Macquarie Atlas Roads - Morgans

Toll Roads│Australia│Equity research│April 9, 2018

Macquarie Atlas Roads MQA internalisation agreement

ADD (no change) Current price: Target price: Previous target: Up/downside: Reuters: Bloomberg: Market cap:

A$5.91 A$6.81 A$6.72 15.3% MQA.AX MQA AU US$3,044m A$3,958m US$18.01m A$23.08m 669.8m 84.0%

Average daily turnover: Current shares o/s Free float:

■ MQA has agreed with Macquarie the details of its internalisation. Costs are less than we expected (albeit run into FY19) with no obvious need for a capital raising.

■ FY18 DPS guidance is unchanged at 24 cps. After factoring in the agreement, our FY19F DPS declines while our forecast DPS from FY20F onwards increases.

■ Our 12 month target price increases 9 cps to $6.81 per share. ADD retained.

Agreement on management internalisation at the MQA level… Macquarie will remain MQA’s external manager until 15 May 2019. During this time, MQA will incur one-off internalisation-related costs (~$12m) as well as continue to pay base fees to Macquarie (say $33-34m pa at current market cap and fee structure). From the termination date, management fees to Macquarie cease but MQA will pay Macquarie $750k per month until end-CY19 for transition services. Performance fees payable to Macquarie cease after 30 June 2018. MQA estimates ongoing running costs on an internalised basis at $15-20m pa, compared to ~$4m currently.

…but still tied to Macquarie via the APRR/MAF2 structure

Vol m

Price Close

Relative to S&P/ASX 200 (RHS)

6.50

125.1

6.00

115.8

5.50

106.4

5.00 100 80 60 40 20

97.0

Apr-17

Jul-17

Oct-17

Jan-18

Modelling impact

Source: Bloomberg

Price performance Absolute (%) Relative (%)

No change has yet been made to the APRR/MAF2 management arrangements with Macquarie. Macquarie will start to receive fees for the ongoing management of MQA’s interest in the APRR from termination of the MQA management agreement. This includes a fixed base fee of €7.4m pa (~$11.9m pa). It also includes a performance fee equal to 15% of actual cashflows when MQA’s IRR exceeds 8% pa; the calculation starts on 16 May 2019 and is based on an agreed APRR valuation as at that date. The agreed valuation would need to be ~10% below our APRR valuation for MQA to accrue a performance fee by the end of the current concession term. MQA has promised to “actively work with Macquarie and other parties to see if mutually acceptable alternative arrangements can be achieved.”

1M 4.4 7

Nathan LEAD T (61) 7 3334 4548 E [email protected]

3M -5.1 0.2

12M 15 15.9

We had assumed internalisation would be completed in 1H18, with MQA paying Macquarie $111m for advisory and support costs funded by a capital raising. The agreement announced today means internalisation costs are only ~$18m spread across FY18-19 (thus no capital raising required), but MQA base fees are paid for 12 months more than we’d anticipated. Based on MQA’s agreement with Macquarie, we assume ~$78m of performance fees are paid in 2H18 via scrip issue as per historical precedent (vs $45m previously but depends on stock performance against the XKIAI). The MAF2 base fees and increase in fund running costs are in-line with our existing forecasts. The outcome is detrimental to FY19F MQA cashflows by 3.7 cps (costs run into FY19), but positive to FY20+ per share metrics by >1.0 cps (no capital raising required).

Investment view With clarity on MQA internalisation, fundamental factors (eg. APRR toll revenue growth, legislated French company tax rate cuts, substantial debt service savings due to expiry of the Eiffarie interest rate swaps in June 2018, declining AUDEUR) should drive the share price higher. However, we also watch cautiously for capital requirements related to the final exit of MEIF2 from the APRR (MQA will be involved in the pre-emptive sale process) and the potential MAF2 internalisation (the PV of future MAF2 base fees at a 7% pa discount rate is €116m).

