I like investing in monopolies, particularly boring ones, and that’s why Transurban (TCL) is one of my preferred stocks. It is essentially a monopoly because motorists don’t have a realistic option with alternative roads and have to pay the tolls, and further, those tolls go up every quarter by at least the rate of inflation. With a little bit of traffic growth, revenue is “guaranteed” to increase each year by mid to high single digit percentage.
It is a defensive stock with low volatility. It really only faces three risks – construction risk on new projects; it gets the traffic forecasting on new projects horribly wrong (as occurred with other developers on Sydney’s Cross City Tunnel and Brisbane’s Clem7 Tunnel – both of which Transurban now owns); or over the medium term, higher interest rates (because it is highly leveraged).
While these risks can be material, they are also well telegraphed. In the main, Transurban’s construction record (notwithstanding that it has had a few issues with the West Gate Tunnel in Melbourne) has proven to be pretty reliable and so it is considered to be a low risk stock.
That was before the Covid 19 pandemic, which changed everything with (previously unimagined) lockdowns. But Transurban survived and as workers returned to the office, traffic volumes picked up. As the charts below show, Transurban has returned to trading in a tight range (1 year and 10 year charts below).
Transurban (TCL) – last 12 months
Source: nabtrade
Transurban (TCL) – last 10 years
There is a new risk in that the NSW Government is looking at toll reform and has commissioned an independent review. The aim is to improve the efficiency, fairness, simplicity and transparency of tolls for motorists. While this may lead to greater adoption of distance-based tolling and toll infringement reform, the NSW Government has recognised the importance of honouring the contracts it has with Transurban. The likely outcome is a fairer system for motorists, but not a material hit to Transurban’s earnings.
Last Thursday, Transurban reported its full year results. Let’s take a closer look at this and what the broker analysts have to say, to see if there is any value in Transurban.
Transurban’s full year
Transurban reported proportional toll revenue of $3,535m for the year, up 6.7% on financial year 2023. Sequentially, second half revenue of $1.772m was up fractionally on the first half’s $1,763m (there are fewer days in the second half). Proportional earnings before interest, tax, depreciation and amortisation (EBITDA) grew by 7.5% to $2,631m, thanks to tight control of costs, which only rose by 3.6%. (Reportings are “proportional” because on some motorways, Transurban owns less than 100%, for example, Sydney’s M7).
Statutory profit soared from $92m to $376m, largely due to a reduction in net finance costs, lower amortisation and the improvement in EBITDA.
Free cash flow, which is the key driver for the distribution paid to unitholders, rose by 15% to $1,954m.
While these numbers were broadly in line with the analysts’ forecasts, the growth in traffic (average daily traffic trips) disappointed a touch at 1.7%. All markets were higher, but the largest market, Sydney, recorded an increase of only 1.3% due in part to construction impacts on toll roads.
Showing the impact of lockdowns and changed working arrangements, and despite population growth, some motorways haven’t yet recovered from Covid-19. For example, traffic on Melbourne’s CityLink in the June quarter of 2024 was 3.3% lower than June 2019, and Sydney’s Lane Cove Tunnel was 17.1% lower. On the other hand, Brisbane’s Logan Motorway was up 26.4% and Sydney’s M5 West was up 6.4%.
On the development pipeline, the West Gate Tunnel project in Melbourne is on track to be completed by the end of 2025. In Sydney, construction of the M7-M12 interchange and M7 widening has commenced, with work expected to be completed in 2026. In North America, there is an extension to the motorway in the Greater Washington area. Plans are being developed to widen the western section of the Logan Motorway in Brisbane. Overall, Transurban forecasts capex for projects under development or delivery of $0.9bn in financial year 2025 (down from $1.1bn in financial year 2024), and then tailing down to $0.5bn in financial year 2026.
Group debt rose from $24bn at 30 June 23 to $25.9bn at 30 June 24. It has an average weighted maturity of 6.7 years and is 88.2% hedged. Upcoming maturities in financial year 2025 and financial year 2026 amount to 12.4% of the total debt. While this will result in higher interest costs when it’s refinanced, the overall impact should be containable. On a liquidity front, Transurban is well covered with a current excess of $1.9bn over and above the $1.4bn committed on projects for financial year 2025 to financial year 2026 and upcoming debt maturities.
The company has guided to a total distribution of 65 cents per unit for FY25, up 4.9% on the 62 cents paid for financial year 2024.
What do the brokers’ say?
The major brokers are largely supportive of the stock. Overall, the profit result was seen as “in-line”, with a little disappointment that traffic growth wasn’t a tad higher. Catalysts for share price growth are seen as finalisation of the NSW toll review, lower global interest rates, additional margin expansion and improving Australian traffic flows.
The consensus target price is $13.44, about 3.7% higher than Friday’s closing ASX price of $12.97. As shown in the table below, the range is tight – from a low of $12.31 from Morgans up to a high of $14.60 from UBS (source: FN Arena).
What’s the bottom line?
On a forecast distribution of 65 cents and priced just under $13, Transurban is yielding a prospective 5%. This is largely unfranked, so the distribution is best described as “interesting” rather than “compelling”.
But the stock is seen as “super defensive” and due to the scarcity of infrastructure stocks, particularly ASX-listed vehicles, Transurban carries a premium as it is the biggest and one of the few available. Institutions won’t be ready sellers.
If bond yields fall quickly, Transurban might also get a push along. However, as it didn’t really bear the cost of rising bond yields on the way up (because such a small proportion of the debt had to be refinanced), it won’t really be a huge winner as yields fall. Overall, it is still likely to be paying more in interest expense.
Bottom line, I think Transurban is reasonable value now around current levels. Certainly, in a market selldown that took it back to $12.40, I’d be a buyer. Conversely, if the market overshoots and Transurban heads up towards $15, I’d be a seller.
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