Company overview - Transurban Group is engaged in the development, financing, operation and maintenance of toll roads networks, as well as management of the associated customer and client relationships. The Company's segments include Victoria (VIC), New South Wales (NSW), Queensland (QLD) and the Greater Washington Area (GWA). Its VIC segment's operations include CityLink operations and development of CityLink TullaWidening and Western Distributor. Its NSW segment's operations include GLIDe tolling system and the development of NorthConnex. Its QLD segment's operations include AirportlinkM7 and the development of Inner City Bypass (ICB), Gateway Upgrade North and Logan Enhancement Project. Its GWA segment's operations include 95 Express Lanes and the development of I-66, I-395 and Southern Extensions to 95 Express Lanes. The Company manages and develops urban toll road networks in Australia and the United States. Its subsidiaries include Transurban Holdings Limited and Transurban Holdings Trust.

TCL Details

Diversifying debt portfolio and extending the average tenor of debt: Transurban Finance Company Pty Ltd (the Group’s financing vehicle) has closed a new A$1.1 billion syndicated bank debt facility. The new facility will be used to refinance Transurban’s existing A$900 million corporate working capital facilities and provide additional liquidity for the Group. The new facility is structured across three tranches with tenors of 3 years, 4 years and 5 years, and ensures the sufficient financial liquidity to meet ongoing funding requirements. Further, in May 2017, Transurban Group announced that Westlink M7 (M7) has proposed to issue A$100 million of fixed rate 12-year, and A$100 million of fixed rate 15-year senior secured notes as part of its capital strategy to diversify debt portfolio into capital markets and extending the average tenor of debt. Further, M7 forms a part of the NorthWestern Roads Group (in which Transurban has a 50% interest), which was created to hold the M7 and to develop the NorthConnex project. The proceeds of the Notes will be used to partly prepay existing term debt due to mature in August 2019 and fund associated transaction costs.  Pricing was completed on 26 May 2017 and settlement is expected to occur in August 2017, and the notes will rank equally with M7’s existing senior debt. Further, it represents company’s capital strategy of diversifying its debt portfolio into capital markets and extending the average tenor of debt. The Notes will rank equally with M7’s existing senior debt and settlement is expected to occur in August 2017.


Low cost of funding with longer tenor; (Source: Company reports)

Q1FY17 driven by growth in the networks of Brisbane and the Greater Washington Area: During Q3FY17, Transurban reported 11.3% year on year (yoy) growth in toll revenue at $502 million, while the proportional toll revenue increased by 10.2% yoy at $520 million. The company continues its investment into networks during the quarter, with key milestones reached in development projects across the networks. Further, company’s Average Daily Traffic (ADT) grew by 5.3% yoy, driven by growth in the networks of Brisbane and the Greater Washington Area. Improving customers’ options relating to the way they manage their accounts remains a focus and the group continues to invest in initiatives in this area. In Sydney, NorthConnex continues to progress on time and on budget, while there are currently 18 of 19 road headers in operation, with over 4km of tunneling now completed. Stage 1 of the M7 resurface works is nearing completion to ensure safe and efficient travel along the road, while stages 2 and 3 of the resurfacing are scheduled for 2018 and 2019. Importantly, Transurban has indicated for opportunities to expand development pipeline while all projects in $9 billion pipeline are amid exclusive negotiations. Transurban Group (ASX: TCL) lately announced that an in-principle agreement has been reached with Brisbane City Council to deliver the $60 million Inner City Bypass (ICB) Upgrade project.


Traffic and revenue performance; (Source: Company reports)

West Gate Tunnel Project update: Transurban announced the CPB Contractors John Holland Joint Venture as the preferred constructor for the design and construction (D&C) of the West Gate Tunnel Project (formerly known as the Western Distributor). The caliber of the submissions received were of the highest standard with CPB Contractors John Holland Joint Venture selected to deliver a quality, city-shaping project that will significantly improve transport and livability for Victorians. The West Gate Tunnel Project will deliver a vital second river crossing for Melbourne, relieving pressure across the city’s busy M1 corridor, both to the west and south-east of the city. The project features two new lanes in each direction along the West Gate Freeway between the M80 Ring Road and Williamstown Road, a 2.8-kilometer tunnel for city-bound traffic and a 4-kilometer tunnel for outbound traffic beneath residential Yarraville, a new bridge over the Maribyrnong River with connections to the Port of Melbourne, CityLink and to the north of the city as well as a new city bypass.
 

