implies c.6.4% cash yield.

No change to our sum-of-the-parts ALX valuation of (login to view). While the short-term cash yield is attractive, our NPV modelling indicates ALX’s equity valuation will continue to decline as APRR’s concession expiry approaches in 2035 (terminal value of zero event, with debt needing to be fully repaid prior to this expiry).

Investment view

While the traffic rebound on the APRR looks good and higher inflation bodes well for future toll escalation, the recent strength in ALX’s share price is surprising given the strong increase in global interest rates and recent surge in AUDEUR (ALX does not hedge its FX exposure).

At current prices, we estimate a 12-month return of c.1% and a 5-year IRR of <5% pa. With such compressed potential returns we retain a HOLD on the stock.

Price catalysts

French federal elections currently underway. APRR is negotiating a c.€400m package of works with the French state that it is hopeful for an outcome on during 2022.

Discussion around further works beyond this, particularly requiring a concession extension, are not expected to progress until the election is completed.

Dulles Greenway regulatory change (pushed out to 2023).

ALX Q2 traffic/toll revenue release on 20 July, with lead indicators from data published by French road network owners VINCI and Atlantia.

Risks

  • Traffic growth and toll escalation.
  • Capital investment activity, including M&A and capital/debt restructuring of the Dulles Greenway.
  • Movement in government bond yields / risk-free rates.
  • Accounting adjustments between APRR statutory profit and distributable profit.

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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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