Macquarie Atlas Roads Group

Transcription

1 AUSTRALIA MQA AU Price (at 06:10, 21 Jul 2015 GMT) Outperform A$3.14 Valuation A$ - DCF (WACC 7.0%, beta 1.0, ERP 5.0%, RFR 2.2%) month target A$ month TSR % Volatility Index Low/Medium GICS sector Transportation Market cap A$m 1, day avg turnover A$m 4.1 Number shares on issue m Investment fundamentals Year end 31 Dec 2014A 2015E 2016E 2017E Revenue m EBITDA m EBITDA growth % Reported profit m Adjusted profit m Gross cashflow m CFPS CFPS growth % PGCFPS x PGCFPS rel x EPS adj EPS adj growth % PER adj x PER rel x Total DPS Total div yield % Franking % ROA % ROE % EV/EBITDA x MQA AU vs Small Ordinaries, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, July 2015 (all figures in AUD unless noted) Following the toll road trend of strong traffic Event MQA reported 2Q15 traffic. The trend from 1Q15 of a strong result seemed to accelerate across both roads in 2Q15 pointing to a stronger dividend outlook and, in the case of Greenway, exit from lock-up. Impact From a dividend perspective, APRR strength is adding to the CY16 dividend for MQA shareholders. Traffic at +2.7% for the quarter is on an improving trend from 1Q15, and highlights growing consumer confidence and lower fuel costs. Traffic strength should continue at least in 3Q15. In addition, in the coming 2 months, we expect to see formalisation of the concession extension and a new capex program agreed to in April which allows for a cut in depreciation. Collectively, with lower funding costs and tax expense we expect PAT growth of 27% in CY15 for APRR, which forms the basis of strong dividend growth in CY16. Traffic revisions translate in to ~$0.006 of additional income for MQA investors. Greenway at +4.2% for 1H15 supports the outlook the road will come out of the three-year lock-up in CY16 with coverage at 1.16x. If traffic can maintain a 4% pa growth rate over the next 30 months, Greenway will come out of lockup 12 months ahead of expectation ie first dividend in CY18. Whilst this seemed challenging, Greenway has delivered it for the last 12 months. An early release from lock-up would add $0.03 to CY18 earnings. Skyway s traffic growth was negative but importantly revenue was up 12% reflecting the benefit of higher toll prices. It is the underlying revenue trend that may allow for some value to be retrieved in the current sale process. At this stage, we do not see any material value for equity albeit ITR highlights the elevated prices being paid may allow for some recovery. Earnings and target price revision We have upgraded our dividend expectation for CY16 by 0.4, reflecting the stronger traffic growth, offset by higher fee assumption. At this stage, we have no expectation the ITR income will be released and Greenway is a CY18 or CY19 event. Price catalyst 12-month price target: A$3.87 based on a DCF methodology. Catalyst: Ongoing traffic improvements Action and recommendation Outperform. MQA lacks announcements, not organic growth. APRR traffic is steadily rebounding with the economy and should have the added benefit of the capex program removing bottlenecks. Greenway is accelerating towards the resumption of a dividend. Target price increased from $3.65 to $3.87 ps. 21 July 2015 Macquarie Securities (Australia) Limited Please refer to page 7 for important disclosures and analyst certification, or on our website