Financial Summary

Dec-16A 18.0

Dec-17A 20.00

Dec-18E 24.0

Dec-19E 36.2

Dec-20E 43.1

Dec-21E 64.0

13% 3.0% 1,685

11% 3.4% 1,775

20% 4.1% 1,891

51% 6.1% 1,979

19% 7.3% 2,050

48% 10.8% 2,125

- growth D/Greenway EBITDA (100%, US$m)

6% 70

5% 74

7% 72

5% 74

4% 78

4% 82

- growth APRR distribution to MQA (A$m) DG distribution to MQA (A$m) MQA corporate costs (A$m) MQA cash balance (A$m)

6% 125 (35) 223

5% 147 (37) 40

-2% 225 (51) 46

2% 307 (49) 46

6% 323 (30) 46

4% 362 105 (30) 46

Distribution (A$ cps) - growth Distribution yield APRR EBITDA (100%, €m)

SOURCE: MORGANS, COMPANY REPORTS IMPORTANT DISCLOSURES REGARDING COMPANIES THAT ARE THE SUBJECT OF THIS REPORT AND AN EXPLANATION OF RECOMMENDATIONS CAN BE FOUND AT THE END OF THIS DOCUMENT. MORGANS FINANCIAL LIMITED (ABN 49 010 669 726) AFSL 235410 - A PARTICIPANT OF ASX GROUP

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Figure 1: Financial summary Valuation summary APRR (25%) DG (100%) PV of Mgmt fees PV of Fund costs Fund cash MQA Equity value Shares on issue MQA Equity value

A$m A$m A$m A$m A$m A$m million $/share

Dec-18 4,265 547 (19) (186) 46 4,653 683 $6.81

Dec-19 4,269 597 (172) 46 4,740 683 $6.94

Dec-20 4,255 652 (168) 46 4,785 683 $7.01

Dec-21 4,199 603 (164) 46 4,685 683 $6.86

Dec-22 4,113 656 (158) 47 4,657 683 $6.82

Dec-23 3,994 711 (152) 47 4,600 683 $6.74

Dec-24 3,830 768 (144) 47 4,500 683 $6.59

Dec-25 3,650 825 (136) 47 4,386 683 $6.42

MQA cash summary APRR/Eiffarie distribution DG distribution Distributions received by MQA External mgmt fees paid Fund OpEx Other MQA cashflow

A$m A$m A$m A$m A$m A$m A$m

Dec-18 225 225 (35) (17) (5) 169

Dec-19 307 307 (20) (29) (11) 247

Dec-20 323 323 (30) 1 295

Dec-21 362 105 466 (30) 1 437

Dec-22 387 2 389 (31) 1 360

Dec-23 412 5 417 (31) 1 387

Dec-24 449 8 457 (31) 1 427

Dec-25 451 13 463 (32) 1 432

MQA distribution - total payment

cps A$m

5.7 (28)

13.2 (66)

16.0 (82)

18.0 (94)

20.0 (115)

24.0 (162)

36.2 (247)

43.1 (295)

64.0 (437)

52.7 (360)

56.7 (387)

62.4 (426)

63.3 (432)

Investments / sales Equity raising FX movements MQA cash balance

A$m A$m A$m A$m

1 18

(53) 59 0 30

12 1 65

154 7 223

(831) 647 7 40

46

46

0 46

0 46

47

0 47

0 47

47

APRR (100% basis) Traffic - growth Revenue - growth EBITDA - growth D&A Net interest Tax Other NPAT Operating CF Dividend paid Capex Net debt

bn kms % €m % €m % €m €m €m €m €m €m €m €m €bn

Dec-13A Dec-14A Dec-15A Dec-16A Dec-17A 21.3 21.7 22.2 23.1 23.8 0.8% 1.6% 2.7% 3.7% 3.2% 2,099 2,149 2,214 2,328 2,425 3.0% 2.4% 3.0% 5.1% 4.2% 1,475 1,520 1,589 1,685 1,775 3.4% 3.0% 4.5% 6.0% 5.3% (395) (404) (405) (397) (398) (331) (324) (278) (237) (182) (276) (332) (341) (351) (443) (32) (41) (27) (29) (46) 442 420 538 671 706 737 821 825 999 1,058 (400) (450) (425) (581) (672) (310) (316) (232) (337) (353) 6.8 6.7 7.4 7.1 7.0

Dec-18 24.5 3.0% 2,553 5.3% 1,891 6.6% (430) (142) (438) (46) 835 1,260 (731) (364) 6.9

Dec-19 25.0 2.1% 2,650 3.8% 1,979 4.7% (452) (115) (437) (47) 928 1,381 (811) (368) 6.7

Dec-20 25.4 1.6% 2,730 3.0% 2,050 3.6% (475) (108) (411) (47) 1,009 1,510 (889) (373) 6.4

Dec-21 25.8 1.6% 2,816 3.1% 2,125 3.7% (491) (107) (405) (48) 1,074 1,605 (959) (199) 6.0

Dec-22 26.2 1.6% 2,900 3.0% 2,199 3.5% (506) (99) (399) (49) 1,146 1,704 (1,028) (202) 5.5

