Company Overview - Transurban Group is engaged in the business of development, operation and maintenance of toll roads. The Company has three geographic segments: Victoria, Australia; New South Wales, Australia and the United States of America (USA). The tolling businesses of Roam and Tollaust have also been included in the New South Wales operating segment. Transurban group is an internally managed toll toad investor with concessions to operate six mature Australian roads and three immature U.S roads. Foundation asset citylink in Melbourne is the group’s most valuable asset, contributing around half of the proportional revenues. It also owns full and partial interests in key motorways in Sydney’s orbital network, namely the M1 eastern distributor, the M5 south West motorway, the Westlink M7, the hills M2 and the Lane Cove Tunnel.

Analysis – The firm offers a defensive and growing cash flow stream. But returns are lower than they appear at first blush given the roads are handed to the government for no consideration when long term concessions end , after repaying all related debt. Careful acquisitions and upgrades including lane additions can generate excess returns. Green field developments are less appealing as they carry high traffic forecasting risk.

Cash flows are defensive and grow strongly as solid revenue growth is leveraged over a highly fixed cost base. Profitability is benefiting from falling debt costs due to global monetary easing through low inflation is allowing toll increases for most assets. The core Australian roads generate strong returns on initial investment. Upgrades such as widening these assets should also generate good risk adjusted returns. Finite life concessions require the firm to add new roads to extend its existence introducing high forecasting risk and needing ongoing equity issues.

2Q14 proportionate revenue came in at $281.3 Million, up 12.6% versus the prior corresponding period. While citylink traffic / revenue was slightly softer than expected and somewhat impacted by the resurfacing of the tunnels, the Sydney toll roads beat expectations on the back of  the M2 upgrade and associated benefits for the M7 and the Lane Cove Tunnel. The M5 upgrade is 60% complete with completion targeted late 2014 in line with the business case.

The main highlight was 10.7% quarterly average traffic growth across the westlink M7, Hills M2, and the lane cove tunnel. It is also pleasing to see the 495 Express Lanes in the U.S improve substantially. Daily average toll revenue on the 495 in December quarter was 24% higher than in September quarter. Traffic volumes on its largest asset citylink grew only modestly but improvements to the tolling system and recovery process drove revenue growth of 10%.  Traffic volumes and revenue continue to fall on the construction impacted M5, but completion of the upgrade in late 2014 will drive strong growth similar ti the current growth on the M2.

The volume and the toll price performance of TCL is replicating 2010 when it benefited from the widening of the citylink tunnels. This time the variance is not solely widening associated with the M2 and the benefits on the M7/LCT but also revenue collection initiatives. The M2 and its ramps like Windsor Road will continue to have a flow on effect on the feeder roads like M7 and LCT.  Within the context of M2 we saw strong mainline traffic supporting the feeder roads. The elevated traffic will continue for another quarter before starting to settle back. Citylink will continue to gain benefits from Glide. For the past 4 quarters tighter application of the tolling rules has resulted in the revenue growth of 1%. The Sydney rods present a strong opportunity of $6-12 Million of additional revenue with leakage of 2 -3.5% on most roads.

The broader growth environment is still robust, but with softer employment growth in Victoria it appears traffic growth has also slowed. Citylink is entering a more level period of growth. In Sydney the effect of lane widening continues to provide a favourable colour to the underlying trend.
The M2 upgrade was completed in August 2013 and the anticipated increase in traffic flow was again reconfirmed in the latest release. The M2 delivered 35.3% revenue and 14.9% traffic growth respectively relative to 2Q2013. We see the 2Q2014 result as further evidence that the M2 upgrade is likely to deliver traffic uplift. M7 and Lane Cove Tunnel have benefited more than expected from the M2 upgrade.


Source - Thomson Reuters

Price		Price % Change
Close:	6.79 (06-Feb-2014)	3M:	(3.82%)
52 Wk High:	7.31 (23-Oct-2013)	6M:	(2.30%)
52 Wk Low:	6.03 (04-Mar-2013)	1Y:	10.95%

Dividend
Yield	4.585799	FY
	5.114823	5yr Av
Payout Ratio	265.7543	FY
	502.9137	5yr Av

Transurban’s road transportation network in Australia and the USA is leveraged to economic growth and employment. While recent data signals positive environment for Transurban, the use of Toll roads for passenger vehicles is also linked to discretionary consumer spending. Given asset proximity tor key residential catchment areas feeding into the primary business districts in Victoria and NSW, Transurban’s industry positioning remains strong in a relatively stable business.

TCL is currently working to deliver thee M5 widening and I95 Express Lanes by calendar year’s end, while progressing the F3/M2 link to financial close, potentially integrating the cross city tunnel into its portfolio and participating in the sale process of Queensland Motorways. TCL vies these opportunities in the context of both generating cash for distributions and long term value generation.

All assets in TCL’s portfolio showed Average Daily Traffic (ADT) growth in both 2Q14 and the first half excluding the construction impacted M5 South West with growth rates continuing to improve across Sydney’s Northwest corridor. Revenue growth continues to outperform traffic performance on the back of toll increases and change in traffic mix with proportionate revenue up 12.6% in the 2^nd Quarter and up 13.1% for the first half.

Citylink recorded a strong 7.9% revenue growth in the 2^nd Quarter on the back of 1.5% traffic growth versus 2.8% growth in the first quarter. This was impacted by road closures for resurfacing work in late December which took 0.5% off traffic. Weekend traffic growth of 2.3% continues to outperform week day growth of 1.2% potentially highlighting renewed confidence by consumers while the 6.3%increase in average toll highlights stronger growth in heavy vehicles and improved revenue collection. For the first half traffic was up 2.1% and total revenue up 8.6%.

In Sydney Construction completion on the Hills M2 upgrade contributed to traffic growth on Hills M2 (+14.9%), Lane Cove Tunnel (+9.1%) and Westlink M7 (+8.1%) in the second quarter with hills M2 revenue up 35.3%, Westlink M7 up 10.3% and LCT up 12.3%. average traffic across Sydney’s Northern corridor increased 10.7% from the previous corresponding period and we expect ongoing strong performance across this corridor given the new capacity added by the recent M2 expansion. The new ramps on Hills M2 accounted for 39% of new traffic in second quarter. Westlink M7 continues to improve with ADT up 8.1%. Combined with a toll price increase on 1^st October 2013, revenue increased 10.3% on the previous corresponding period to A$57.9 Million. Lane cove tunnel is also benefitting from the M2 upgrade completion with truck growth (+15.7%) significantly outperforming car growth (+8.9%). Revenue eon the M5 southwest declined 3.0% to A$46.7Million in the second Quarter with traffic down 2.4%. Construction works remain on schedule and on budget with the project 60% complete and final completion due late 2014. The M1 eastern distributor recorded solid revenue growth of 3.5% in 2Q2014. We will be putting a BUY on the stock at the current price of $6.79.
 

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