APRR (ALX 25% interest) – heavies strong but slower overall
Atlas Arteria (ALX) reported +1.3% growth in overall traffic in the quarter was below the 1.8% CAGR across 2010-2017, and below the above-trend growth seen in recent periods. Compositionally, light vehicle growth was below trend (+1.1% on pcp vs 10 year CAGR of approximately 3.4% per annum); heavy vehicle growth was above trend (+3% on pcp vs 10 year CAGR of 1.7% per annum), benefiting from one more workday in the period. The traffic benefit from rail and pilot strike activity seen in previous periods has subsided.
The other stand-out factor was fuel prices – while fuel price elasticity is not significant at small changes in price the size of the diesel price increase (>20% on pcp) had an impact.
As well as traffic growth and mix, toll escalation and the APRR/AREA split contributed to +3.9% revenue growth on the pcp. We've adjusted our traffic growth outlook for the next 12 months down to align with this growth, which results in traffic CAGR over the next 8 years being marginally below the 10 year trailing CAGR. This downgrade, net of applying AUD/EUR spot, reduces our ALX valuation by 11 cents per share.
In-principle agreement for a new capex plan with the French State
The APRR has reached an in-principle agreement with the French State (but still subject to approval) for a capex plan that will see the APRR invest EUR 187m, of which we understand approximately 10% will be financed by local authorities. The capex will be compensated via supplemental toll increases of 0.198% pa at APRR and 0.389% pa at AREA over 2019-2021.
We model the capex being funded by cashflows, given cash is trapped by dividends being constrained by accounting profits. NPV impact is breakeven, noting the capex is relatively small.
Seperately, a correction to our modelling of the revenue cap for 2033-2035 (we were too harsh) adds 12 cents per share to our ALX valuation.
Dulles Greenway (ALX approximately 100% economic interest)
ALX says traffic decline of 4.7% on pcp in the September quarter was impacted by Hurricane Florence (as were TCL's Virginian Express Lanes) as well as continuing improvements to the surrounding competing road network. Traffic growth in the first 21 days of the December quarter was -2.1% on the pcp, albeit this was supported by +2.5% growth for the 3 day Colombus Day weekend in early October.
We assume -3.7% traffic decline in 2H18, -1% decline in 2019, and then 2% pa growth thereafter (albeit we do not have high conviction in this long-term outlook given the road's track record).
Applying spot AUD/USD to our valuation offsets the mild forecast decline and lifts our ALX valuation by 3 cents per share.
Reduction in AUD/EUR and AUD/USD spot rates continues to support the ALX valuation. Our 12 month share price target lifts by 1 cent per share (Morgans clients can login to view).
We estimate a 12 month Total Shareholder Return of 6-7% at current prices. As such, we downgrade our recommendation from Add to Hold.
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