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 is Australia’s largest toll road operator and it currently holds seven of the nine toll road concessions in NSW, including the M1, M2, M5 and M7 motorways. Transurban controls 15 of 19 road toll concessions in Australia, and 7 of the 9 existing concessions in New South Wales. It has access to highly detailed traffic data when bidding for new roads and is able to leverage its existing toll roads to offer unique unsolicited proposals to state governments. Transurban’s development projects continued to progress throughout the March quarter. Whilst continuing to grow the business through development, the Group is also focused on enhancing customer experience, engaging with local communities and maintaining its commitment to safety and sustainability. The acquisition of the A25 and entry into the Montreal region have also been in alignment with Transurban’s strategy of focusing on heavily congested, urban areas with strong demographics. The recent development on proposed acquisition of a majority interest in the WestConnex project highlights that competition watchdog, ACCC is raising little uncertainty while many of the concerns flagged can be addressed by government and/or TCL undertakings. Its major projects including the West Gate Tunnel Project is expected to be completed in 2022 and this will add value to the toll road giant’s performance, while the group has continuously focussed on providing decent income stream to investors.
 

Value Model created through strategy (Source: Company Reports)

Update on Distribution Payment - The Company announced that it will pay a distribution of 28.0 cents per stapled security for the six months ending 30 June 2018. This comprises a 25.5 cent distribution from Transurban Holding Trust and controlled entities and a 2.5 cent fully franked dividend from Transurban Holdings Limited and controlled entities. This takes the FY18 distribution to 56.0 cents per stapled security, of which 5.0 cents will be fully franked. It was expected that the final distribution will have a tax-deferred component of approximately 20 per cent- 40 per cent. The extent to which distributions were paid in FY18 are tax-deferred will be confirmed in Tax Statements to be issued with the final distribution in August 2018. The Group announced that the issuance of new securities under the Distribution Reinvestment Plan will remain suspended for the distribution for the six months ending 30 June 2018. Securities will be traded ex-dividend on 28 June 2018, with a record and payment date on 29 June 2018 and 10 August 2018, respectively.


Average Annual Daily Traffic and Revenue Growth (Source: Company Reports)

Update on Transurban’s interest in WestConnex - ACCC raised preliminary competition concerns about Sydney Transport Partners’ proposed acquisition of a majority interest in the WestConnex project. Sydney Transport Partners is a consortium led by Transurban. WestConnex is a very significant toll road asset, and as such represents an opportunity to establish a strong rival toll road operator. Transurban already has significant incumbency advantages when competing for future toll road projects. ACCC was concerned that the proposed acquisition may cement Transurban’s advantages when competing for future toll roads.


Network Potential in North America (Source: Company Reports)

The ACCC was also concerned about the effects of the proposed acquisition on competition between toll roads. If the acquisition proceeds, motorists might lose the benefits from the potential competition between WestConnex and Transurban’s existing toll roads. For example, to attract more vehicles away from Transurban roads, an alternative owner of WestConnex might lower tolls for certain trips or make changes to its roads or services to ease traffic congestion. The ACCC was examining whether the NSW government can constrain Transurban to prevent it from having advantages over other companies on future toll road concessions if it succeeds in buying WestConnex.

Details of the Statement of Issues - Australian Competition and Consumer Commission announced that it will continue to review the proposed acquisition by a Transurban-led consortium of a 51 per cent interest in the WestConnex assets that were currently available for sale by the NSW Government. The ACCC released a Statement of Issues which outlined the ACCC’s preliminary views on issues arising from the proposed acquisition and highlighted the areas for further inquiry as part of the review process. The Statement of Issues identified ‘issues that may raise concerns’ and ‘issues unlikely to raise concerns’. The ACCC has not identified any ‘issues of concern’. Transurban and its consortium members will assist the ACCC with its ongoing review. The release of a Statement of Issues by the ACCC was a recognised step in the ACCC’s informal merger review process and as it did for the previous acquisitions, TCL will continue to work with the ACCC to enable it to complete its review. The ACCC invited submissions from interested parties in response to the statement of issues by 31 May 2018. The ACCC’s final decision is expected to be out on 19 July 2018.

Financial Close of the Eastern Distributor Motorway (M1) Refinancing – Recently, TCL announced that the Eastern Distributor (ED) has successfully raised $226 million of non-recourse debt via a new bank debt facility with a tenor of 4 years. Transurban owns a 75.1 per cent interest in the ED. The funds raised will be used to repay $225 million of existing ED bank debt, which is due to mature in July 2018. This refinancing has delivered a substantial reduction in the ED’s overall funding costs. The hedged interest rate on the new facility was significantly lower than the hedged interest rate on the maturing facility. The Group continued to appreciate the strong support that it received from its relationship banks and as well as acknowledged the quality and strong performance of the ED. It was observed that Debt market conditions continued to remain positive for Transurban’s debt refinancing pipeline as currently observed market interest rates were below the Group’s average cost of debt.


Current cost of Debt Trend (Source: Company Reports)

Positive Outlook – TCL has a clear strategy to become the partner of choice with governments providing effective and innovative urban road infrastructure and services utilising core capabilities. It focuses on Geographic diversification into additional North American market with potential for network expansion and a demonstrated history of market-led negotiations. It works on the opportunities to drive value through operational efficiencies, upgrades to customer products and network enhancements. It has stable financials with FY17 Annual Average Daily Traffic (AADT) growth of 4 per cent and EBITDA margins of almost 70 per cent. 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. It has the abilities to drive efficiencies on and off Transurban roads like by traffic modelling and network planning to inform road design and application of technology. It is on a success path to create further opportunities in South East Queensland as population growth in Southeast Queensland will add almost two million people by 2041 and approximately one million in greater Brisbane region.


A25 Historic Revenue Profile (Source: Company Reports)

Stock Performance- Transurban has been awarded five toll road concessions or upgrades following unsolicited proposals to state governments, in exchange for increase or extension of existing tolls. It is the only operator in the past 30 years who has been granted a toll road concession in Australia following an unsolicited proposal to a state government. Moreover, it was observed that the Average Daily Traffic (ADT) increased by 2.7 per cent in March Quarter 2018, with growth across all Australian markets. In March, Transurban opened its road to runners and walkers as part of the 13^th annual Herald Sun/CityLink Run for the Kids. More than 23,000 people took part and raised $1.4 million for the Royal Children’s Hospital Good Friday Appeal. TCL expects to leverage from improving economic landscape with growing population, better average daily traffic, inflation-linked tolls, and EBITDA margin drivers like A25.

ROE of the stock improved from 2.2 per cent as at December 2016 to 7.2 per cent as at December 2017and ROIC also improved from 0.4 per cent as at December 2016 to 1.7 per cent as at December 2017.The stock was down by 6.02 per cent in the past six months and it is worth noting that the stock was up by 126.59 per cent in last 10 years (as at 4 June 2018). While state government is ideally liked to have competition among toll road operators, the likelihood of distance-based toll fees being imposed on drivers in the future (to compensate for a decline in fuel excise taxes) meant that states might be happy to deal with just one party, like Transurban. We recommend to “Buy” the stock at the current market price of $11.85 as the market sentiments look favourable and it is expected that the Group will continue to perform well while changes in the crude oil price scenario are also noted.
 

TCL Daily Chart (Source: Thomson Reuters)

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