APRR (MQA 25%) – heavies continue to be strong
Macquarie Atlas Roads (MQA) have announced +4.8% traffic growth on the previous corresponding quarter (pcq), benefitting from favourable economic conditions in France and positive network (new sections of road, including an untolled 5.5km from March) and calender (earlier Easter and additional school holiday vs pcq) effects. Toll escalation of 2% from February contributed to +6.6% revenue growth.
Growth in heavy vehicle traffic (approx. 3% higher average toll than light vehicles) of +6% on the previous corresponding quarter, or say 5.3% excluding network and calendar impacts, was well above the 20 year heavy vehicle CAGR of approx 1% per annum. On the face of it, light vehicle growth of +4.5% looked strong, but after adjusting for the calendar (approx. 2.3%) and network (approx. 0.7%) impacts, the underlying growth of approx. 1.5% was broadly in-line with the trailing 10 year CAGR.
We expect toll revenue growth, cost control, substantial debt service savings and legislated tax rate cuts to deliver strong growth in distributions to MQA over coming years.
Dulles Greenway (MQA approx. 100%) – decline as expected
MQA says -6.5% traffic decline on pcq was due to calendar (earlier Spring Break), government (shutdown), and weather (late March midweek snow event) impacts, as well as the ongoing congestion relief on competing routes and rail expansion works. MQA said the decline in the quarter before the snow event and Spring Break traffic was -4.3%, so less than the -5% decline MQA anticipates for 1H18 (and what we continue to have factored into our forecasts).
Revenue declined -4.3% on pcq, with toll escalation less than we'd expected (tolls are rounded down to the nearest 5c). We've reduced our EBITDA forecast by approx. 2% as a result.
Forecast and valuation
MQA's equity valuation is exposed to currency risk related to its investments in the APRR (AUD/EUR) and Dulles Greenway (AUD/USD). Both have been declining recently to the benefit of MQA. Aligning our currency assumptions to spot currency rates lifts our valuation by 17 cents per share. On a business-as-usual basis, we expect MQA's dividends per share to more than double by FY21F compared to FY18 guidance of 24 cents per share. However, our base case equity valuation reaches a peach in FY20F, as the growth in cashflows is offset by decay in the APRR's remaining concession period (expires Nov-35). A five year investment IRR of 10.2% per annum captures this impact (buy at current share price, receive forecast distributions over the next five years, sell at our 2023 MQA valuation).
We have increased our share price target slightly and retain our Add recommendation.
Morgans clients can login to view our detailed report and share price target for Macquarie Atlas Roads (MQA). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.
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.