Atlas Arteria: In a holding pattern

About the author:

Author name:

By Nathan Lead

Job title:

Senior Analyst

Date posted:

27 February 2023, 7:30 AM

Sectors Covered:

Infrastructure, Utilities, Banks

• Atlas Arteria (ASX:ALX) the FY22 result provided no major surprises. DPS guidance was unchanged.
• 12 month target price (login to view), based on forecast changes.
• HOLD retained, albeit we think the share price may be putting too much weight on the likelihood of an imminent takeover bid from IFM.

Analysis

We view revenue as the key operating earnings risk for tollroads (given high margins and operating leverage), but ALX pre-released its traffic/revenue data. Looking into FY23, APRR traffic may be flat due to flat French household consumption and real GDP.

Chicago Skyway traffic is likely to decline due to construction works on the adjoining Indiana Toll Road and expected contraction in industrial production (positive outlook from 2024-27).

Dulles Greenway traffic continues to be disappointing in its COVID rebound, with sustained prevalence of working-from-home meaning ALX is flattening out its forecast traffic rebound growth curves. Toll escalation on the APRR (almost 5%) and Chicago Skyway (11.9% in 2023 and maybe c.9% in 2024) is being buoyed by the spike in inflation.

The market continues to wait for two potential value creation events, being: (1) the Dulles Greenway regulatory, tolling and capital restructure; and (2) APRR concession extension.

A legislative outcome is expected shortly as to whether VDOT will be authorised to negotiate a new concession agreement for the Dulles Greenway; if not, ALX will progress a rate cap application for an increased toll with a possible decision in mid-to-late 2024 (we now assume no toll escalation until FY25).

ALX indicated it could use asset and/or ALX corporate level capital to execute a DG capital restructure to deliver sustainable distributions from the asset.

ALX believes an investment package on the APRR that delivers a concession extension is unlikely to be achieved until President Macron’s pension reforms are resolved. Furthermore, ALX says the government is considering what happens to the asset at the end of the APRR’s concession period. 

No change to DPS guidance, with 2H22 DPS of 20 cps (expected to be paid in April) and FY23 DPS of 40 cps. Implies cash yield at current prices is c.5.9%. ALX continues to believe the 40 cps is a sustainable level.

We can’t see the sustained support of the ALX distribution from distributions from the APRR (will be impacted by higher interest rates and commencement of amortisation of Eiffarie debt), Warnow Tunnel and Chicago Skyway.

However, ALX can smooth its distribution across FY23-25 with releases of excess corporate cash plus the planned US$230m capital release from the Chicago Skyway.

Forecast and valuation update

We will update our forecasts further when APRR releases its financial statements. In the meantime, we mildly upgrade APRR (costs) but downgrade its distributions to ALX (revised capex budget).

We upgrade CS EBITDA (finalised 2023 tolls, updated escalation look-back variables). DG downgraded on more extended recovery (we now don’t see it making first distributions until FY29).

Business-as-usual (BAU) valuation +9cps to $5.94, as a result of forecast changes.

At the time IFM bought its stake we think it was implicitly willing to pay A$1.4bn above our BAU valuation for 100% of ALX, now c.$1/sh. We add this to our BAU valuation to estimate a potential takeover price (assumes IFM values the CS in line with our valuation including the poison pill), hence $6.92/s.

12 month target price (login to view) based on a 60% weight attached to our BAU valuation and 40% weight attached to our takeover valuation.

Price catalysts

IFM takeover (already has substantial shareholding and a Board seat). Value accretive extension to APRR concession and capital restructure of Dulles Greenway.

Risks

M&A: IFM exiting its ALX interest and thus takeover speculation exiting the share price. ALX employing value destructive tactics to defend against the takeover bid. ▪

BAU: 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.

Find out more

You can find further detailed analysis of company results this reporting season by browsing our reporting season tag, and view a full list of upcoming results on our Reporting Season Calendar.

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