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

Transurban Group, the toll roads’ developer and operator, believes in managing the base of its associated customer and client relationships while providing good infrastructure assets. The Company's segments include Victoria (VIC), New South Wales (NSW), Queensland (QLD) and the Greater Washington Area (GWA). Whilst continuing to grow the business through development, Transurban is also focused on enhancing customer experience, engaging with local communities and maintaining its commitment to safety and sustainability. Work on the 395 Express Lanes continues to progress, with two of five construction phases completed and renovation work on the Pentagon’s campus initiated. The LinktGO app was launched in Queensland in March 2018, prior to the Commonwealth Games, to assist interstate and international travellers, with strong take up to date. In March, Transurban opened its road to runners and walkers as part of the 13^th annual Herald Sun/CityLink Run for the Kids. Overall, TCL’s main aim is to be a partner of choice, with governments providing effective and innovative urban road infrastructure and services by utilising core capabilities. TCL expects to leverage from improving economic growth with growing population, better average daily traffic, inflation-linked tolls, and EBITDA margin drivers like A25.

 

Value Creation Strategy (Source: Company Reports)

Positive March (FY18) Update: Transurban released its March quarter 2018 update and during the period, Average Daily Traffic (ADT) increased by 2.7%, with growth across all Australian markets. Traffic growth for the quarter was impacted by the timing of the Easter holiday period. In addition, Transurban reached agreement in March to acquire the A25 in Montreal for C$840 million. The asset is comprised of a 7.2 kilometres toll road and bridge and connects to one of the fastest growing areas of Montreal. The acquisition provides access to a second North American market with a growing population. Transurban will assume responsibility for the management and operations of the A25 after financial close, which is targeted for Q4 FY18, dependent on Investment Canada Act approval. In Sydney, NorthConnex continues to progress, with 20 of the 21 kilometres of top heading for the mainline tunnel, as well as on and off ramps, now excavated. Work to integrate the tunnel with the Hills M2 Motorway is expected to be completed ahead of schedule in early May. Construction works have impacted traffic growth on the Hills M2.


Significant Demand and supporting outlook (Source: Company Reports)

For the March quarter, Sydney average daily traffic (ADT) increased by 3.5% to 660,000 trips. Construction commenced on the West Gate Tunnel Project in January 2018, with over 800,000 work hours already invested and a third major work site now established to create a tunnelling hub which will accommodate over 500 workers. For the quarter, Melbourne ADT increased by 3.2% to 831,000 transactions. Construction on the Logan Enhancement Project is progressing on schedule, with the first girders recently installed for the Wembley Road bridge duplication. The Disruption caused by these works impacted traffic growth for the quarter on the Logan Motorway. For the quarter, Brisbane ADT increased by 2.1% to 396,000 trips. In the Greater Washington Area, the Virginia Department of Transportation (VDOT) accepted Transurban’s proposal to extend the I-95 Express Lanes by 10 miles south to Fredericksburg under the existing 95 Express Lanes concession agreement. However, the Greater Washington Area ADT decreased by 3.9% to 87,000 trips, impacted by adverse weather conditions and associated school and government closures.



Cost of Debt Trend (Source: Company Reports)

Pricing of Senior Secured Debts: Transurban Queensland (“TQ”) announced that it has successfully priced USD 500 million of senior secured, 10-year USD Reg S debt (the “Notes”) under its Euro Medium Term Note Programme. TQ is 62.5% owned by Transurban. The proceeds of the issuance will be used to repay the majority of the remaining balance of the recently established bank bridge facility for TQ. The transaction was well oversubscribed and pricing for the transaction was below the current average cost of debt for the Transurban Group. The strong demand for the Notes illustrated the continuing appetite from the global debt investor base for the TQ credit. TQ has successfully priced CHF 200 million of senior secured Swiss debt maturing December 2025 (the “Notes”) under its Euro Medium Term Note Programme. The proceeds of the issuance will be used to repay in part the recently established bank bridge facility for TQ.