Dec-23 26.6 1.6% 2,987 3.0% 2,274 3.4% (521) (86) (418) (49) 1,200 1,773 (1,093) (206) 5.1

Dec-24 27.1 1.6% 3,075 2.9% 2,349 3.3% (539) (72) (436) (50) 1,252 1,833 (1,187) (209) 4.6

Dec-25 27.5 1.6% 3,166 2.9% 2,427 3.3% (558) (57) (455) (51) 1,306 1,899 (1,281) (213) 4.2

Eiffarie (100% basis) Dividend received from APRR add: APRR tax transferred to FE less: Group tax paid add: Other less: Eiffarie net interest less: Eiffarie debt repayment Cash available for distribution Distribution paid by Eiffarie MQA ownership interest Distribution received by MQA Withholding tax on dividend Acquisition debt service Net distribution to MQA AUDEUR Net distribution to MQA Eiffarie Net debt

€m €m €m €m €m €m €m €m €m €m €m €m €m fx A$m €bn

Dec-13A Dec-14A Dec-15A Dec-16A Dec-17A 400 450 425 581 672 245 348 362 347 446 (71) (99) (121) (276) (376) (19) (2) 40 (146) (1) (224) (237) (180) (174) (174) (91) (112) (30) (70) (90) 241 342 492 257 473 184 330 423 417 503 19.4% 19.9% 20.1% 20.1% 20.1% 36 66 85 84 101 (1) 36 66 85 84 101 0.732 0.678 0.654 0.673 0.685 49 97 130 125 147 2.4 2.3 1.3 1.3 1.3

Dec-18 731 445 (390) (1) (94) (110) 581 587 25.0% 147 (3) 144 0.638 225 1.2

Dec-19 811 450 (442) (1) (20) 798 798 25.0% 200 (3) 196 0.639 307 1.2

Dec-20 889 425 (448) (1) (20) 844 844 25.0% 211 (4) 207 0.639 323 1.2

Dec-21 959 404 (399) (1) (20) 944 944 25.0% 236 (5) 231 0.639 362 1.2

Dec-22 1,028 398 (393) (1) (20) 1,012 1,012 25.0% 253 (6) 247 0.639 387 1.2

Dec-23 1,093 416 (411) (1) (20) 1,077 1,077 25.0% 269 (6) 263 0.639 412 1.2

Dec-24 1,187 436 (431) (1) (20) 1,172 1,172 25.0% 293 (6) 287 0.639 449 1.2

Dec-25 1,281 454 (449) (1) (28) 1,258 1,204 25.0% 301 (13) 288 0.639 451 1.2

Dulles Greenway (100% basis) EBITDA USA GAAP Debt service = P&I Pre-reserves cashflow Change in SDSRA and ERA Change in Improvement Fund Change in ERA Post-reserves cashflow Tax Acquisition facility debt service Distribution to MQA AUDUSD Distribution to MQA Net debt (incl. acquisition debt) ADSCR for 3 yr test (1.15x limit) ADSCR for 1 yr test (1.25x limit)

US$m US$m US$m US$m US$m US$m US$m US$m US$m US$m fx A$m US$m x x

Dec-13A Dec-14A Dec-15A Dec-16A Dec-17A 59 63 66 70 74 (57) (61) (62) (63) 4 8 13 (1) (1) 11 (3) 4 (1) (10) (23) (0) 0 0 864 858 1,023 1.03 1.18 1.18 1.10 1.18 1.18

Dec-18 72 (52) 21 (1) (12) 8 1,033 1.20 1.20

Dec-19 74 (53) 21 23 (36) 8 -

Dec-20 78 (30) 48 (8) 0 (40) -

1,043 1.25 1.25

1,045 1.31 1.34

Dec-21 82 (39) 43 (30) (0) 112 125 (44) 82 0.78 105 1,126 1.54 1.54

Dec-22 85 (69) 17 (1) (0) (2) 13 (11) 2 0.78 2 1,123 1.28 1.28

Dec-23 89 (70) 20 (1) (0) (3) 16 (11) 4 0.78 5 1,118 1.32 1.32

Dec-24 93 (71) 23 (1) (0) (3) 18 (12) 7 0.78 8 1,111 1.36 1.36

Dec-25 97 (72) 26 (1) (0) (3) 22 (12) 10 0.78 13 1,103 1.40 1.40

Dec-13A Dec-14A Dec-15A Dec-16A Dec-17A 49 97 130 125 147 49 97 130 125 147 (18) (23) (25) (30) (31) (4) (3) (4) (4) (7) 4 2 3 1 (0) 31 72 105 91 109

