By Sarah Shaw

How long have you held the stock?

Since March 2015.

What do you like about Transurban?

Many positives including:

• Quality and resilience of earnings – their toll roads are largely monopolistic intra-urban roads reducing traffic elasticity to price escalation and correlating traffic growth to local GDP (with all four jurisdictions that they are exposed being predominantly service-based economies);
• At minimum CPI toll escalation but in some cases better than CPI toll escalation on an annual basis supports real revenue growth;
• Depth and breadth of networks gives TCL a competitive advantage in new bids – it has synergies others cannot replicate;
• Strong government relationships – TCL has commissioned Greenfield projects (North Connex, Western Distributor) without competition through unsolicited bid process;
• Underappreciated US toll road exposure – Incremental traffic and pricing data highlights increased valuations given i) long concession; ii) discretionary pricing; iii) high GDP-per capita catchment; and iv) further network optionality;
• Strong growth pipeline – over A$10bn development pipeline ($5.5bn of which is exclusive/ committed);
• Optimised balance sheet – looks highly geared at headline but somewhat misleading due to large proportion being non-recourse and long dated (US debt maturity is >30 years); and
• A solid 4.5% dividend yield offering investors both income and capital return.

We balance these positives against certain risks to the TCL story including:

• Negative government intervention in an effort to reduce TCL’s competitive position; and
• Management over bidding/over paying for growth – haven’t historically but always a risk as market gets more competitive.

On balance, we believe at this price the positives outweigh the risks to justify our investment

How is it better than its competitors?

Compared to the majority of its global toll road peers it offers;

• Better concession terms including toll escalation;
• Better balance sheet utilization;
• Stronger competitive advantage for new projects; and a
• Stronger growth pipeline.

What do you like about its management

It has a highly experienced management team that has a proven track record of execution in terms of operating toll road assets, building new assets, executing growth strategies and financial discipline – reflected by their track record in achieving targets relating to short term incentives (STIs) and long term incentives (LTIs) which stipulate network configuration, growth and total shareholder returns.

What is your target price?

This is not a hard number – it’s based on an internal rate of return (IRR) of at least 8% – if the annualised return falls below an 8% we would be a seller.

At what point would you sell it?

There are a number of scenario’s where we could look to reduce or sell our position including:

• When its valuation falls below our benchmark return;
• Something fundamentally changes in the investment thesis to see the value or quality of the asset portfolio or company deteriorate (eg over bid on new assets);
• We re-position our portfolio for a shift in strategic direction which could see us reduce exposure to “user pay assets” such as TCL which are correlated to macroeconomics – eg if we see the macro environment deteriorating we will reduce our exposure to user pay assets.

How much has it added to your overall portfolio over the last 12 months?

It has had a total return of 22.8% over the last 12 months

Where do you see value?

High quality toll road operator which is under-valued at current prices based on our analysis which includes:

• Assessment and modelling of attractive concession terms;
• Strong competitive position with significant synergies that would be difficult to replicate;
• Strong management team who are executing;
• Positive macro environment; and
• Scope for additional projects – not valued until secured but upside potential.

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.