Atlas Arteria: Traffic rebounds while awaiting the takeover bid

About the author:

Nathan Lead
Author name:
By Nathan Lead
Job title:
Senior Analyst
Date posted:
20 July 2022, 2:30 PM
Sectors Covered:
Infrastructure, Utilities

  • The strong rebound in APRR traffic continues in line with our expectations, supporting an outlook for attractive distributions from ALX (if it remains listed).
  • Short-term share price performance will be influenced by what seems to be imminent takeover activity. Hold retained, with an increased share target price (login to view).

Event

  • ALX released its Q2 traffic and toll revenue data, which is the key earnings risk leading into its 1H22 result (due 31 August). Traffic and revenue is recovering broadly in line with our expectations on both key roads (APRR, Dulles Greenway).

Analysis

  • APRR (c.85% of our ALX equity valuation): 1H22 traffic (+23% on pcp) and toll revenue (+20% on pcp) was effectively in line with our forecast, albeit mix was more skewed to light vehicles than assumed. APRR traffic was above pre-COVID levels by c.2%. ALX cited the APRR’s resilience to higher fuel prices and supportive domestic tourism.
  • Dulles Greenway: Traffic (+12% on pcp) and toll revenue (+20%) was marginally ahead of our forecast, but traffic is still >30% below pre-COVID. Movement in average toll suggests there was a greater proportion of peak period traffic than normal, which we assume will normalise as traffic recovers.

Forecast and valuation update

  • With traffic and revenue broadly as expected, we leave asset level earnings forecasts effectively unchanged. DPS forecast reduces by c.1%. With the stock facing takeover activity, we acknowledge these forecasts are somewhat irrelevant.
  • ALX stand-alone valuation lifts 4 cps to $6.53/share, due mostly to update to spot FX. This is indicative of the potential downside if IFM does not carry through with a takeover bid.
  • 12-month target price lifts (login to view). This is our guestimate of the price IFM may ultimately need to pay to succeed in its takeover, similar to what happened with the takeovers of infrastructure stocks SYD, SKI, and AST whereby the initial bid price was nudged up to see the deal receive support.

Investment view

  • Hold. IFM is a well-known Australian infrastructure manager (one of the protagonists in the SYD takeover) so unlikely to commit to the on-market purchase of 15% of ALX and indicate a potential takeover without intending to follow through with a formal takeover bid.

Price catalysts

  • A higher bid price than the $8.10/share that IFM paid for its initial 15% interest in ALX.

Risks

  • A takeover bid not proceeding or extended delays in the deal’s completion.
  • Traffic growth and toll escalation.
  • Capital investment activity.
  • Unexpected change in inflation and interest rates.
  • Accounting adjustments affecting distributions from APRR

Find out more

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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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