2 APRR The traffic trend remains stronger than expectation at APRR led by car traffic. Key elements of the quarterly traffic: Car traffic: Underlying trend of +2.7% for the quarter is well above the five and ten year averages of 1.1% and 1.0%, respectively, and builds on 1Q traffic growth of +1.8%. Expectation is the positive trend will continue especially as consumer confidence is improving. Fuel prices are yet to be a drag. Truck traffic. Underlying trend of +2.1% was consistent with our expectation of 2.0%. APRR s road has tended to outperform the broader French manufacturing index, reflecting a little more European traffic from other countries like Germany and Italy compared to ASF (Spain) and SANEF (Belgium). The other unusual element of the 2Q15 was toll trip growth of +0.3% despite no toll increase and car traffic increasing faster than truck traffic. This is explained by AREA s toll roads growing faster than APRR as the AREA toll is slightly higher than APRR. Secondly, pricing per km is not equal on every road. There is clearly a bias to some of the larger segments where pricing per km is more attractive. Capex spend for the half remains low at 55m (included in sales). This compares to 110m in the pcp. We suspect this is likely to be timing and will accelerate with the formal approval of the package, albeit the immediate impact is slightly better cashflow in 1H15. Fig 1 Traffic growth at APRR Growth on pcp Growth on pcp Cars (LHS) Consumer Confidence (RHS) Fuel Price (RHS) APRR HV (mvkt) French manufacturing production Cars (LHS) 10% 20.0% 10% 8% 15.0% 8% 6% 6% 10.0% 4% 4% 2% 5.0% 2% 0% 0.0% 0% -2% -5.0% -2% -4% -4% -6% -10.0% -6% -8% -15.0% -8% -10% -20.0% -10% Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Source: APR, INESS, July 2015 From an earnings perspective, the PAT growth in CY15 is expected to increase from 24% to 27% for APRR. This is materially more significant than growth from traffic which accounts for 6.3%. The other improvements that generate the growth are: Depreciation falling from 404m to 369m. The step-down reflects the change in asset life as a result of the concession extension of 2-3 years once the approval is formalised. This is ~6% of the earnings growth. Interest expense stepping down from 332m to ~ 278m. Refinancing older debt at rates of % along with lower cash balance has improved the financing cost of the group. This trend which accounts for 7% of the growth will continue over the coming two years as the portfolio benefits from ongoing refinancing. Associate loss after 1.5m will no longer have a drag on the P&L as the associates will have been fully written off. Tax expense in CY14 was unusually large at 44%, compared to statutory at 38%. This should again step back down in CY15. We expect further benefits in CY16 with the tax rate stepping back down from 38% to 34.4%. A risk for investors is the elevated tax rate remains. In essence, tax does not increase, thus accounts for the other improvement. One element of the EBITDA that is impossible to forecast is maintenance provision. In CY14 it increased to 37m from 26m. A concession extension potentially sees a retiming of the maintenance schedule, especially the end of concession maintenance. The potential is for a positive surprise, albeit this is more likely in 2H15 when it can be revisited. 21 July

