Atlas Arteria: Arrival of Q4 data

About the author:

Author name:

By Nathan Lead

Job title:

Senior Analyst

Date posted:

27 January 2023, 8:00 AM

Sectors Covered:

Infrastructure, Utilities, Banks

• Release of Q4 traffic and revenue data from Atlas Arteria (ASX:ALX) removes a key risk heading into the FY22 result due to be released on 23 February.
• 12 month target price (login to view), which includes an IFM takeover premium.
• HOLD retained, albeit we think the share price may be putting too much weight on the likelihood of an imminent takeover bid from IFM.

Event

Release of Q4 traffic and toll revenue data. This included first-time data on the A79 (France) and Chicago Skyway (USA).

Analysis

APRR (ALX 32%): FY22 toll revenue increased +8.7% vs FY21, with traffic +8%. Note that the 2021 and 2019 pcp were both boosted by abnormal events. FY22 performance was c.2% below our forecast. We have reduced our EBITDA forecast (traffic, CPI) and increased our debt service forecast (forward rates).

Dulles Greenway (ALX c.100% economic interest): FY22 toll revenue increased +12% vs FY21 with traffic +6.6%. FY22 performance was c.9% below our forecast, which assumed a more rapid recovery in traffic volumes.

Traffic has been flat over the last three quarters, albeit ALX notes that traffic congestion is increasing on alternative free routes which bodes well for future traffic improvement on the DG. For a road whose traffic growth has underperformed over the long run the market may be skeptical on its ultimate recovery.

We have downgraded our forecast by pushing out the traffic recovery year by 12 months to 2024.

A79 (now 100% owned by APRR): Since tolling commenced on 4 Nov-22, traffic has averaged 820k VKT per day, with heavy vehicles making up around 40% of traffic. Toll revenue was €4.2m.

We have not yet included the road in our modelling (we await detail on costs), albeit annualising the Q4 revenue implies the A79’s revenue is <1% of the APRR’s revenue in FY22.

Chicago Skyway (66.7% owned by ALX): FY22 traffic +2.2% on pcp with revenue +5.1% on pcp. Performance was a touch ahead of our forecast, albeit seasonality has been difficult to ascertain based on ALX’s disclosures.

ALX noted that FY22 positively benefitted from roadworks along the competing route on the Frank Borman Expressway. We mildly downgrade our forecasts given US CPI expectations have waned since our last update.

Forecast and valuation update

Business as usual (BAU) valuation reduces 2 cps to $5.86ps. Target price of (login to view) based on 60% probability of takeover (see below) and 40% BAU valuation.

Investment view

ALX’s share price is trading well above our BAU valuation. Note the Chicago Skyway acquisition significantly reduced our BAU valuation because: (1) of the size of the capital raising and its offer price was far below our per share BAU valuation at the time; (2) the transaction cost leakage; and (3) the acquisition price paid by ALX was far in excess of our valuation of the asset.

Given the above, we think the share price already includes a takeover premium reflecting the belief that IFM will move to a takeover bid over time. At the time IFM bought its stake we think IFM was implicitly willing to pay A$1.4bn above our BAU valuation for 100% of ALX, which is now equivalent to c.$1/sh.

Adding this to our BAU valuation (and thus assuming IFM values the CS in line with our valuation including the poison pill) implies a takeover price of $6.84/sh.

Price catalysts

IFM takeover (already has substantial shareholding and a board seat). Value accretive extension to APRR concession. Value accretive capital restructure of Dulles Greenway allowing release of trapped cash and future cashflows.

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.

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