Atlas Arteria: Another infra player gets a (likely) bid

About the author:

Nathan Lead
Author name:
By Nathan Lead
Job title:
Senior Analyst
Date posted:
08 June 2022, 10:30 AM
Sectors Covered:
Infrastructure, Utilities

  • Atlas Arteria (ASX:ALX) looks likely to receive a takeover bid from Infomedia Limited (ASX:IFM).
  • 12 month target price set in line with IFM’s on-market purchase price of (login to view).
  • HOLD retained, given potential for a formal takeover price to be higher than the current share price.

Event

IFM has acquired a c.15% interest in ALX via on-market purchases at $8.10/share. It intends to request access to due diligence material from ALX to assess whether it will submit a non-binding indicative takeover proposal.

Analysis

On our estimates, IFM’s purchase price implies 13.7x proportional EV/forward EBITDA, or c.11x excluding our valuation deduction for fund opex.

Note differences in remaining concession periods (c.85% of our ALX valuation comes from ALX’s stake in the APRR which has c.13.5 years remaining on its concession) and regional economics makes these multiples difficult to compare against others in the space.

We estimate the bid price implies c.3% pa equity IRR. Take out all fund level costs and this lifts to c.4% pa. IFM could layer in fund level gearing and more HoldCo debt to enhance equity returns further. However, this adds risk to the structure and justifies a higher target return.

Forecast and valuation update

Small updates to forecasts to reflect the APRR’s recent bond issue (at a quantum and at rates higher than seen in recent times given the surge in market interest rates) and changes in spot AUDEUR and AUDUSD since our last note.

Our stand-alone valuation lifts from (login to view) per share, as a result of the above forecast changes. Factset consensus target price is (login to view) per share.

For us to justify IFM’s purchase price requires, amongst other things, more aggressive assumptions than we make regarding traffic growth, macro variables, sizable capital deployment at returns above cost of capital, gearing, FX rates, and/or finite vs. perpetuity life assets.

12 month target price set in line with IFM’s on-market purchase price of (login to view) per share. However, applying a typical 20-30% takeover premium to the last undisturbed pre-bid trading price implies a price range of $8.50-9.20 per share.

Investment view

Toll-roads have attractive inflation-linked toll escalation and ALX’s simplification of its structure has improved its appeal as an M&A target. However, we are somewhat surprised by the timing of this bid given ALX’s recent share price strength and the relatively short remaining concession period on the APRR.

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 purchases and indicate a potential takeover without intending to follow through with a formal takeover bid.

Price catalysts

  • A higher bid price than $8.10/share once IFM completes due diligence.

Risks

  • A 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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