Brokers Line Up Either Side On Macquarie Atlas Roads

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-Is this a turning point for MQA?
-Problem with low distribution yield
-Risks remain elevated
 

By Eva Brocklehurst

Brokers range up on both sides when it comes to Macquarie Atlas Roads ((MQA)). It's either for or against the toll road company. Traffic levels are improving across the core assets. Europe's recession has weighed, and continues to weigh, on traffic but at least some growth has been forthcoming. Growth on France's APRR (MQA holds 20%) was recorded in the June quarter for the first time since September 2011.

Overall, weighted average traffic advanced 1.9% in the quarter with revenue rising 4.2% as tolls also rose. The timing of Easter affects the quarterly comparison and on a year-to-date basis the weighted average traffic was up 1.7% and average revenue up 3.9%. Toll revenue on APRR was below Deutsche Bank's forecasts and the broker is yet to see the recovery in heavy vehicle traffic that is a proxy for economic conditions. Deutsche Bank does not include Dulles Greenway in the US and the M6 toll road in the UK in valuing MQA, as there is a low likelihood they will provide distributions in the near future. The M6 was positively affected by the completion of roadworks on the motorway but growth on the toll road is expected to be limited.

Here's the nub of the problem. It's the low distribution yield that plagues the outlook for the stock. Deutsche Bank's distribution forecast has been increased to 10c for FY15 but that's two years away. In MQA's case the broker believes the stock is overvalued compared with other names in the sector, such as Transurban ((TCL)) and Sydney Airport ((SYD)). BA-Merrill Lynch, which is yet to update on the latest traffic data, said last month that the problem with the stock is that over-estimating traffic on just one of the roads can skew the assessment. Most of the assets are still in the development stage and the failure of just one could severely impact aassumptions behind the other.

Those brokers which are the most positive, as Macquarie suggests, are seeing the gradual improvement in the business feeding through to the distribution outlook and risk perception. Macquarie notes that, at an internal rate of return of 13.7%, the stock is still 270 basis points higher than the likes of Transurban, yet the risk profile is not materially different.

A highlight for UBS is that Eiffarie, which part owns APRR, is reducing gearing. This should free up additional equity free cash flow from Eiffarie to lift the distribution. UBS estimates it could be increased by 25% in FY15. The key for both UBS and Macquarie is the risk/reward. Both brokers believe it is moving to the side of the investor and so retain Buy ratings (Macquarie is Outperform). The ratings on the FNArena database diverge in that the neutral ground is not held. There are three Buy and three Sell. On the database the consensus target price is $2.17, signalling 5.2% downside to the last share price. The targets range from $1.60 (BA-Merrill Lynch) to $3.00 (UBS). The target has moved from $1.93 prior to the announcement to the current price subsequently.

CIMB also makes note of the stock's low yield relative to others in the sector. On the database the consensus dividend yield for FY13 earnings forecasts is 2.7% and for FY14 it's 4.2%. CIMB believes that, while traffic is trending positively on APRR, a meaningful recovery is not likely just yet. The French economy is expected to stay under pressure. MQA's valuation is also very sensitive to the exchange rates and the stock rose strongly recently on the back of the Australian dollar's slide. The Australian currency has been down 14% since April 1 against the euro which compares with a 33% rise in MQA's share price over the same period. This rise is overdone in CIMB's view, because of the subdued outlook for France. APRR's operating performance is expected to be flat at best. The broker also expects a further rate cut from the European Central Bank and some relative strengthening in the Australian dollar over coming months. Hence, the broker sticks with an Underperform rating.

Dulles Greenway road in the US, of which MQA holds 50%, needs to establish a positive trend in traffic growth — it's only just in the positive at 0.3% for the half year — before a sale process can begin, in UBS view. For Macquarie the driver of value in the US is the state of Virginia's economic growth. At this stage there is is little difference to distributions as a dividend from the asset is still 4-5 years away. The improved traffic does, nonetheless, increase the equity value for a potential sale. Hindering a sale is the current dispute at the SCC over the recent price increases. Macquarie note that, within the SCC review, a study is suggested to determine whether a move to distance-based tolling is appropriate. In the broker's view this could provide some upside for investors.

JP Morgan is happy to retain an Overweight recommendation, suspecting the traffic figure may indicate a turning point in France. This broker also notes the stock is highly leveraged to a devaluing AUD/EUR. MQA is in negotiations with the banks on the M6 regarding refinancing of debt which matures in FY15. This is expected to result in change to the accounting treatment of the M6. The upshot of the debt reconfiguring is that JP Morgan would not be surprised if MQA ends up managing the toll road but no longer holding an equity interest. It currently owns 100% of the M6 toll road.

MQA holds investments in several international toll roads including the M6 Toll (UK, 100%), Autoroutes Paris-Rhin-Rhone (France, 20%), Dulles Greenway (US, 50%), Chicago Skyway (US, 23%), Indiana Toll Road (US, 25%), Warnow Tunnel (Germany, 70%) and South Bay Expressway (US, 50%). Macquarie Bank is the external manager of MQA.

See also, All Roads Lead To Big Currency Boost For Macquarie Atlas on June 25 2013
 

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