West Gate Tunnel Project five phase community engagement; (Source: Company reports)

Distribution guidance upgrade: The group increased its FY17 distribution guidance to 51.5 cents per security (cps), representing a 13.2% increase as compared to the FY16 distribution. Overall Proportional toll revenue enhanced 10.9% to $1,065 million while average daily traffic (ADT) rose 4.8%. The group’s proportional earnings before interest, tax, depreciation and amortization (EBITDA) also rose by 12.1% to $817 million and accordingly their free cash surged 47.5% to $680 million. The group holds $9 billion of development projects at Melbourne, Sydney, Brisbane and Greater Washington Area. Domestic performance of TCL was decent with Proportional toll revenue rising 8.8% to $434 million. ADT rose 3.4% to 648,000 trips driven by solid traffic across the network. The region’s EBITDA rose 10.4% during the period. The group’s construction of the NorthConnex (NCX) project is on track with 15 road headers currently in operation. On the other hand, the region’s M2 traffic was impacted by construction of NorthConnex while large vehicle toll multipliers are now at three times cars on the Lane Cove Tunnel (LCT), M5 and Westlink M7.


Network EBITDA margins; (Source: Company reports)
 
Growth potential in North America: Company maintain focus on heavily-congested, urban areas with strong demographics and continues to leverage core capabilities and apply a long-term partnership approach, while effectively responding to changing market conditions. The company considers equity stakes and other roles to position for long-term expansion, and maximize the investment made and value created through existing Express Lanes network. Moreover, increasing household income levels driving consumer purchasing power, increasing customer demands for service, information and choices. The company’s long-term partner approach aligns with shifting political and consumer sentiment and existing network expansion enhance competitiveness through technology solutions, acquisitions and new partnerships.


Network potential in North America’s most congested cities; (Source: Company reports)

Melbourne is the fastest growing state economy with nation-leading growth in population, while business and population growth centered on inner city and western suburbs with robust residential construction activity. Network-wide road congestion and public transport services remain a key issue in face of continuing population growth. The company is increasing its network capacity and efficiency through development of existing infrastructure to enhance the livability of local communities and further exploring opportunities to provide managed motorway services to assets adjacent to Transurban’s Victorian network. While the political focus will increasingly shift to next election due in November 2018, both Labor and Coalition have supported asset recycling, which will focus on integrated transport solutions including West Gate Tunnel Project, Metro Tunnel project, Level crossing removals, Outer suburban arterial, roads program (OSAR), North East corridor.


Melbourne network; (Source: Company reports)
 
Continuing investment on infrastructure in Sydney: Low interest rates have supported significant housing investment, and population growth is expected in north-western and southwestern growth corridors, while the growth to continue in established centers of CBD, Macquarie Park and North Sydney. The company is working with government partners to provide transport solutions and strengthening relationships with local communities, while demonstrating outstanding project management on current / future construction projects. Further, it will to participate in network growth opportunities, and integrate technology solutions into networks to improve the customer experience.  Importantly, population and economic growth justify the recent and continuing investment in Infrastructure. Largest program of Government infrastructure spending in NSW since Sydney Olympics include Sydney Light Rail, Western Sydney Airport, Sydney Metro, WCX.


Sydney network; (Source: Company reports)
 
The stock has risen about 7.8% in the past six months (as on July 10, 2017) on account of better H1FY17 results and improving operating environment. Given the huge allocation of infrastructure spending in recent budget and robust project pipeline, we give a “Buy” recommendation at the current market price of $11.32


TCL Daily chart; (Source: Thomson Reuters)
 

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