Atlas Arteria: Outlook remains supportive

About the author:

Author name:

By Nathan Lead

Job title:

Senior Analyst

Date posted:

18 November 2021, 8:00 AM

Sectors Covered:

Infrastructure, Utilities, Banks

• We endorse an ADD recommendation for ALX with a 12 month target price of (login to view) and forward DPS of c.44cps (with mid-single digit compound growth over coming years).

Event

We update our investment thesis based on macro movements, recent traffic data, the APRR’s recent bond issue, and the investor day briefing.

APRR (31% owned by ALX) – the outlook is improving

The October 2021 CPI has been published at 2.6% YoY, which we think will feed through the annual toll escalation formula to a February 2022 increase of c.1.9% (well above the <1% escalators in recent years). Market expectations for medium-to-long term French inflation have also increased, and now average c.2% pa through to 2030. Inflation updates added 19cps to our ALX valuation. 

While inflation is increasing, interest rate risk is mitigated by largely fixed rate debt with staggered maturities through to 2034. Its credit appeal is evidenced by its recent bond issue priced at very skinny margins (23 bps over swap for 6.6 year debt). Changes to capital mgmt. assumptions added 12cps to our valuation.

Recent release of traffic data by peer toll road owners in France show traffic is lifting above pre-COVID levels (VINCI reported October traffic 4.7% above its 2019 pcm. Atlantia’s data shows weekly traffic was above the 2019 pcw in 3 of the last 5 weeks, with the first week of November up 14.7% on the 2019 pcw). We leave our traffic forecast unchanged.

ALX continues to believe that large road infrastructure programs won’t be awarded by the French Govt until after the 2022 presidential election. There is hope this will see the APRR earn a concession extension in exchange for a program of works, albeit the terms of the deal will determine whether this is NPV accretive.

Dulles Greenway (~100% ec. interest) – a focus on distance-based tolling

The road currently suffers from burdensome legislation that does not apply to other toll roads. At present, this requires it to apply annually to the state for approval to lift tolls. ALX is seeking to move the governing legislation across to the Public Private Transportation Act framework and to move to distance-based tolling at a known real price for the life of the concession.

ALX thinks the political environment for the change to occur is positive, with the next legislative sitting in February. Resolving the legislative framework and tolling structure will then allow ALX to pursue debt restructure so as to have sustainable distributions from the asset.

We have upgraded our toll escalation forecasts, allowing for the approved c.5% pa off-peak escalation applying to c.70% of trips across 2021/22.

This is a big assumption, but we now assume average tolls beyond 2022 will lift in line with US inflation expectations (which themselves have risen considerably in 2021 to now average c.3% pa through to 2030). This added 40cps to our valuation.

We have taken the opportunity to offset the toll escalation uplift with a decline in assumed traffic growth. While acknowledging the high population growth and household incomes in the road corridor, our previous traffic growth assumption of 2% pa from 2023 is uncomfortable.

The road has a history of bouts of negative growth and works along competing free routes were completed in mid-2021. We now assume post-2023 growth of 1% pa, broadly half the expected population growth in the region. This change contributed to a 50cps valuation deduction.

Investment view

ADD retained. At current prices, we estimate potential 12 month return of c.10% and c.7% pa IRR over 5 years.

The difference between the short and long-term return estimates is due to the valuation decay we expect as the APRR approaches its concession expiry in 2035 (with debt to be fully repaid).

Price catalysts

Potential major capital works being awarded to APRR post-presidential election and Dulles Greenway regulatory change (both in 2022). Q4 traffic data in late January. FY21 result in late February.

Risks

Traffic growth and toll escalation. Capital investment activity, including M&A and capital/debt restructuring of the Dulles Greenway. Movement in bond rates.

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