Portfolio Changes - Buy Atlas Arteria (ALX) | Sell Ampol (ALD)
Australian Equities Income Portfolio Change
We have sold the Ampol holding in the portfolio and initiated a position in Atlas Arteria with the proceeds. The investment in Ampol has required some patience however it has returned more than 30% over the past 12 months compared to the ASX200 total return of 9.6% over the same period. A number of outstanding issues from prior management have been addressed, including the decision to retain the Lytton refinery based on the asset’s economics being underwritten by the Federal Government’s fuel security services payment policy. As is often the case with regulatory support, refiner margins have improved dramatically since the policy was enacted, but the long-term economics have nonetheless been underpinned. The company is in the process of acquiring Z Energy for $1.9b, which is to be debt funded, limiting its ability to pay high dividends and taking capital management off the agenda for the coming period.
While the improved market conditions for Ampol have been reflected in the share price, there is a growing risk of extended inflation and lower growth from exogenous geopolitical events, which adds to the existing outlook for monetary tightening by G7 central banks. This environment, we believe, is likely to favour real asset exposures, particularly those with structural inflation hedges in their revenues. Atlas Arteria represents such an exposure, whereby its tolls are 70% explicitly tied to inflation, with the balance either inflation-linked or subject to regulated pricing for which inflation is relevant. Its portfolio includes ~31% stakes in each of the APRR and ADELAC toll roads in Eastern France, the Warnow Tunnel (100%) in Rostock, Germany and the Dulles Greenway (100%) toll road in Virginia, US. ALX currently trades on a CY22 EV/EBITDA multiple of 10.2x and dividend yield of ~6.3% unfranked. At an asset level the RCEA/A79 toll road in France is due to open in CY23 which will step up toll revenue, the Dulles Greenway asset is being renegotiated with government to move to a concession revenue model and ALX/Eiffage aim to extend the APRR concession beyond its 2035 term. Current capital expenditure under review includes EUR400m ALX/Eiffage for CY23.