We maintain our $5.40 per share fair value estimate for narrow-moat-rated Atlas Arteria ALX after an improved third quarter. Atlas Arteria is a global toll-road investor created out of the reorganization of Macquarie Infrastructure Group in 2010. The firm's main asset is a 30.82% stake in Autoroutes Paris-Rhin-Rhone, or APRR. APRR owns concessions to toll more than 2,300 kilometers of motorways in eastern France, most ending late 2035. The firm also wholly owns the Dulles Greenway and 66.67% of the Chicago Skyway, both in the US.

Atlas screens as slightly undervalued at current prices. It offers an attractive yield of 8% based on the current security price. However, distributions are likely to be flat for the next few years and fall in the long term as the firm loses APRR, which contributes about 80% of proportionate earnings before interest, taxes, depreciaton and amortisatioin (“EBITDA”), in late 2035.

Weighted average traffic volumes rose 0.6% in the September quarter compared with the same period last year. Traffic volumes fell 0.1% in the year to date, showing an improving trend as the year progresses. Combined with higher tolls, proportional revenue increased 5.0% in the quarter and 4.2% in the year to date. Overall, revenue is tracking close to our prior expectations.

Core asset APRR in France reported a 0.6% increase in traffic volumes in the September quarter, with high-toll-paying truck volumes up 1.7%. Consumer Price Index-linked toll growth combined with the positive mix shift to trucks helped revenue increase by 4.9%. Hot on the heels of the new airport and toll road tax, the French government is debating the introduction of a temporary tax on large companies for 2024 and 2025, which would also catch APRR. The outcome of the debates should be known by December. If enacted, the impact on our valuation would be less than 2%, all else equal.

The Chicago Skyway performed slightly below our expectations in the quarter, with traffic volumes down 6.4% due to higher tolls, weak summer leisure traffic, and lackluster truck volumes, suggesting a subdued local economy. Nonetheless, revenue increased by 1.9% because of higher tolls.

Dulles Greenway continues its delayed recovery from the pandemic, with traffic volumes up 4.9% and revenue up 5.7% in the third quarter. Despite improving performance, we expect free cash flow to be negative again this year.

Business strategy and outlook

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.

APRR is one of the largest tolled motorway groups in Europe. Concessions covering its main network end on Nov. 30, 2035, and on the smaller AREA network on Sept. 30, 2036. These concessions are relatively short compared with those for other listed toll-road operators.

When the concessions end, the roads are returned to the government for no consideration and after repaying all debt. The APRR concessions set base toll increases at 70% of the consumer price index, or CPI, excluding tobacco, and set a base level of maintenance and upgrade capital expenditure of about EUR 200 million per year.

Atlas Arteria also owns 100% of Dulles Greenway and 67% of Chicago Skyway. Along with high debt levels, the main issue for Greenway is weak traffic volumes following the pandemic and as competing roads have been upgraded. After failing debt service coverage tests in recent years, Greenway is not allowed to pay distributions to investors. The Skyway also suffers from weak traffic volume growth, but tolls increase relatively quickly and its balance sheet is sound.

Atlas also owns the Warnow Tunnel in Germany, but it is tiny, contributing 1% of proportional EBITDA.

Atlas bulls say

  • We forecast distributions to investors increase at a low-single-digit percentage on CPI-linked tariffs at APRR.
  • APRR is a good quality asset. Revenue is defensive and earnings have a positive long term outlook. Dulles Greenway and Chicago Skyway add longer-term value.
  • Toll roads are in high demand from pension funds and other large investors searching for yield. The two best roads could potentially be sold for high prices.

Atlas bears say

  • While distributions should increase in the medium term, Atlas must repay APRR debt before losing the asset in 2035.
  • While the best in Atlas Arteria's stable, APRR is less attractive than many other toll roads because of its relatively short concession life, high ongoing capital expenditure, and subdued organic revenue growth.
  • Distributions are expected to exceed underlying free cash flows for the medium term

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Terms used in this article

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.