Macquarie Atlas Takes The Internal Route

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Macquarie Atlas will pursue plans to simplify its management structure and brokers expect distributions should improve once the transition occurs.

-Main benefits to come from improved investor sentiment towards the stock
-Complicated agreement regarding management of APRR yet to play out
-Potential for corporate activity around Atlas Arteria made easier
 

By Eva Brocklehurst

Macquarie Atlas ((MQA)) is taking a new road, with plans to internalise management being submitted to its AGM on May 15 for approval. Brokers welcome the move to simplify the company's management structure and expect distributions to improve from FY20 onwards.

Macquarie Atlas will be renamed Atlas Arteria with an ASX code of ((ALX)) and will appoint a new management team. Macquarie Fund Advisers (MFA) will remain as manager for 12 months until May 15, 2019. During this time Atlas Arteria will incur one-off internalisation-related costs as well as continue to pay base fees.

MFA will be paid the third instalment of its FY17 performance fee and six months of transition services fees from May 16 2019, to allow Atlas Arteria to establish offices and a new management team.

Morgan Stanley believes the proposed transition is manageable and estimates net savings in management fees of around $15m per annum. UBS considers this a positive first step to full independence and the agreement should result in a net $8m per annum saving on costs.

The main benefits are likely to come from improved investor sentiment towards the stock, as conflicting interests and governance concerns are removed, while future performance fees will be linked to cash flow rather than the share price.

Macquarie notes the performance fees will be taken in cash and Atlas Arteria will use the Eiffarie borrowing facility to finance these fees, meaning there is no impact on the dividend, while using its surplus cash from Greenway and improved currency to repay the borrowing.

The internalisation costs are less than Morgans assumed but the base fees being paid for 12 months are more than it expected. This broker assumes around $78m in performance fees are paid in the second half of FY18, via the issue of scrip as per historical precedents.

Morgans considers the agreement detrimental to FY19 cash flows, as costs run into FY19, although positive for FY20 and beyond. Further clarity on the internalisation, however, signals that fundamental factors should drive the share price of Atlas Arteria higher henceforth.

APRR

The company's Dulles Greenway (US) management is internalised while the company's APRR (France) stake will still be managed by MFA and associated funds (MEIF2, MAF2), with ongoing performance fees.

As the management agreement remains in place this suggests a larger and more complicated negotiation between MFA and Eiffage is yet to play out. The performance fee at the asset level remains an unquantifiable contingent liability but UBS notes starting value will be agreed as of May 2019, after a material step up in APRR cash flow.

MFA will receive a base fee of EUR7.4m to manage APRR along with the performance fee of 15% of the internal cash return of 8%. The base value of APRR is yet to be determined.

Morgans remains cautious about the capital requirements related to the exit of MEIF2 from APRR and the potential internalisation of MAF2. UBS believes MFA is incentivised to resolve the next stage of internalisation, to release the MEIF2 stake in MAF2 and facilitate an orderly wind up of that fund.

The broker envisages a clear path for the cash contribution from APRR to Atlas Arteria to rise to $350m, or more, in 2020 from $150m in 2017. This would account for around $0.50 per share in cash flow before any eventual distributions from Dulles Greenway.

The broker suggests Atlas Arteria will offer strong growth over the next three years and a considerable amount of upside, given the decision to explore internalisation amid the potential to acquire a further 5% stake in APRR.

Macquarie point out that between July 2018 and May 2019 there is effectively no performance fee on the APRR value and this provides a route for co-owner Eiffage to potentially bid for the business if a negotiated outcome is not achieved.

While Macquarie considers internalisation is a good move, the path chosen highlights a need to resolve the APRR ownership structure. At this point, the broker believes the potential ahead for corporate activity in Atlas Arteria is being made easier and this should ensure the core value of $6.55 a share can be realised .

FNArena's database shows five Buy ratings. The consensus target is $6.61, suggesting 11.8% upside to the last share price. The dividend yield on FY18 and FY19 forecasts is 4.1% and 6.1% respectively.

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