Company Reports

Atlas Arteria is a global toll-road group. By far its most valuable asset is a 31% stake in Autoroutes Paris-Rhin-Rhone. Despite APRR's dominant motorway network in eastern France, the short concession life, high base capital expenditure requirements and subdued organic growth make it less attractive than some motorways. Longer-term distribution growth is likely to be held back by higher interest rates and, from the mid-2020s, the need to pay off all debt at APRR before handing the motorway concession back to the government in 2035. After the APRR concession ends, we estimate Atlas Arteria’s distributions will fall by two thirds to a level supported by the smaller Dulles Greenway and Chicago Skyway.

Narrow-moat Atlas Arteria’s first-quarter traffic results were relatively weak. Despite the benefit of an extra day in February, weighted average traffic growth was negative 0.7% compared with the previous corresponding period. Revenue growth was 2.9%. Revenue and traffic are tracking below our full-year forecasts, primarily due to one-offs like farmers’ strikes and severe snowstorms. We downgrade our 2024 expectations slightly, but longer-term forecasts are largely unchanged. We maintain our AUD 5.60 per security fair value estimate and consider the stock fairly valued.

Narrow-moat-rated Atlas Arteria’s proportional EBITDA increased 7% to AUD 1.38 billion in 2023 on the recovery of traffic volumes and solid toll uplifts. There were no surprises with traffic volumes and revenue, previously released in the firm’s quarterly update. However, earnings were slightly below expectations as operating cost inflation was worse. We downgrade our forecasts marginally for higher operating costs and interest expense and trim our fair value estimate by 4% to AUD 5.60 per security—the stock currently screens as fairly valued.

Atlas Arteria is a global toll-road group. By far its most valuable asset is a 31% stake in Autoroutes Paris-Rhin-Rhone. Despite APRR's dominant motorway network in eastern France, the short concession life, high base capital expenditure requirements and subdued organic growth make it less attractive than some motorways. Longer-term distribution growth is likely to be held back by higher interest rates and, from the mid-2020s, the need to pay off all debt at APRR before handing the motorway concession back to the government in 2035. After the APRR concession ends, we estimate Atlas Arteria’s distributions will fall by two thirds to a level supported by the smaller Dulles Greenway and Chicago Skyway.

Narrow-moat-rated Atlas Arteria finished 2023 relatively strongly, with December quarter toll revenue increasing 6% on average compared with the previous corresponding period on a like-for-like basis. For the full year 2023, proportionate toll revenue increased 7% on 3% growth in traffic and solid toll increases. The result was close to our expectations, though France was a little better and the U.S. a little weaker than we expected. We adjust our 2023 earnings forecasts marginally but leave longer-term forecasts largely unchanged.

We downgraded our fair value estimate for narrow-moat-rated Atlas Arteria by 3% in August to incorporate a mooted increase in nonincome tax at core asset APRR in France. That tax has now been proposed and we expect will be approved by French Parliament in late 2023. It is set at 4.6% of revenue above EUR 120 million, which we estimate will increase APRR’s nonincome taxes by 42% in 2024, sufficiently close to our prior assumption of 50%. We maintain our AUD 5.85 per security fair value estimate, which includes a AUD 0.50 takeover premium given likely interest from IFM Investors.

We cut our fair value estimate on narrow-moat-rated Atlas Arteria by 3% to AUD 5.85 per share, which includes a AUD 0.50 takeover premium, on higher potential taxes. The group's proportional EBITDA increased 8.5% to AUD 670 million in the first half of 2023, on 4.5% proportional traffic volume growth and solid toll increases. Core asset, APRR in France, is tracking a little ahead of our prior expectations on strong traffic volumes and the weaker Australian dollar, leading us to marginally upgrade our 2023 EBITDA forecast.

We maintain our fair value estimate of AUD 5.70 for narrow-moat Atlas Arteria following its first-half 2021 results. The stock currently trades at a 12% premium to fair value. The forecast 2022 distribution yield is relatively attractive at 5.30% and growth should be strong--a CAGR of 10% from 2021 to 2026--but the concession life of the core motorway is a relatively short 14 years.

Atlas Arteria's 2020 traffic and revenue update is broadly in line with expectations and we maintain our AUD 6.00 per share fair value estimate. The stock is fairly valued at present, offering a forecast 2021 yield of 5.2% with solid growth. The main issue preventing us from being more positive is the short concession life. The concession over the main asset, APRR, expires in just 15 years. At the end of the concession, the motorway is given to the government for no consideration, after repaying all debt.

We trim our fair value estimate for narrow moat rated Atlas Arteria by 3% to AUD 6.00 after downgrading earnings forecasts because of continuing impacts from the coronavirus pandemic. We now forecast EBITDA grows at a compound annual rate of 7.1% over the next five years, compared with 7.9% previously. The stock appears fairly valued at current prices, offering a forecast 2021 yield of 4.6%.

Atlas Arteria is a global toll-road group with, effectively, two assets. By far its most valuable asset is a 31% stake in Autoroutes Paris-Rhin-Rhone. Despite APRR's dominant motorway network in eastern France, the short concession life, high base capital expenditure requirements and subdued organic growth make it less attractive than some motorways. Nonetheless, lower interest and tax rates should drive strong growth in APRR's earnings and distributions in the medium term. Longer term distribution growth is likely to be held back by the eventual normalisation of interest rates and, from the mid-2020s, the need to pay off all debt at APRR before handing the motorway concession back to the government in 2035. After the APRR concession ends, Atlas Arteria’s distributions will fall by two thirds to a level supported by the smaller Dulles Greenway.

As foreshadowed in our note on Jan. 12, 2017, we cease coverage on Macquarie Atlas Roads Group to focus on businesses with higher-quality, more sustainable earnings and better market liquidity that are more suitable for our investors.

Macquarie Atlas’ full-year 2016 results were in line with our expectations, and we maintain our AUD 5.20 fair value estimate. We reiterate our intention to cease coverage in March 2017.

We advise that we will cease coverage of Macquarie Atlas Roads in March 2017. Coverage has been transferred to a new analyst during this period. We reiterate our $5.20 fair value estimate, no-moat rating, high uncertainty, and Standard stewardship.