WEEKLY STOCK COMMENT: TRANSURBAN
Roy Davidson, 20 December 2018
Transurban (TCL) owns and operates a number of high quality toll road investments across Australia, the United States and Canada. 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, 17 toll roads. This portfolio includes CityLink, which joins three of Melbourne’s major motorways, seven roads in the Sydney orbital network, stakes in six roads in Queensland, two in Virginia in the US, and one in Montreal, Canada. TCL is constantly developing options to grow its operations (such as the West Gate Tunnel project in Melbourne and WestConnex in Sydney) 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 on the East Coast of Australia and North America. Moving into Virginia and Montreal provides a growth opportunity for the company. In Australia, ongoing projects (e.g. extensions and lane widening) provide additional earnings uplift and enable TCL to negotiate for toll increases, concession extensions etc. TCL is also focusing on boosting margins across its network via the deployment of its GLIDe electronic tolling system.
TCL recently won the auction for the large WestConnex project in Sydney, which links into the company’s existing network. The project comprises 33km of new motorway to be fully completed by 2026. We view this project as strategically important as it cements TCL’s position as the dominant toll road operator in the attractive Sydney market. Sydney’s population is forecast to continue to grow strongly, particularly in the WestConnex corridor. We expect the WestConnex project to have positive flow-on effects to TCL’s other roads in Sydney. It also places TCL in the box seat for potential future projects being considered by the New South Wales Government.
The operating outlook remains positive for TCL, with strong traffic growth across its networks 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. Recent results have been strong, with the company continuing to deliver operationally and growing its dividend well. TCL remains one of our favoured exposures to the Australian infrastructure sector.
Risks to TCL include:
- regulatory change
- declining aggregate demand
- rising interest rates