3 Fig 2 APRR P&L Jun-14 Dec-14 Jun-15 Dec Vehicles Traffic km Car Commercial Total Traffic Car % 1.9% 1.4% 2.3% 1.8% 2.0% 1.4% -1.3% 0.9% 1.6% 2.0% 0.6% 0.6% 0.6% 0.5% 0.6% Commercial % 2.2% 0.8% 2.0% 1.7% 6.1% 2.9% -3.8% 0.5% 1.5% 1.9% 1.8% 1.8% 1.9% 1.8% 1.8% Growth % 2.0% 1.3% 2.2% 1.8% 2.6% 1.6% -1.7% 0.8% 1.6% 2.0% 0.8% 0.8% 0.8% 0.7% 0.8% Profit & Loss Jun-14 Dec-14 Jun-15 Dec Revenue Tolling m 998 1,083 1,019 1,106 1,882 1,961 1,971 2,029 2,082 2,124 2,171 2,225 2,271 2,325 2,381 Other m Construction m Total Revenue m 1,139 1,271 1,105 1,141 2,242 2,181 2,226 2,399 2,410 2,246 2,240 2,295 2,342 2,398 2,455 Growth % 2.8% 2.0% 2.0% 1.9% 4.3% 4.2% 0.8% 3.0% 2.4% 1.9% -0.3% 2.5% 2.1% 2.4% 2.4% Costs Purch & exter charges m Payroll m Other net m Maintenance provision m Construction m Taxes other than inc m EBITDA m ,299 1,377 1,398 1,449 1,483 1,507 1,548 1,594 1,632 1,673 1,716 Growth % 4.4% 0.5% -1.3% 4.3% 6.5% 6.0% 1.5% 3.7% 2.3% 1.6% 2.7% 3.0% 2.4% 2.5% 2.5% Margin % 70.5% 67.7% 68.2% 69.3% 67.0% 68.1% 68.6% 69.0% 69.0% 68.8% 69.1% 69.4% 69.7% 69.8% 69.9% Depn & Amortis m EBIT m ,011 1,055 1,079 1,139 1,170 1,204 1,221 1,249 1,285 Growth 5.0% -0.2% 1.2% 9.7% 8.1% 6.1% 1.7% 4.4% 2.3% 5.6% 2.7% 2.9% 1.4% 2.3% 2.9% Margin 46.2% 43.5% 48.2% 53.2% 41.8% 45.6% 45.4% 44.0% 44.8% 50.7% 52.3% 52.5% 52.1% 52.1% 52.4% Net interest m Profit Before Tax m ,023 1,082 1,122 1,147 Growth 1.8% 6.6% 11.1% 16.6% 19.9% -3.9% 0.0% 15.2% 4.3% 14.1% 8.1% 9.8% 5.8% 3.7% 2.2% Associate loss m Tax expense m Net Profit After Tax m Growth 1.3% -11.1% 9.6% 45.4% 19.0% -5.7% -0.8% 12.8% -5.1% 26.9% 14.6% 9.9% 5.8% 3.7% 2.2% Source: Macquarie Research, July 2015 Overall impact of the outlook is the improved traffic translates into ~$0.005 for MQA shareholders, albeit the over dividend is subject to currency, which we are forecasting average 0.64 for CY July

4 Greenway best quarterly growth rate since MQA owned the road (10 yrs) As the charts below highlight the trend around the Greenway has shifted over the last two years with traffic re-entering the corridor. The split started to emerge in Sept 2011 and has gained momentum in the last two years. The major shift is the alternative corridors like Waxpool Rd have started to become full. Secondly the improving economic background in Washington is increasing road usage. Evidence of this is developed roads like DTR are growing at 1.1%. With major roads full, Greenway having capacity, it is capturing the incremental growth. This was the original thesis for acquiring the road back in Whilst unfortunate it has taken ten years to see this play out, the trend is now emerging with Greenway delivering the best growth since MQA/MIG took ownership of the asset at 5.0% for the quarter. This is the second time in 12 months that it has had a record quarter (previous +4.5% in 4Q14) One interesting trend is off peak (weekend traffic) has grown faster than weekday traffic in 6 of the last 7 quarters, with growth at 7.4% in 2Q15 vs weekday at 4.5%. The impact is the trip price growth is below the 2.8% minimum. Thus overall revenue growth at 7.4% is consistent with expectation, despite traffic being slightly better. Fig 3 Traffic growth long term and vs DTR 12m moving avera ge ADT 65,000 63,000 61,000 59,000 57,000 55,000 53,000 51,000 49,000 47, % 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% Greenway grth DTR Volume change 45,000 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Source: MQA, July % Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Whilst the accelerated growth is exciting, Greenway major test is in CY16, where its DSCR must exceed 1.15x to move out of the mandatory 3 year equity lock up that is presently in. Presently we assume 4% growth in residual of CY15 and 3% in CY16, with DSCR estimated to be 1.165x. Growth would need to slow to less than 2.5% pa for there to be a potential issue around equity lockup. This seems unlikely. Whilst the equity lock up test is 1.15x, the dividend lock up test is 1.25x. Whilst we do not expect Greenway will meet the CY16 dividend lock, if the growth trend of 4.0% can be maintained it is possible that Greenway could meet the CY17 test of 1.25x, bringing forward a dividend. By CY17, based on 4% traffic growth the lock up reserve will have ~US$22m ie A$0.025ps for MQA shareholders in CY18. Beyond CY18, MQA shareholders should benefit from the release of the lock up reserve used to purchase some of the bonds. We estimate there is ~US$64m to be repaid between July

