- The December quarter data release provided further evidence of continuing strong growth on MQA's APRR asset and traffic decline on the Dulles Greenway.
- We expect a number of positive drivers to propel MQA's share price higher in 2018, with the size of internalisation fee leakage and higher government bond rates the key investment risks.
- After updating for France tax changes, December quarter toll revenue data and macro assumptions we upgrade our 12 month share price target.
Solid growth on the APRR (25% MQA) continues
Macquarie Atlas Roads (MQA) reported CY/FY17 growth in traffic (3.2%) and toll revenue (4.2%). Of particular note was the strength in heavy vehicle traffic in the December quarter (+8.2% vs 5 year CAGR of 3.1% per annum). MQA notes the favourable economic environment in France and the inclusion of additional motorway sections as part of the agreed stimulus plan with the French State. While 2H17 traffic growth was marginally ahead of our forecast, toll revenue was broadly in-line due to lower effective tolls than we had forecast. We expect the revenue growth will leverage into approximately 5% EBITDA growth, with declining interest costs also a feature of the FY17 result.
Our forecasts assume current overall traffic growth fades to a long-run average of 1.6% per annum from CY20, which implies an eight year forward CAGRs similar to that achieved over the last eight years.
Dulles Greenway (100% MQA) traffic decline was expected but still disappointing
MQA reported 1.3% decline in traffic and 1.6% growth in toll revenue on the Dulles Greenway (DG) for CY/FY17, marginally weaker than our forecast of -1% and +1.7%, respectively. As previously discussed, the traffic weakness is due to improvements to competing networks and Metrorail extension construction activity. We expect 1.3% EBITDA growth (MQA definition) in FY17. We forecast declining traffic for 2018 and 2019, with the DG providing first cash distribution to MQA in FY20.
Next key events
MQA will release its FY17 result on 28 February. With toll revenue now disclosed, our focus will be operating cost control and interest cost reduction. MQA has committed to updating the market on the progress of its internalisation initiative by the time of its AGM (we assume the fee leakage to Macquarie will include approximately $66m for accrued performance fees and approximately $121m for advisory and support services, to be funded by a capital raising or share issue to Macquarie).
The AGM is expected in late April/early May.
We expect a number of positives in 2018 from the APRR, including ongoing traffic strength and substantial interest cost reduction. Medium term, the equity value of MQA's stake in the APRR will benefit from legislated cuts to France's company tax rate (from 39.4% in FY17 to 25.83% in FY22). Furthermore, the Morgans' house view is that the AUD/EUR will fall from approximately 65 cents currently to mid-50s by 2020 (which could lift our MQA valuation into the mid-high $7/share range).
While we remain cautious on the potential fee leakage to Macquarie (particularly given Macquarie has exited its shareholding in the stock), once internalisation is complete we view MQA as a potential takeover candidate.
Even without the M&A upside, we find the growth in distribution attractive, forecasting MQA to more than double its dividends per share between FY17 and FY20.
We retain our Add recommendation with an upgraded share price target.
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