One of my seven key structural growth themes is “monopoly toll bridges”. It’s a concept I have “borrowed” from the master, Warren Buffett, who is often quoted saying “a monopoly toll bridge is my dream investment”.
When you think about that statement it is absolutely valid, but even more so in a world of ultra-low interest rates, low growth and low inflation. High barrier to entry, long duration, infrastructure assets with pricing and volume power will continue to outperform in that environment.
We are in a world of negative interest rates and negative real yields on most long bonds in the world. Anyone who buys a long bond and pays a government an interest rate, in my opinion, is insane. That is return free risk and I think there are many ways of buying bond similar instruments that will continue to strongly outperform long bonds in terms of total returns.
Infrastructure assets with long concessions benefit on all fronts in the current environment. That environment will continue as even the US Federal Reserve is backing away from interest rate rise forecasts. In reality, the world is still cutting interests rates at the aggregate level and buying long bonds in the form of QE.
For an infrastructure stock, you have the benefit of falling interest costs on their debt, the ability to refinance debt at better rates and longer duration, mandated toll rises above inflation, and in some cases, volume growth (traffic growth) that is driving earnings and distribution growth. You also have indebted governments wanting the private sector to own and operate key infrastructure assets that is further driving growth.
I also believe the best investment ideas are those that you see with your own eyes in everyday life. Infrastructure assets, such as airports and toll roads, are classic examples of assets you can assess with your own eyes in everyday life. Today I’m going to write about a company that readers of these notes from Sydney, Melbourne and Brisbane use either directly or indirectly on a daily basis: Transurban Group (TCL); Australia’s true monopoly toll bridge.
TCL owns and operates a monopoly ring of toll roads around Australia’s three most populated cities. You pretty much can’t get around or across Sydney, Melbourne or Brisbane without paying TCL a toll. The move to “cashless tolling” has made using TCL’s toll roads painless and is part of the reason for the structural increase in traffic volumes and toll revenues. Most of us don’t even know on a daily basis what our total tolls paid are. All we notice is TCL direct debiting another $100 from our bank accounts every few weeks!
As you can see, Australia’s three largest cities are simply ringed by TCL assets. I’m sure you all recognise the toll roads and tunnels in the slides above, and most likely use them.
The good news for TCL shareholders is TCL management is ‘sweating’ these monopoly assets hard. It’s one thing to have a wonderful monopoly asset endowment, but the real skill is generating the highest economic “rent” from these assets. TCL is generating high economic rent from their assets. This was evidenced at the interim result in February where TCL raised both revenue and distribution guidance.
[2].
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Most importantly, this extraction of economic rent is driving distribution (dividend) growth. I can’t stress enough how much more important dividend GROWTH is over dividend yield. You always should seek dividend GROWTH over basic dividend yield. TCL offers, in my view, structural dividend GROWTH.
[4]This really is the key point: TCL is all about distribution growth and that distribution growth will beat ANYTHING a long bond can deliver.
Part of this inflation protection/pricing power is driven by TCL’s toll mandates [5]. In a low inflation world, the ability to raise prices and therefore revenue is a major structural advantage.
Obviously, to keep growing distributions, you have to keep growing revenue and TCL has years of growth projects ahead of it in the three key east coast cities that will continue to increase traffic and, therefore, toll volumes on its network.
(Click the links for the Sydney [6], Melbourne [7], and Brisbane [8] networks).
You can see why I think TCL has a bright short, medium and long-term future. This is in reality a “structural growth bond”.
The 1H FY16 result delivered double digit earnings growth of +14.6%. The FY16 distribution guidance was upgraded to 45.5c, which equates to distribution growth of +13.8% yoy.
In a world where genuine double digit EPS and DPS growth is hard to find, these are highly attractive numbers and in my view there is more to come.
TCL consistently states they have further efficiencies to improve network and financial performance, utilising technology. This suggests further economic rent will be extracted from this wonderful set of assets, which will be positive for TCL shareholders.
I genuinely believe TCL should be a core portfolio holding for all Australian investors.
Yes, you don’t get fully franked distributions, but fully franked distributions aren’t the be all and end all. In fact, you’ve recently seen fully franked dividends haven’t stopped the Australian banks falling -25%. One of the banks problems is their dividends are flat or falling, whereas TCL’s dividends are rising.
I can also see no higher barrier to entry business listed in Australia than TCL.
TCL has no competition, if anything, they have further enhanced their monopoly position in all key markets. This is a very important point.
TCL has all the attributes I seek in an investment. It is Australia’s “monopoly toll bridge” and if you believe in the Warren Buffett approach to long-term investment, you should own it.
When you are next driving along a TCL owned toll road, ask yourself: why don’t I own these shares?
The best investment ideas you see with your own eyes in everyday life.
The AIM Global High Conviction Fund owns TCL shares.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.