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A stock picker’s guide to Macquarie Atlas

For those who don’t know, Macquarie Atlas (ASX: MQA) is a toll road developer and operator with a stake in six major roads throughout the U.S., Germany, France and Britain. Its interests range from 22.5% in the Chicago Skyway (the smallest), up to 100% of the M6 Toll Road (the biggest) in the UK, with several in between.

Macquarie Atlas also owns 19.44% of the APRR in France, 50% of the Dulles Greenway in Virginia, 25% of the Indiana Toll Road in Indiana and 70% of the Warnow Tunnel river crossing in Eastern Germany. This means that Macquarie Atlas’ earnings are 100% exposed to the strength of the Australian dollar versus the Euro, the GBP and the USD, a fact that has seen its share price spike from $2.40 to ~$3.10 over the past six months or so.

Macquarie Atlas derives all of its earnings from tolls, and has a weighted average concession length for its toll collections of 52 years, and up to 85 years in some cases. The tolls are set fees that increase at varying schedules over the life of the concession agreement. In France the tolls can currently increase by 0.7x the rise in the Consumer Price Index (CPI) every year, while in Indiana and Chicago tolls rise by 2% or CPI + Nominal GDP per capita every year, whichever is greater.

The M6 toll can rise up to twice a year at the absolute discretion of Macquarie Atlas. While this last one sounds like a real gold mine, Macquarie has recently restructured its M6 debt so that all tolls collected are repaid into the loan, with Macquarie receiving a 750 000 GBP fee per annum for managing the asset.

All in all, Macquarie looks to have an excellent portfolio of assets with long concession periods that should deliver long-term revenues. However, its prospects for growth are slim, with traffic levels rising between 0.8 and 4.5% across all its roads bar one, which saw a traffic decline on the back of higher tolls. As detailed above, Macquarie Atlas has fair scope for raising tolls; however the company is not planning any acquisitions for the next five years or so, which will also limit its earnings growth. Macquarie Atlas has no corporate level debt, and all asset-level debt is non-recourse to Macquarie.

According to Atlas management, the near future will be spent managing its toll roads and achieving efficiencies in order to deliver returns and dividends to shareholders, who received 5.7 cents per share last year (unfranked).

Foolish takeaway
I’m not convinced that Macquarie Atlas can grow its earnings at a rate reasonable enough to justify investing in this company over others that could grow dividends and earnings faster. Macquarie did show a $1.4 billion profit for the year; however this is due almost entirely to the removal of M6 toll road liabilities from the books.

Net earnings from continuing operations equated to a measly 8.71 cents per share. Further gains to share price and earnings will come if the Australian dollar weakens further, but that’s a ‘if and when’ proposition. Macquarie Atlas’ real strength is its lack of debt and its long-term, mostly secure revenue streams which make this share one of the most reliable earners I’ve seen on the ASX – with the exception of Macquarie’s banking arm and its former airport in Sydney.

For investors wanting certainty and security over the long term, Macquarie Atlas may be just the share for you. Investors chasing larger incomes and better earnings prospects may be better off looking elsewhere.

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Motley Fool contributor Sean O’Neill doesn’t own shares in any company mentioned.

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