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

Toll road operator and transport infrastructure company, Transurban Group has been performing well in the past few years and has recently raised cash to pay $5.5 billion for West Gate Tunnel (WGT) Project which is due for completion in 2022. This can be a game-changer for Transurban along with other developments. Under this effort, TCL asked its current shareholders to buy more shares at $11.40 which represented a 5% discount to the closing price of $12 stated under the offer and big investment giants have been seen to help TCL in raising the capital. While a significant part of the revenue comes from Australia, the group is now putting efforts for growth catalysts from the USA including the recent efforts on extension of the I-95 Express Lanes to Fredericksburg.

Healthy financial performance: TCL’s proportional toll revenue for FY17 increased by 10.6% and accounted to $2,153 million; and its proportional earnings before interest, tax, depreciation and amortisation (EBITDA) increased by 10.1% and accounted to $1,629 million. It distributed 51.5 cents of dividend for FY17; and has set its FY18 distribution guidance at 56.0 cents, which is an increase of 8.7%. Its average daily traffic grew by 4.0% as compared to prior year. TCL has also invested in a number of sustainability, technology and safety related initiatives to help it in positioning its future environment. As far as its network activities are concerned, they are in line with revenue from Sydney increasing by 9.2% and accounting to $872 million whereas from Melbourne the toll revenue increased by 4.1% and accounted to $687 million.
 

Revenue Trend (Source: Company Reports)
 
Plan for 2018: The new 95 and 495 Express Lanes trials are to begin in mid-2018 and a new bridge is to be constructed over the Maribyrnong River which will have a direct access to the Port of Melbourne. Further, a twin elevated road structure will also be constructed along the Footscray Road which will have connections to CityLink and with Western edge of the city. This all is the part of West Gate Project and once it will be completed in 2022, this project is expected to result in network improvements in Pakenham to Geelong and new 70 km of new traffic lanes will be in operations. Overall, economic benefits of $11 billion are expected for the State of Victoria through this move.
 

Projects’ Timeline (Source: Company Reports)
 
Projects undertaken: TCL’s key projects are under construction and are on schedule and within the budget. One of the Projects as highlighted above is West Gate Tunnel Project for which the group indicated to raise $5.3 billion of equity. Recently, Virginia Department of Transportation (VDOT) also accepted its offer to extend I-95 Express Lanes to Fredericksburg under the existing I-95 Express Lane concession agreement. It will extend its existing project by 10 miles in the I-95 median and this project includes new access points to the existing I-95 Expressing Lanes, which includes two new flyover ramps to support 28,000 workers at Marine Corps Base Quantico. All these extensions represent an investment of more than US$1 billion; and after completing these projects, the Express Lanes network will be the largest connected network in United States. The financial close on the US$565 million project has been scheduled for the first half of 2019.

Renounceable Entitlement Offer: The group had launched a fully underwritten pro-rata accelerated renounceable entitlement offer of new Securities to raise approximately $1.9 billion and the proceeds have been earmarked for funding of Transurban’s share in the West Gate Tunnel Project and for general corporate purposes. It completed its institutional component of the Entitlement Offer and raised gross proceeds of approximately $1.35 billion. The new securities will be entitled to the distribution of 56.0 cents per security.

Delivering Value to customers: Its customers save more than 310,000 hours of travel-time each working day by using the roads in Sydney, Melbourne and Brisbane. More than 50% of customers’ accounts pay $10 or less per month. For safety issues, it entered into a partnership with Neuroscience Research Australia (NeuRA) to launch the Transurban Road Safety Centre. TCL works closely with its stakeholders to deliver the benefits from the Projects. It is also focusing on solving some of the significant road network issues in Melbourne. For instance, it replaced Roam Express to reduce all the confusions over multiple brands. Further, improved customer experiences support the performance of the group. The setup costs for tag accounts and retail fees have also been reduced. With this backdrop, TCL’s website features and self-service channels were rated highest in terms of uptake amongst all the brands.
 

Customer Satisfaction (Source: Company Reports)

Sustainability: It was awarded with DJSI Industry Mover Sustainability Award 2017 and as the “Employer of Choice for Gender Equality” for the third year. It also launched its second Reconciliation Action Plan which was named as “Innovate RAP”. The third and fourth stage are about to commence that is “Stretch” and “Elevate”. TCL also investigated into its transport mobility challenges which were faced by Aboriginal and Torres Island communities. It continued its partnership with Landcare Australia so as to continue the investigation in developing communities. It was granted with some innovation grants which assisted in development of new road and safety initiatives. ASCI rated it as one of the “Leading” Company for its sustainability reporting for the ninth year.

Risks from WGT Project: TCL runs the risk of WGT project not getting completed in time which may be owing to factors such as failing to comply with the obligations under WGT Project agreement or fulfilment of other requirements or dissatisfaction of the CityLink users might emanate. There is also a risk that the Project costs can be more than what was expected and Transurban will be responsible for any cost overruns which will be incurred by D&C contractor and these cost overruns may have an adverse impact on TCL’s business, cash flow and on its financial conditions. However, given the group fundamentals and strengths in terms of projects’ completion, we believe that these occurrences have a low chance. In fact, contractual close with the Victorian State Government to build, toll and operate the $5.5bn West Gate Tunnel Project until 2045 itself signifies the confidence on the group’s potential. Further, timing of the project with first traffic in 2023 is expected to open some opportunities.

Stock Performance: TCL earnings growth has been robust over the past ten years and has doubled in the last 5 years. In the last six months, the stock has been up 6.8% (as at January 19, 2018). Its positive net income, operating cash flows and an improvement in long-term debt to total assets in FY17 are all the positive indicators. The price potential at the back of key projects and any concession extension at Citylink will give a better track. The group has also reiterated its FY18 dividend guidance including distribution of 28 cents for six months ending December 31, 2017. With stepping into an intensive period of construction, the group is tipped to have single-digit medium-term growth. Given the decent income opportunity offered by the stock, we give a “Buy” at the current market price of $12.04
 

TCL Daily Chart (Source: Thomson Reuters)

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