Lower Fees, But Brexit Impacts On Macquarie Atlas

This story features MACQUARIE GROUP LIMITED. For more info SHARE ANALYSIS: MQG

-Dulles Greenway action key to distributions
-Below trend traffic growth expected
-Question remains over manager
 

By Eva Brocklehurst

The outlook for Macquarie Atlas Roads ((MQA)) is sound, although brokers caution about the growth risk on the company's main toll road earner in France given the decision by the UK to exit the EU.

In an unrelated development, the external manager of the infrastructure fund, Macquarie Group ((MQG)), has lowered its fee base, citing the successful divestment of the Indiana toll road and the Chicago Skyway, which leads to a more streamlined portfolio and stronger corporate balance sheet.

Base management fees payable by Macquarie Atlas are reduced to a flat 1% per annum, which compares with the previous rates of 1.75% for market caps under $1bn and 1% for market caps over $1bn.

The reduction in this rate lowers Credit Suisse's base fees estimate by 12% to $31m for 2016 and by 24% to $28m for 2017. The present value cost of the management contract falls to $405m from $498m, which means shareholders have access to more value. This also suggests to the broker that a push for internalising management is likely to lose momentum.

Morgans increases its 2017-18 distribution forecast by 7% to account for the base fee savings and believes it reasonable to assume the new fee structure is permanent. The performance fee accrued for 2016 is $134.1m, below Morgans estimates of $144m, and the difference lifts valuation slightly. The performance fee is paid in scrip, which dilutes per share metrics.

No material changes are made to Credit Suisse's distribution expectations, as lower fees are expected to offset the recent strength in the Australian dollar against the euro and US dollar.

Morgans expects 2017 distribution guidance at the interim result in August and envisages a path to a step-change in the distribution in 2019 to more than 40c per security. The outlook for distributions will be influenced by the company's actions after its Dulles Greenway co-investor exits its stake later this year.

Macquarie Atlas will need to raise capital to buy the 50% stake, but could be a seller of its 50% if there is an attractive offer from a third party. Dulles Greenway is considered unlikely to start paying cash to Macquarie Atlas until 2019 because of lender distribution restrictions.

Thus, Morgans envisages retained cash plus distributions from APRR will need to support the company's distribution over a larger share base through to 2019 in the event the company acquires the Dulles Greenway stake. The broker upgrades its rating to Add from Hold.

Macquarie Atlas derives around 70% of its value from the APRR toll road in France and Credit Suisse suspects traffic growth may slow in the wake of declining business and consumer confidence following Britain's vote to leave the EU.

There is a second risk for the medium term if the Schengen agreement collapses and border controls are re-imposed across Europe. Credit Suisse estimates this could reduce cross broader freight traffic on the APRR. Hence, the broker maintains conservative traffic growth estimates of 1.9% for the second half of 2016, 2017 and 2018. This compares with first quarter traffic growth of 6.5%.

Of all stocks under coverage, Macquarie Atlas is the most exposed to EU growth concerns, Morgan Stanley maintains, although lower re-financing costs dominate the growth outlook in the near term. The broker envisages the UK decision may reduce growth for a number of years on APRR and the analysts expect a slowdown in EU GDP growth, which is reflected in base cast forecasts.

Still, marking to market bond yields incorporated in the broker's discount rates supports valuation and rating. Morgan Stanley believes the case for internalising the manager will grow stronger as the asset portfolio matures and is simplified.

Internalisation is the trend and Macquarie Atlas is the remaining listed infrastructure vehicle on ASX managed by Macquarie Group. The company has not commented on internalisation recently other than to reiterate that the board regularly reviews its position.

In the meantime, the broker believes the manager adds value by maximising corporate activity opportunities, such as a purchase or sale of Dulles Greenway or a capital restructure of the M6 and Warnow Tunnel. Longer term, the broker canvases several scenarios which range from Macquarie Group investing in more assets to divesting assets.

Macquarie expects another strong quarter in traffic will be reported in coming weeks with any impact from Brexit expected to emerge in the second half. This broker is also not expecting a repeat of the 6.5% growth seen in the first quarter and suggests it will take another 18 months until traffic growth returns to the long-term trend around 1.3%. Macquarie expects 2016 traffic growth of 3.3%.

In Dulles, Greenway traffic growth continues to benefit from the saturation on alternative routes. The broker believes current growth of 3.7% is conservative compared with first quarter growth of 7.3% Macquarie envisages the attraction of this road continues to grow, noting Macquarie Atlas is a net seller of assets where traffic is growing and demand for these assets is high.

Credit Suisse values the stock on a probability weighted scenario. The status quo suggests fair value implies a dividend yield of 3.2% for 2016 and 3.6% for 2017 and proportional enterprise value/earnings multiples of 14.5 for 2016 and 11.5 for 2017.

FNArena's database has five Buy ratings and one Hold (UBS, yet to update on the fee change). The consensus target is $5.38, suggesting 1.6% in downside to the last share price.
 

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