APRR (25% MQA) – strong growth for mature road network
Traffic grew 3.5% on the previous corresponding quarter (pcq) and toll revenues grew by 4.6% (vs our previous 2H17 revenue growth forecast of 3.3%). The strong heavy vehicle growth (+7.1% on pcq) was particularly impressive given there was one less workday in the period than the pcq. As well as the strengthening European economic conditions (and additional motorway sections), we speculate the strong growth in truck traffic may be partly due to increased internet-based shopping.
We have lifted our forecasts by assuming above trend traffic growth continues until mid-2019, before reverting to an unchanged long-term growth rate. This delivers a 3-4% uplift to our forecast EBITDA and 5-6% increase in forecast distributions to MQA across FY18-20F.
Dulles Greenway (100% MQA) – declining traffic
The road reported a -0.3% decline in revenue on the pcq, driven by a -3.2% decline in traffic. Traffic was negatively impacted by congestion relief as a result of widening works on competing free routes and the Metrorail extension construction activities which reduced Dulles Greenway capacity in the period. MQA continues to caution that traffic will continue to be impacted by various competing network improvements and construction activities over the next 24-36 months. We assume the decline in traffic seen in the September quarter continues through to mid-2018 and then a further 1% per annum decline to mid-2020. Changes to forecasts are immaterial.
Due to the assumed negative traffic growth, our forecasts indicate that the Dulles Greenway will not exit distribution lock-up until 2019, with first cash distribution to MQA in 2020.
Our forward valuation lifts 28 cents per share as a result of the APRR forecast changes. Rolling forward our valuation to December 2018 lifts our valuation by a further 9 cents per share. We set our 12 month share price target (A$6.13) in line with this revised MQA equity valuation.
Our MQA valuation peaks in 2019, before decay of our APRR valuation commences as the expiry of the concession draws closer and the cashflow uplift from substantial interest cost savings has been realised. However, we forecast a significant step-up in dividends per share in 2019. Further material change is delivered by French company tax rate cuts (33% down to 28%) benefiting 2021 distributions. Note the market may treat MQA as cum capital raising, given MEIF2 has not yet fully exited its position in the APRR asset.
Key risks to our investment view include traffic, toll escalation, currency exposure, interest rates, external management, capital management and M&A.
We retain our Add recommendation.
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