Stock pick: L1 Capital

Atlas Arteria (ASX: ALX) is an owner and operator of toll roads globally, with its main assets being a 31% interest in one of France’s best quality toll road networks, the 2,318 km APRR, and a 100% ownership in Dulles Greenway, a 22km toll road located in North Virginia, USA. APRR is a highly cash-generative, mature toll road with a concession expiry of 2035. It comprises the majority of ALX’s current cashflows.

ALX shares are trading approximately 30% below what its levels were only three months ago, due to a temporary lull in road traffic driven by COVID-19 lockdown restrictions and complexity over its debt structure. We believe ALX is attractive as it has concessions over high quality, critical infrastructure and is trading on an implied dividend yield (assuming normal traffic) of roughly 7.5%. With the decline in global interest rates to near zero, we believe ALX should trade at a premium to its pre-COVID-19 levels given the implied increase in valuation from applying lower discount rates to its cashflows. ALX has low levels of leverage relative to peers, an A- S&P credit rating and available liquidity materially greater than 2020/21 debt maturities.

We believe ALX has both near-term and medium-term valuation catalysts. In the near-term, we expect COVID-19 lockdown restrictions to have only a short-term impact on traffic volumes, with a quick recovery driven by the easing of restrictions and consumers avoiding public transport for COVID-19 safety reasons. This phenomenon has already played out in markets such as China and South Korea that are ahead of Europe in relaxing restrictions. In the medium-term, we believe the market will better appreciate several aspects that will drive improved cash flow generation for ALX going forward, including the end of a significant CapEx build program at APRR, lower French corporate tax rates and the unlocking of Dulles cashflows to the group.

The main risk is a large and prolonged recurrence of COVID-19 that leads to more permanent road network closures and sustained traffic volume reductions.

This information has been prepared and provided by L1 Capital. To the extent that includes any financial product advice, the advice is of a general nature only and does not take into account any individual’s objectives, financial situation or particular needs. Before making an investment decision an individual should assess whether it meets their own needs and consult a financial advisor. This stock pick was published on 22 May 2020 and is subject to change.