Atlas Arteria: Come Back IFM

About the author:

Author name:

By Nathan Lead

Job title:

Senior Analyst

Date posted:

01 September 2022, 9:00 AM

Sectors Covered:

Infrastructure, Utilities, Banks

• Atlas Arteria (ASX:ALX) released its 1H22 result (albeit traffic and toll revenue had been pre-released) and also provided first-time guidance for the next two distributions and an update on the IFM takeover approach.
• HOLD retained, on the basis that IFM will at some point return with a takeover offer. 12 month target price (login to view). Forward cash yield 5.0%.

1H22 result analysis

IFM takeover approach: ALX reaffirmed that IFM has indicated it is not presently in a position to meaningfully progress a takeover proposal and has ceased discussions with ALX.

However, IFM currently has a total interest of 19% in ALX, it has received FIRB takeover approval, and ALX is considering IFM’s request to appoint a director to the ALX Board. As such, we believe there is a better than even chance IFM will recommence a takeover process at some time in the future.

DPS guidance: ALX provided first-time 1H22 DPS guidance (to be paid in 2H22) of 20 cps (+29% on pcp) and 2H22 DPS guidance (to be paid in 1H23) of 20 cps (-2% on pcp). At current prices, the DPS guidance implies a cash yield of 5.0%.

APRR (ALX 31%, 84% of ALX equity valuation): EBITDA growth of +23% on pcp was driven by 21% revenue increase and operating leverage. Dividends are teed off accounting earnings, with 31% NPAT growth driven by the EBITDA growth and lower provision for maintenance. The outlook for revenue growth is supported by trade growth (heavy vehicles) and excess household savings (light vehicles). Profit is also supported by company tax rate cuts from 27.5% in FY21 to 25% from FY22.

ALX highlights its positive correlation to inflation, with toll price escalation on the APRR linked to French CPI while debt is largely fixed rate with an average duration of 5.2 years. Our forecasts currently assume October CPI of c.6.6% translating into c.4.8% annual toll escalation in Feb-23.

The high inflation environment may also increase the probability of the APRR being awarded a concession extension by the French Govt. in exchange for capital works, so as to limit cost increases to consumers (the alternative to an extension may be higher tolls).

Dulles Greenway (ALX c.100% economic interest): EBITDA growth of +25% was in line with our forecast. The DG did not distribute any cash to ALX in the period (never has). Assuming traffic recovery and effective toll growth in-line with US CPI, we forecast first distributions from the DG in FY26, albeit our conviction in this view is not strong.

ALX continues to pursue distance-based tolling on the DG and a capital restructure to see sustainable distributions.

ALX: ALX’s end-of-period cash balance of A$132m provides c.$60m of surplus cash over its policy of targeting two years of fund opex cover. We think this surplus will be needed to support ALX’s DPS guidance for the next two payments, with the cash balance declining to c.$100m.

Forecast and valuation update

We factor in the debt and depreciation costs related to the APRR’s €659m acquisition of the A79, but have yet to include its traffic, revenues and ongoing costs given limited disclosure (ie. tolls will be set when the road opens in 4Q22). Instead, we have a placeholder in our valuation equal to the asset’s purchase price.

BAU valuation lifts 17 cps to $6.87/s (this is indicative of the downside risk if IFM announces it is exiting its position in ALX). 12 month target price set at (login to view), being a 60% weight to a takeover price of $8.35/s and 40% to our BAU valuation.

Investment view

HOLD. The share price is trading above our BAU valuation due to IFM’s takeover interest. We think it likely IFM will recommence a bid, but timing is uncertain.

Price catalysts

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

Risks

• A takeover bid not proceeding or extended delays in the deal’s completion. Traffic growth and toll escalation. Capital investment activity. Unexpected changes to inflation and interest rates. Accounting adjustments between the APRR company and consolidated levels impacting dividends paid by the APRR to ALX.

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