WEEKLY STOCK COMMENT: TRANSURBAN (TCL)
Roy Davidson , 16 February 2017
Transurban (TCL) owns and operates a number of high quality toll road investments in Victoria, New South Wales, Queensland, and Virginia in the United States. Its assets are intra-urban (i.e. within urban centres rather than between centres), with revenue growth driven by inflation-linked toll prices and incremental traffic growth.
TCL fully owns, or has stakes in, 15 toll roads. This portfolio includes CityLink, which joins three of Melbourne’s major motorways, six roads in the Sydney orbital network, stakes in six roads in Queensland and two in the US. TCL is developing options to grow its operations (such as the Western Distributor in Melbourne) while the operating outlook remains robust with the Australian toll road assets providing good growth.
TCL looks to acquire or develop roads in cities with stable governments and where it can benefit from network effects to drive strong returns. To this end, TCL has its focus at present on the East Coast of Australia and Northern Virginia in the US, in the Washington DC metro area. Moving into Virginia provides a growth opportunity for the company. TCL invests in its US asset through an investment vehicle called DRIVe, in which TCL has a 75% interest. Recent projects, such as the Cross City Tunnel, the M5 widening, and the I95 Express Lanes will provide an earnings lift. TCL will also deploy its GLIDe electronic tolling system, which is currently used on CityLink and across other toll road operations. This will reduce costs through economies of scale.
The operating outlook remains positive for TCL, with strong traffic growth in Melbourne and Sydney set to continue. The Australian toll road assets provide steady cash flows, while new projects in the US and Australia provide growth. The company also has further opportunities to improve returns by implementing new technologies such as its GLIDe tolling systems and insourcing certain functions. The company’s FY16 result was solid, with the company continuing to deliver operationally and announcing stronger than expected FY17 guidance.
Risks to TCL include; 1) rising interest rates, 2) changes in technology, and 3) development risks.