APRR (ALX 25%) traffic growing at above trend rates
In 1H18, Atlas Arteria (ALX) reported that light vehicle traffic increased 4.3% on the previous corresponding period, while heavy vehicles increased 6.3%. This growth is above the compound growth seen between 2009-2017 of 1.7% for light vehicles and 2.5% for heavy vehicles per annum. Strikes in France (rail, pilots) boosted traffic (particularly light vehicles) meaningfully. Calendar and network effects mostly netted out.
The strength of French economic conditions is driving underlying growth well above trend. Toll revenue increased +6.8% on the previous corresponding period. This bodes well for EBITDA growth in 1H18 (we target approx. 7% growth), given the operating leverage in the business and typically constrained costs (usually driven by headcount reduction and increasing automatic transactions).
Forecast upgrades from incorporating the 1H18 data lifts our ALX valuation by 12 cents per share.
Dulles Greenway (ALX approx 100% economic interest) traffic in decline
1H18 traffic declined -5.9% on the previous corresponding period, weaker than our forecast and ALX's expectations of a 5% decline (ALX says it was in-line after adjusting for weather impacts). Traffic was again impacted by improvements to competing routes. The weaker traffic than expected flowed into a 3.6% decline in toll revenue, approx 1% below what we had assumed. This has thus impacted our EBITDA forecast by an equivalent amount, such that we now anticipate an approx. 5% decline in EBITDA. The downgrade has reduced our ALX valuation by 3 cents per share.
1H18 result due on 30 August
With toll revenue now disclosed, our focus will be on opex containment, interest cost reduction, tax and D&A (given the APRR's dividends are constrained by accounting profits). We are optimistic that initiatives are underway to eliminate the amortisation of the Eiffarie debt following the interest rate hedge expiry in June, albeit the decision rests not with ALX but Eiffage (holds the controlling interest in APRR). We have assumed this occurs (an arguably aggressive assumption), which contributes approx. 8 cents per share to the step-up in our dividends per share (DPS) forecast in FY19.
With a new CEO-elect and this being a half-year result, we do not expect a change to FY18 DPS guidance of 24 cents per share. Also look for comments on the progress of internalisation.
Next key events
- Q3 traffic/toll revenue data to be released on the 23rd of October
- France October CPI for Feb-2019 APRR toll increase
- MEIF2 kicking off the sale of its remaining approx 7.8% stake in the APRR (timing uncertain), which will trigger the pre-emptive sale process involving ALX (ALX's pro-rata share is approx 4.7%)
- Settling of APRR agreed valuation for MAF performance fee calculation (occurs upon termination of external management, the latest being May 2019)
The market will also be interested in the direction that the new CEO leads ALX, whether that is business-as-usual with existing assets or growth-by-acquisition.
We retain our Add recommendation with an increased share price target (Morgans clients can login to view).
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