Atlas Arteria: APRR’s rebound continued in Q4

About the author:

Nathan Lead
Author name:
By Nathan Lead
Job title:
Senior Analyst
Date posted:
28 January 2022, 11:30 AM
Sectors Covered:
Infrastructure, Utilities

  • The highlight of the Q4 traffic and revenue data was the continuing strong recovery in the APRR’s traffic (APRR accounts for c.85% of ALX’s equity valuation).
  • ADD retained, given potential return and leverage to both sustained traffic recovery and higher inflation.
  • 12-month target price lifted to (login to view), mostly due to lower FX rates.

Event

Atlas Arteria (ASX:ALX) has released its December quarter 2021 traffic and toll revenue data, which shows toll revenue for key asset APRR (France) has rebounded broadly in-line with our expectations. The Dulles Greenway continues to be depressed vs pre-COVID levels.

Analysis

APRR (ALX 31%): FY21 traffic and toll revenue was down -5.6% and -2.6% vs FY19, respectively. The extent of traffic recovery was evident in the Q4 data, with traffic the highest ever recorded by the APRR; growth was +2.3% on the 2019 pcq, particularly noteworthy given the 2019 pcq was boosted by strike activity impacting rail and air travel. ALX says mobility restrictions remain relatively relaxed in France.

The Q4 performance was in line with our expectations, so our APRR forecasts remain unchanged. We assume APRR traffic exceeds FY19 in FY22F, and returns to the long-term trendline from FY23F.

Further support for the earnings outlook comes from higher France CPI (we target 2022 toll escalation of 1.9%), low interest rates, and company income tax rate cuts (falling from 31% in FY20 to 25% in FY22F). 

Dulles Greenway (ALX ~100% economic interest): FY21 traffic and toll revenue decreased 35% and 33%, respectively; traffic in 4Q21 was 27% below the 2019 pcq and below our expectations. Sustained traffic recovery requires an increase in weekday traffic (on average down 32% vs 2019) from return to the office.

We trim our short-term traffic forecasts by assuming traffic recovers to pre-COVID by FY23 (6 months later); forecast EBITDA is downgraded 4% in FY21 and 16% in FY22. Exit from distribution lock-up is not expected until FY26, with first cash distribution to ALX in FY27.

Forecast and valuation update

Local currency asset forecast changes reduce our valuation 2 cps. Reduced AUDEUR and AUDUSD compared to our last research note offset this and lift our valuation to (login to view).

Given the modelling changes (particularly lower spot FX), we lift our forecast of distributions paid by 2-3% from FY22F. We now expect paid DPS to grow from 28.5cps in FY21 to c.45/48/51cps by FY22/23/24F.

Investment view

ADD retained. At current prices, we estimate potential 12 month return of c.15% (inc. 7% cash yield) and c.8% pa IRR over 5 years.

The difference between the short and long-term return estimates is due to the forward valuation decay we expect as the APRR approaches its concession expiry in 2035 (with debt to be fully repaid).

Price catalyst

Potential major capital works being awarded to APRR post France presidential election in 2022.

Dulles Greenway regulatory change (2022).

FY21 result on 24 February.

Risks

Traffic growth and toll escalation.

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

Movement in bond 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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