No white flag on tax debate

RESULTS ANALYSIS

Need To Know

• Middle of the road result. Traffic volumes improving with strong fee revenue growth.
• French concession and tax discussions continue. More information to come in Sept/Oct 2023.
• Expect overhang of French discussion to soften short-term investor sentiment. 

1H23 Result overview: 

Total Group toll revenue up 7.9% on 1H22

1H23 EBITDA up 8.5%  on 1H22

Total group traffic volume up 4.5% on 1H22

1H23 DPS in-line with consensus at 20cps 

FY24 guidance of 40cps in-line. FX Hedged to mitigate exchange risk

Traffic and Fee Escalation

In-line result driven by notable toll fee increases and FX tailwinds. Record inflation rates over France and Germany have led to strong APRR / AREA growth of ~4.7%. 

Traffic volumes are progressing well. APRR traffic increased 4.6% to a record amount. Warnow tunnel traffic increase 7.2% primarily due to the roadworks on a competing route. Chicago Skyway volumes fell ~2.4% although it remains above where the acquisition took place. Dulles Greenway traffic was up ~8.4% although still remains notably below pre-COVID.

Total revenue growth was robust in the period due to strong fee escalations. APRR up 7.5% on 1H22, ADELAC up 13.1%, Warnow up 14.3%, Chicago Skyway up 8.6% (despite the lower volume) and Dulles up 9.5%. Management expect to see strong ongoing revenue growth due to defensive and robust fee escalations. 

France Concession and Tax

Concession issues arising from the French government appear to be in a better position that what was priorly expected. Management expect that a shortening of concession is unlikely although its not yet able to be ruled out. What could be more likely is a change in taxing measures for concession based operators within France. There is some speculation that the tax will be tolling specific. If this is the case then management will view it as a breach of contract and will move to litigation in order to fight the ruling. Management suggested that the current contract indicates that ALX would be entitled to compensation if a specified tax was put in place.  

In order for the tax to not be a breach of contract, it would need to be a broadly applied tax on all concession based operators (e.g. airports, etc). There's no clear or definitive answer on this in its current state but management expect to get more information from the French government in the upcoming 2024 Budget which is expected in late September and the further financial review in October. 

At current, management have implied that they've explored multiple outcomes and have included this thought process when implementing the FY23 DPS guidance. 

Investment Implications

Balance sheet appears to be in good position. Debt repayment profile appears relatively even out until FY2033. APRR is ~98% fixed and has been FX hedged for the upcoming distribution in order to mitigate risk. 

FY23 APRR CAPEX guidance at ~€120m remains in-line with guidance given at FY22 result. Includes the 4 projects announced prior in the year. Expect CAPEX for APRR 2023-2027 of ~€350m-€400m p.a.

Investment View

ALX’s cash flows and distributions are defensive and the current yield of ~6.5% is sustainable over the next few years, backed by continuing traffic volume recovery. We retain our Buy rating with potential upside catalysts, defensive cash flows and sustainable distribution although note that risk remains around the French concession discussion. 

Re-affirm our Buy rating.