5 Fig 4 MQA fundamentals Year Ending 30 June Valuation Eiffarie/APRR $m 936 1,371 1,981 2,098 2,105 2,303 2,191 2,033 2,046 2,093 Greenw ay $m Other (incl. Net Cash) $m Management Costs $m Total Valuation $m 681 1,119 1,790 1,959 2,159 2,600 2,591 2,489 2,520 2,629 MRE's Fair Value NAV $ Discount rate % 10.5% 8.9% 7.5% 7.1% 7.0% 7.0% 6.8% 6.7% 6.5% 6.5% Currency impact to value $ A: Proportionately Consolidated (ex M6Toll/IT/Skyw ay) Revenue $m Greenw ay $m Eiffarie/APRR $m APRR maintenance provisio $m Op cost & base fee $m EBITDA (proforma) $m Margin % 58% 63% 64% 60% 68% 69% 69% 69% 69% 70% Maintenance Capex $m Cash Interest Expense $m Cash Tax Expense $m Debt repayment $m Cash Earnings $m MQA eps eps growth % 39% 52% 173% 93% 233% 98% 103% 103% 94% 99% PE (Price / MIG Earnings) x Balance Sheet Net Debt $m 2,823 2,744 3,252 3,221 3,157 3,461 3,154 2,891 2,741 2,753 Gearing (d:d+e) % 65% 64% 67% 66% 65% 67% 65% 63% 61% 62% EV/Prop EBITDA post fee x Net debt:ebitda (ex perform x DSCR x Concession life yrs Dividend (March/Sept of period) Eiffarie/APRR (t-1) $m Greenw ay $m M6Toll/ITR $m Management fees/other $m Dividend to be paid $m Dividend Yield % Closing Number of Share m EFPOWA m Holding Company Accounts Cashflow M6 Toll $m Eiffarie $m Greenw ay $m Other (+ int income) $m Mgmt Fees $m Workig capital chg ( + new $m Net operating cashflow $m Investments/Divesments $m Dividends $m Residual Cash Closing cash balance Source: Company data, Macquarie Research, July July

6 Fundamentals Macquarie Wealth Management Macquarie Quant View The quant model currently holds a neutral view on Macquarie Atlas Roads Group. The strongest style exposure is Growth, indicating this stock has good historic and/or forecast growth. Growth metrics focus on both top and bottom line items. The weakest style exposure is Profitability, indicating this stock is not efficiently converting its investments to earnings as proxied by ratios such as ROE, RO 198/383 Global rank in Transportation % of BUY recommendations 100% (2/2) Number of Price Target downgrades 0 Number of Price Target upgrades 0 Attractive Quant Local market rank Global sector rank Displays where the company s ranked based on the fundamental consensus Price Target and Macquarie s Quantitative Alpha model. Two rankings: Local market (Australia & NZ) and Global sector (Transportation) Macquarie Alpha Model ranking A list of comparable companies and their Macquarie Alpha model score (higher is better). Factors driving the Alpha Model For the comparable firms this chart shows the key underlying styles and their contribution to the current overall Alpha score. Downer EDI Veda Group Downer EDI Veda Group Mineral Resources 0.2 Mineral Resources Macquarie Atlas Roads Gro 0.0 Macquarie Atlas Roads Gro Seven Group Holdings -0.3 Seven Group Holdings Transpacific Industries G -0.4 Transpacific Industries G Virgin Australia -1.5 Virgin Australia % -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% Valuations Growth Profitability Earnings Momentum Price Momentum Quality Macquarie Earnings Sentiment Indicator The Macquarie Sentiment Indicator is an enhanced earnings revisions signal that favours analysts who have more timely and higher conviction revisions. Current score shown below. Drivers of Stock Return Breakdown of 1 year total return (local currency) into returns from dividends, changes in forward earnings estimates and the resulting change in earnings multiple. Downer EDI Veda Group Mineral Resources Macquarie Atlas Roads Gro Seven Group Holdings Transpacific Industries G Virgin Australia Downer EDI Veda Group Mineral Resources Macquarie Atlas Roads Gro Seven Group Holdings Transpacific Industries G Virgin Australia % -50% 0% 50% 100% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return What drove this Company in the last 5 years Which factor score has had the greatest correlation with the company s returns over the last 5 years. Return on Equity FY1 SAL Growth 5yr Historic CPS Growth FY1 Return on Equity NTM Turnover (USD) 20 Day Turnover (USD) 250 Day PE Growth FY1 Altman Z-Score -31% -36% Negatives Positives -26% -28% 31% 30% 29% 37% -40% -20% 0% 20% 40% How it looks on the Alpha model A more granular view of the underlying style scores that drive the alpha (higher is better) and the percentile rank relative to the sector and market. Alpha Model Score Valuation Growth Profitability Earnings Momentum Price Momentum Quality Capital & Funding Liquidity Risk Technicals & Trading Normalized Score Percentile relative to sector(/383) Percentile relative to market(/412) Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group (cpg@macquarie.com) 21 July