SOURCE: MORGANS RESEARCH, COMPANY

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Figure 2: Changes to forecasts 2017 actual

old

2018F new

r%

old

2019F new

r%

old

2020F new

r%

old

2021F new

r%

APRR (100% basis, 20.1% MQA owned): Traffic Mn VKT Revenue €m EBITDA €m Group debt service €m Group tax paid €m Dist'n to MQA A$m Net debt exc acquisition debt €bn

23.8 2,425 1,775 (410) (376) 147 8.3

24.5 2,553 1,891 (279) (390) 213 8.1

24.5 2,553 1,891 (279) (390) 225 8.1

-% -% -% 0% -% 6% 0%

25.0 2,650 1,979 (172) (443) 307 7.9

25.0 2,650 1,979 (172) (442) 307 7.9

-% -% -% 0% (0%) (0%) 0%

25.4 2,730 2,050 (146) (449) 324 7.6

25.4 2,730 2,050 (147) (448) 323 7.6

-% -% -% 0% (0%) (0%) 0%

25.8 2,816 2,125 (152) (399) 362 7.2

25.8 2,816 2,125 (153) (399) 362 7.2

-% -% -% 0% (0%) (0%) 0%

DG (100% basis, 100% MQA owned): Traffic million Toll revenue US$m EBITDA US GAAP US$m Debt service US$m Tax paid US$m Dist'n to MQA A$m Net debt inc. acquisition debt US$m

19.2 92 74 (63) 1,023

18.5 92 72 (52) 1,033

18.5 92 72 (52) 1,033

-% -% -% -%

18.3 94 74 (53) 1,043

-% -% -% -%

18.7 99 78 (30) 1,044

-%

19.1 103 82 (39) 82 1,126

19.1 103 82 (39) 82 1,126

-% -% -% -%

-%

18.7 99 78 (30) 1,044

-% -% -% -%

-%

18.3 94 74 (53) 1,043

MQA fund level: Distributions received by MQA Mgmt and fund costs Other operating receipts MQA distributable CF Distribution to investors MQA cash balance

A$m A$m A$m A$m cps A$m

147 (37) (0) 109 20.0 40

213 (32) 1 182 24.0 57

225 (51) (5) 169 24.0 46

6% 59% (875%) (7%) -% (20%)

307 (29) 1 279 39.9 57

307 (49) (11) 247 36.2 46

(0%) 67% (1018%) (11%) (9%) (20%)

324 (30) 1 295 42.2 58

323 (30) 1 295 43.1 46

(0%) (2%) (22%) 0% 2% (20%)

466 (31) 1 437 62.5 58

466 (30) 1 437 64.0 46

(0%) (2%) (22%) 0% 2% (20%)

million

670

698

683

(2%)

698

683

(2%)

698

683

(2%)

698

683

(2%)

MQA shares on issue

-%


Figure 3: DPS forecast 70

64.0

60 15.3

52.7 0.3

50 43.1 0.0

A$ cps

units

36.2

40

30

24.0

20

16.0

18.0

48.7

20.0 36.2

13.2 10

5.7 13.2

16.0

52.3

43.1

18.0

20.0

24.0

5.7 0

Distribution excluding DG

Distribution from DG SOURCE: MORGANS RESEARCH, COMPANY

3


Figure 4: APRR management structure – before MQA internalisation

SOURCE: MQA

Figure 5: APRR management structure – after MQA internalisation

SOURCE: MQA

Figure 6: MQA deferred performance fees

SOURCE: MQA

4


Figure 7: MQA valuation summary December 2018 valuation date Millions unless otherwise stated 25% APRR (France) 100% Dulles Greenway (USA) NPV of external base fees NPV of external performance fees NPV of fund opex MQA cash Equity value Shares on issue MQA equity value per share

EV NPV local currency 19,605 1,465

EV/EBITDA x 9.9 19.9

Net debt 100% Equity local currency local currency (8,099) 11,506 (851) 615

MQA stake % 25.0% 100.0%

MQA debt (151) (188)

MQA Equity local currency 2,726 427

FX rate 0.639 0.781

MQA Equity A$ 4,265 547 (19) (186) 46 4,653 683 $6.81


Key risks which may have an impact on our investment view include: Traffic growth; Toll escalation (driven by CPI and capital investment); Currency exposure; Operating and capital cost control; Interest rates; Returns on new investment; Transition from external to internal management; Capital management; Change of tax laws; and M&A.

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