Atlas Arteria Earnings: Tolls and Traffic Volumes Drive Strong Growth; New Tax Is Likely in 2024

We cut our fair value estimate on narrow-moat-rated Atlas Arteria ALX 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.

A key near-term risk is the potential for higher taxes at APRR, with the French government and press arguing that toll roads are making excessive profits. While APRR is contractually protected from additional toll road-specific taxes, we understand that isn’t the case where the tax is more broadly applied to all concession companies, including airports and utilities. In first-half 2023, APRR paid nonincome taxes (land tax, motorway tax, economic contribution tax) of EUR 139 million, in addition to corporate income tax of EUR 201 million. In comparison, net profit after tax was EUR 568 million.

There is a lot of uncertainty about whether a new tax will be implemented and how large it could be. But given toll road owners are a popular target for taxes, we assume a 50% increase in nonincome taxes in 2024, which leads to a 5% EBITDA downgrade and the cut in our fair value estimate. At the current price, the stock is fairly valued. It offers a big yield of 6.5% but has a relatively short average concession life of about 19 years, weighted by EBITDA.

The concession for APRR, which contributes 83% of proportional EBITDA, ends in 2035. When concessions end, roads are handed over to the government for no consideration after repaying all associated debt.