7 Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie First South - South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down % in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 30 June 2015 AU/NZ Asia RSA USA CA EUR Outperform 46.23% 58.36% 47.27% 44.20% 60.65% 43.01% (for US coverage by MCUSA, 9.68% of stocks followed are investment banking clients) Neutral 37.67% 25.65% 29.09% 49.29% 34.19% 40.93% (for US coverage by MCUSA, 5.53% of stocks followed are investment banking clients) Underperform 16.10% 15.99% 23.64% 6.52% 5.16% 16.06% (for US coverage by MCUSA, 1.38% of stocks followed are investment banking clients) MQA AU vs Small Ordinaries, & rec history (all figures in AUD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, July month target price methodology MQA AU: A$3.87 based on a DCF methodology Company-specific disclosures: MQA AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of 's equity securities. The Macquarie Group is a substantial securities holder of (MQA.ASX). The analyst and/or associated parties own or have other interests in securities issued by MQA. MACQUARIE CAPITAL (AUSTRALIA) LIMITED or one of its affiliates managed or comanaged a public offering of securities of in the past 12 months, for which it received compensation. Important disclosure information regarding the subject companies covered in this report is available at Date Stock Code (BBG code) Recommendation Target Price 14-Apr-2015 MQA AU Outperform A$ Feb-2015 MQA AU Outperform A$ Dec-2014 MQA AU Outperform A$ Oct-2014 MQA AU Outperform A$ Sep-2014 MQA AU Neutral A$ Aug-2014 MQA AU Outperform A$ Aug-2014 MQA AU Outperform A$ Feb-2014 MQA AU Outperform A$ Jan-2014 MQA AU Outperform A$ Oct-2013 MQA AU Outperform A$ Jul-2013 MQA AU Outperform A$ Jun-2013 MQA AU Outperform A$ May-2013 MQA AU Neutral A$ Feb-2013 MQA AU Outperform A$ Feb-2013 MQA AU Outperform A$ Oct-2012 MQA AU Outperform A$ Oct-2012 MQA AU Outperform A$ Jul-2012 MQA AU Neutral A$ July

8 Target price risk disclosures: MQA AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. Analyst certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN , AFSL No ) ( MGL ) and its related entities (the Macquarie Group ) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN , AFSL No ) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited (ABN , AFSL No ) ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN , AFSL No ) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act Any MGL subsidiary noted in this research, apart from MBL, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research is general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. 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The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at 21 July