The performance of MIG’s toll road investments is best illustrated by the cash flows generated by the assets. MIG revalues the assets it has invested in every six months and publishes these valuations together with an associated NAB.
Why MIG revalues its assets
Under Australian Accounting Standards the valuations of MIG’s non-controlled assets are reflected in the MIG accounts, while MIG’s controlled assets, aside from derivative instruments, are carried at historical cost (less any associated depreciation and amortisation).
How MIG revalues its assets
As toll roads are cash-generating assets, the usual way to determine the value of a road is to express in today’s terms the cash the toll road is expected to generate over the life of the concession (the period over which the right to levy tolls is given). This is called the ‘present value’ of the cash flows. A dollar today is worth more than a dollar in the future, for a number of reasons including:
- A dollar today can be invested and earn interest
- The purchasing power of a dollar in the future may be less than a dollar today because of price increases due to inflation
- A dollar today is certain whereas there may be a risk that a dollar expected in the future will not be received.
The process used to express expected dollar receipts in the future into a present value equivalent is called ‘discounting’ and the models used to perform this calculation are called discounted cash flow (DCF) models. These models apply a ‘discount rate’ to the expected cash flows: this rate determines how much less a future dollar is worth than a dollar today, in other words how many cents in today’s terms each future dollar is worth. The higher the discount rate, the lower the present value of a dollar receivable in the future. MIG generally uses DCF analyses to value its unlisted and illiquid listed investments. This approach is consistent with other market participants.
MIG’s valuation models estimate the future cash flows that are expected to be generated by an asset and made available to MIG (through dividends, loan repayments, etc.), and discount these cash flows back to their present value at balance date. The valuation derived from the DCF analysis is periodically benchmarked to other sources such as recent market transactions, to ensure that the DCF valuation is providing a reliable estimate.
Valuation model inputs
There are a large number of variables which are used as inputs into the valuation models for MIG’s toll road assets in Australian dollars. These include:
- Revenue and expenses
The value of a toll road asset is sensitive to the expectations of future traffic and toll levels, as well as operating and capital expenditure associated with those traffic levels.
MIG employs specialist traffic forecasting experts to provide a view on the most likely level of traffic to use the road having regard to a wide range of factors including the development of the surrounding road network, economic growth in the traffic corridor and people’s willingness to pay specific toll levels based on the perceived benefits they gain from using the toll road.
Operating and capital expenditure estimates are dependent on forecast traffic levels and long-term plans for the asset. For example, traffic on a toll road may be so congested that extra lanes may need to be built. The operating and capital expenditure estimates are developed by the management of each toll road in consultation with appropriate third party experts.
- Cost of debt
Debt service (interest and principal payments) is another important input into MIG's toll road asset valuations, and depends on both existing financing arrangements and any assumed future arrangements. - Risk free interest rate
MIG uses the 10-year government bond rate, or its equivalent, as a proxy for the risk free interest rate in the country in which the toll road is located. A risk premium is then added to this risk free rate in order to derive the final discount rate, which becomes the basis for discounting future cash flows. All other factors being unchanged, if bond rates increase, a corresponding decrease is likely to be seen in the valuations of MIG’s assets.
The risk premiums applied to the DCF forecasts for MIG’s non-controlled assets are disclosed on page 65.
- Inflation rates
Many of the toll regimes at MIG’s assets are varied having regard to local inflation rates. Higher levels of forecast inflation will lead to higher forecasts of toll revenue, and conversely for lower inflation levels. Given that expenditure on MIG’s assets is generally less sensitive than revenue to changes in inflation, changes in inflation assumptions will change the valuation of an asset. In general, higher inflation assumptions result in a higher valuation for an asset.
Often, increases in long-term interest rates are associated with increasing inflation. In this scenario, the higher interest rates will tend to reduce an asset’s valuation while the increase in inflation will act to increase the value.
- Exchange rates
Currently, 91% of MIG’s portfolio is represented by toll road assets outside Australia. MIG’s policy is not to hedge the translation of the valuations of these toll roads back to Australian dollars, however forward commitments in foreign currencies are hedged. Increases in the value of the Australian dollar relative to currencies of the countries where MIG assets are located will lead to a reduction in valuation and the converse will be true for decreases in the Australian dollar.
To ensure the objectivity of the valuation process, MIG uses independent sources where possible in projecting these cash flow components. These forecasts are updated at regular intervals and whenever there are significant changes to an asset (e.g. the opening of a new adjoining motorway). Macroeconomic assumptions are adjusted every six months in order to reflect current values.
Sensitivity of MIG’s valuations
As outlined above, MIG’s valuations are sensitive to movements in a number of variable inputs. Details of the impact of movements in various inputs on MIG’s portfolio of non-controlled assets are included on
page 65.