Atlas Arteria: Moderating

About the author:

Author name:

By Nathan Lead

Job title:

Senior Analyst

Date posted:

25 March 2022, 8:30 AM

Sectors Covered:

Infrastructure, Utilities, Banks

• Rating downgraded from ADD to HOLD given compression in potential returns.
• Moderated expected growth in DPS given modelling changes and upward surge in AUDEUR. Likewise, 12-month target price reduced from (login to view).

Event

ALX has enjoyed recent share price strength (particularly late last week to >$7ps), which seems abnormal given the upward momentum in sovereign bond yields / risk-free rates and surge in AUDEUR and AUDUSD relevant to ALX.

Alongside our reduced DPS outlook and A$ valuation of ALX, this compresses total potential returns.

Forecast update

We adjust downwards our forecast €-denominated distributable cashflow from MAF (the last key corporate entity between APRR and ALX), after revising assumptions regarding MAF cash reserving and APRR tax obligations.

Of greater negative impact on the A$-translated value of the €-denominated distributions received by ALX from MAF is the surge in the AUD (+7%) and AUDUSD (+4%) since our last ALX note on 24 February. ALX does not FX hedge its capital investments or expected distributions from its assets, so higher spot FX negatively impacts the stock.

Net result of the above is that we downgrade our forecast of ALX’s DPS by 5% / 2.0 cps in FY22F, and 8-9% / c.4.0 cps across FY23-24F. We now expect the paid distribution to lift from 28.5 cps in FY21A to 41.5 cps in FY22F and 44.25 cps in FY23F.

Valuation update

Our ALX 12-month target price is based on a forward sum-of-parts DCF valuation. The valuation increased 11 cps as a result of the local currency forecast changes and decreased 35 cps from the increase in FX rates (particularly AUDEUR).

Furthermore, we rolled the valuation forward to June 2023, which reduced the valuation by a further 4 cps. As such, we see current fair value at c.$6.61ps, declining to our target price of $6.41ps by June-23 (and we set our 12-month target price at this level).

Our modelling includes 43.25 cps of DPS paid across 2H22- 1H23 (in addition to the 20.5 cps distribution that traded ex on 22 March).

Investment view

At current prices we estimate potential 12-month return of c.2%, based on a 12- months forward cash yield of c.6.4% and c.4% share price downside towards our target price.

Over a five-year holding period, at current prices we estimate an IRR of c.5% pa, based on our DPS forecast and five years forward valuation of (login to view). This picks up ALX’s decaying equity NPV over time, as the APRR progresses towards its concession expiry in 2035 (requiring a greater dedication of cashflow towards debt amortisation) as well as its revenue cap in 2034 and 2035.

Neither the 12-month or 5-year potential investment returns discussed above justify an ADD. Hence, we downgrade to HOLD.

Price catalysts

APRR is negotiating a c.€400m package of works with the French state that it is hopeful for an outcome on during 2022.

Discussion around further works beyond this, particularly requiring a concession extension, are not expected to progress until following the French federal elections.

Dulles Greenway regulatory change (pushed out to 2023).

Q1 traffic/toll revenue release on 20 April, noting peer road network owner VINCI’s traffic data showed +2.5% growth vs 2019 in January and +7.5% in February.

Risks

Traffic growth and toll escalation.

Capital investment activity, including M&A and capital/debt restructuring of the Dulles Greenway.

Movement in government bond yields / risk-free rates.

Accounting adjustments between APRR statutory profit and distributable profit.

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