- FY17 asset performance for Macquarie Atlas Roads (MQA) was largely as expected, with solid APRR growth and weakened Dulles Greenway traffic/profitability.
- Revised FY18 DPS guidance of 24 cents per share implies a 4.3% yield at current prices.
- While internalisation uncertainties and rising bond rates may hold back the stock in the short term, we see multiple drivers delivering distribution and capital growth.
APRR (25% MQA) continues to deliver
FY17 traffic (+3.2% growth on the previous corresponding period) and revenue (+4.2%) had been pre-disclosed. EBITDA growth of +5.3% was in-line with our forecast, and delivered approximately 70 bps margin expansion in 2H17.
Debt service reduction continues, with a drop of €69m (-40% on the previous corresponding period) in 2H17. FY18-19F should see further substantial declines, triggered by expiry of legacy Eiffarie swaps in June-18. 2H17 capex of €206m was below forecast, contributing to a lower net debt balance (€8.4bn). The reduced forward capex budget further improves the net debt outlook.
Cashflows were impacted by a once-off additional tax of 5% (€43m) in FY17, with legislated (material) tax cuts across FY19-21 supporting earnings and dividend growth.
Changes to forecasts have lifted the medium-term dividends we expect from the asset, and increased by valuation by 22 cents per share.
Dulles Greenway (~100% MQA) impacted by competition
FY17 traffic (-1.6% growth on previous corresponding period) and revenue growth (+1.3%) had been pre-disclosed. EBITDA growth (+1.1%) saw costs higher than we anticipated, albeit margins remained very strong (>81%). MQA provided first-time 1H18 traffic guidance of -5% decline on the previous corresponding period (excluding possible weather impacts) driven by network changes, with a more vague statement about expecting the road's performance to cycle through the impact of the network changes in 2H18 (we've factored in -2% decline). Given the proposed US$15m project to improve capacity at the eastern end of the road, we've also assumed a 1% decline in 2019, before lifting to 2% per annum long-run growth thereafter.
Forecast changes have reduced our valuation by 9 cents per share, and we now expect first distributions in FY21F.
MQA lifts FY18 distribution guidance
FY18 DPS guidance was increased 0.5 cents per share to 24 cps (+20% growth on the previous corresponding period). On a business-as-usual basis, we expect the distribution to lift above 42 cps by FY20F entirely supported by growth in distributions from the APRR Group. MQA's cash was less than expected (2 cps reduction in valuation), and will require a capital raising or scrip issue for any major capital activity.
MQA (and maybe MAF) internalisation is the short term issue awaiting resolution, but no new detail was given. MQA reaffirmed its commitment to update the market by its AGM in May. We've dialed down assumed fee leakage (and assumed related capital rising) from internalisation and performance fee crystallisation ($156m vs $186m previously), noting a +/-$10m change impacts our valuation by -/+2 cents per share.
Other key events this year include the quarterly traffic/toll revenue releases, expiry of the Eiffarie interest rate hedge (and potential refinancing triggered by it), and the likely sale by MEIF2 of its remaining stake in the APRR via the pre-emptive process which includes MQA.
We've upgraded our 12 month share price target by 11 cents per share (Morgans clients can login to view). While internalisation uncertainties and rising bond rates may hold back the stock in the short term, we see multiple drivers delivering distribution and capital growth.
We retain our Add recommendation.
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