Stock of the Day - Transurban Group (SELL)

Transurban Group (TCL), engaged in urban toll road networks in Australia and the United States of America, appears to be a good target for consideration given the existing market sentiments.


Statutory Results (Source - Company Reports)

TCL’s sales were A$1.15 billion during year ended June 2014, which indicates a decrease of 3.8% in comparison to 2013. Most of the revenue for TCL emanates from New South Wales-Australia wherein the sales have been A$600.00 million in 2014. TCL has a market capitalization of about A$14.75 billion. The stock has increased in value during the previous 5 fiscal years with the stock about 16% up to A$7.78 for 52 weeks ending 03^rd October 2014. Its gross profit margin has been reported to be better than 2013. The long term debt and total liabilities as of June 2014, were A$6.08 billion and A$8.84 billion, respectively. 


Performance Highlights (Source – Company Reports)

In the near future, earnings and cash flow growth will be driven by the healthy pipeline of growth projects. Specifically, TCL will be able to steer through well in terms of EBITDA by virtue of the projects in each of its operating geographies. For instance, financial close for the CityLink-Tulla widening is expected by CY14 or early CY15; and financial close for NorthConnex is on track for late CY14. TCL opined that the Queensland Motorways (QML) integration is proceeding as expected, in QLD. The acquisition completed in July 2014. For the Gateway Upgrade North widening project, TCL is in discussions with QLD Govt. Further, the 95 Express Lanes (85% complete) in the US remain on schedule to open in late 2014. 495 Express Lanes capital restructure have also been completed. Pocahontas 895 transfer to lenders has also been completed. Pavement rectification works on the Logan Motorway have been ceased with a review underway, in order to avoid further addition to traffic congestion.

The Company reported that a New tolling system is about to be rolled out in NSW. There are continued improvements in fee/revenue capture through GLIDe tolling platform as well. With regards to Operations and maintenance, CityLink road operations moved in-house with the acquisition of TransLink Operations; Hills M2/LCT operations moved in-house; and CityLink tunnels’ resurfacing has been completed.

Further, changes with respect to the Executive team are expected to deliver during next phase of business. TCL completed $2.74Bn capital raising to fund equity contribution for the QML acquisition. Further, $1.27Bn of Westlink M7 project debt is being refinanced.

TCL also acquired the Cross City Tunnel (CCT) in June 2014 for A$475m, which may add to opportunities for TCL’s existing Sydney road network.


Portfolio Performance (Source – Company Reports)

TCL advised pro-forma FY14 QML cash flows of A$100m, which will serve a good start for FY15.  The Company appears to be better positioned in view of increased traffic growth which can offset the rising interest rates environment. To counterpoise the interest rate movements, TCL is undertaking substantial refinancing activity as exemplified earlier.


Financing Update (Source – Company Reports)

On its investor’s day, TCL confirmed FY15 guidance of 39cps to be fully FCFPS covered. Then Brisbane growth outlook remains promising in view of expected QLD population and employment growth during 2014-18.


Assets for FY15 (Source – Company Reports) ²Scheduled to commence operations in FY15.

The FY15 earnings will be due from recent projects including flow-on benefits from the M2 widening (across TCL’s northern Sydney assets), inclusion of the Cross City Tunnel, M5 widening to be fully delivered by calendar year-end (slightly delayed) and earnings from QML. TCL clarified that M5 is currently tax paying whereas rest of its tax consolidated groups will not be paying tax at least until 2020.


Distribution Growth (Source – Company Reports)

There appears to be some level of risk to QML traffic with respect to greater dependence on commercial vehicles with any softness in the macroeconomic environment. With increasing population in various cities of Australia (for example, Melbourne) and further job creations, the transport infrastructure may need to withstand a great pressure, which in turn may create opportunities for TCL. 


TCL Daily Chart (Source - Thomson Reuters)

However, at present, TCL is still little far away in its upgrade cycle and is yet to reap benefits from its growth projects. Colossally great potential has not been foreseen, as such, in the near future. We also see risks such as those associated with recent M&A activities in view of integration with existing assets and TCL’s system in entirety, other than the traffic growth related perils. We believe that the stock is copious at the current price of $7.84, given all conditions; and accordingly, we put a SELL recommendation on the stock.
 


 
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