Fundie's Favourite

Reasons to love toll operator Transurban

Investment Committee, Switzer Dividend Growth Fund
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How long have you held the stock?

We’ve held Transurban since the global financial crisis, when the company committed to controlling costs and paying future dividends through operating cash flows.

What do you like about it?

Toll road operators are a simple infrastructure business that can grow earnings in line with broader economic activity. While not quite as cyclical as an airport infrastructure asset, they do exhibit a very predictable earnings outlook and are ideal for having in a portfolio context.

Transurban needs to keep on top of its gearing levels and costs going forward. It has a good management that can stand out versus its global peers.

How is it better than its competitors?

The quality of its assets, the control it has on future price movements, and its ability to keep costs low due to its gearing levels. Management has had a good track record over the past five years.

What do you like about its management?

The previous management was one of the first companies to communicate to the market in the GFC that it would address its gearing levels, keep costs down, deliver predictable earnings and pay a dividend via operating cash flows. Management has since changed; however, the philosophy remains the same.

What is your target price on TCL?

Our 12-month forward target price $7.15, with circa 4.8% yield (i.e. yield around 50-75 basis points greater than the broader market).

At what point would you sell it?

If it became de-listed. The long-term cash flow of this type of asset is the ideal asset for a large pension fund, either globally or domestically (industry super fund or Future Fund).

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

TCL is up nearly 17% (including dividends) over the past 12 months. This is well above expectations. Expected returns for this exposure is around 9% p.a. total return.

Is it a liquid stock?

Yes, TCL is the ideal liquid infrastructure stock for both domestic and global investors. As such, it suits both large and small investors.

Where do you see the value?

The value is in the assets. Also, it has simple predictable earnings growth in line with broader economic activity. Costs need to be maintained going forward. We believe it is the ideal stock to construct a diversified equity portfolio that ideally needs defensives and cyclicals.

George Boubouras is chief investment officer at Equity Trustees

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.

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