Composition of Group Debt (Source: Company Reports)

Other Updates: TQ successfully raised $954 million of debt via a new bank debt facility with a tenor of 18 months. The proceeds of the new bank facility will be used to prepay AirportlinkM7’s (“APL”), a wholly owned subsidiary of TQ, $950 million non-recourse bank debt facility. The Group appointed Mr. Mark Birrell as its Non-Executive Director. The Victorian House of Parliament recently voted to revoke the Planning Scheme Amendment (PSA) GC65 for the West Gate Tunnel Project, a scenario that was specifically addressed in the West Gate Tunnel Project Agreement executed by the State and Transurban in December 2017. The Project planning approvals will remain the responsibility of the State and may take the form of a Planning Scheme Amendment or an alternative approval pathway. The Group recently announced the completion of the retail component of its fully underwritten pro-rata accelerated renounceable 3 for 37 entitlement offers. The Retail Entitlement Offer has raised gross proceeds of approximately $554 million from the issue of approximately 48.6 million new securities at an issue price of $11.40 per new security.

Full Acquisition of Equity Interest in the A25: Transurban has reached an agreement with Macquarie Infrastructure Partners to acquire 100% of the equity interests in the A25, located in the Montreal metropolitan area for CAD 840 million plus transaction costs of CAD 18 million. The A25 is a 7.2km toll road and bridge connecting Northern Montreal across the Rivière des Prairies to commercial and residential areas. Transurban will assume responsibility for the management and operations of the A25 after the financial close, which is targeted for Q4 FY18 and is dependent on Investment Canada Act approval. It opened in May 2011 with a concession to September 2042. It recorded an average annual daily traffic of 44,616 in FY16 and 46,535 in FY17.


Revenue Trend of A25 (Source: Company Reports)

Outlook: The group is expected to benefit from $11.4 billion of new developments and asset enhancements and the ability to source new value-accretive opportunities. TCL aims to collaborate with partners and focus on long-term transport to support multi-modal transport solutions and bringing new technologies to drive asset performance. It has also launched Australia’s first real-world trial of user-pays road charging. The group believes that NorthConnex is structured for both near-term distributions and long-term value creation while TQ represents a matured portfolio with distribution accretive from day one. Meanwhile, the Notes priced inside the current average cost of debt for the Transurban Group and the issuance demonstrated the Transurban Group’s commitment to using global capital markets to meet its strategic objectives. Having ongoing access to global debt markets was consistent with Transurban’s broader capital strategy. It is anticipated that TQ will replace the new bank debt facility with a series of capital market issuances. The acquisition of the A25 and entry into the Montreal region was aligned with Transurban’s strategy of focusing on heavily congested, urban areas with strong demographics. The group is positioned well in terms of balance sheet and requires minimal refinancing until FY20. TCL is also poised well to leverage from higher employment that would drive additional traffic growth, better commercial activity and higher freight volumes and rise in wage growth. Thus, rising inflation environment as also indicated by the Reserve Bank of Australia (although with sluggish growth trend) is expected to enhance revenue.

Stock Performance: The transaction of pricing of senior secured 10-year USD Reg S deb was Transurban Queensland’s (“TQ”) debut USD Reg S offering and represented another important milestone in its debt investor diversification strategy. The consolidation by Transurban Queensland (“TQ”) of all of its senior debt funding requirements will provide greater funding flexibility to the group, by providing access to a wider and more diverse global debt investor base. After nearly three years of planning, development and public consultation, the Group has an agreement with the State to build the West Gate Tunnel Project and is committed to provide Melbourne with this desperately needed infrastructure as soon as possible. The share price was down by 3.84 per cent in the past one year, followed by a rise of 6.19 per cent in the past one month. We give a “Buy” recommendation at the current market price of $11.90 by looking at the broader pipeline of development projects that are helping to transform the transport networks of the cities in which it operates and consistently growing distributions.
 

TCL Daily Chart (Source: Thomson Reuters)

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