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

Acquisition of WestConnex motorway: Transurban Group (ASX: TCL) is engaged in the development, operations, management, maintenance, and finances of urban toll road networks. The company is known to be the largest and the leading toll road operator in Australia. The company holds interest in 13 roads in Sydney, Melbourne, and Brisbane, Australia; and 2 roads in the Greater Washington area, the United States; as well as 1 in Montreal, Canada. TCL for WestConnex has participated in a bid to acquire equity stake from the NSW Government, with CPPIB, AustralianSuper and Tawreed Investments Limited. The company has submitted the bid in July 2018. Recently, the group gave a proposed undertaking for the acquisition of majority interest in WestConnex motorway and this is under consultation by Australian Competition and Consumer Commission (ACCC). According to the undertaking, TCL will publish detailed toll traffic data for toll roads in NSW and the data will be more detailed and accurate one than the currently provided data. Previously, ACCC had highlighted concerns on preliminary competition related events with TCL having an advantage in obtaining future toll road concessions. This is because TCL has access to detailed traffic data from existing toll roads. Meanwhile, TCL has also given an undertaking that it will release a 15-minute-interval toll gantry data for each quarter. This will include vehicle count, classification (e.g. light vehicle, heavy vehicle) and direction of flow of traffic. The undertaking is still under ACCC’s purview in terms of requirement and addressing competition concerns on the acquisition of the WestConnex motorway. Further, the data is proposed for toll roads, that includes M2, Lane Cove Tunnel, Cross City Tunnel, M1, WestConnex itself, and any other toll road in NSW in which TCL has an interest. TCL may publish data for M5, Westlink M7 and NorthConnex; these are however, subject to obtaining consent from partners on the three roads. If it is unable to obtain consent, the company plans to publish a more aggregated set of data for those roads. Meanwhile, a view of market participants was to be undertaken by ACCC while evaluating the proposed undertaking till August 15, and whether there will be a rise in the potential competition concerns. ACCC’s final decision is expected to come by 6 September 2018, but the ACCC can take an earlier decision if possible. Overall, TCL is confident that the company will get all necessary approvals.

Healthy FY 18 Financial Performance: TCL has more than doubled its FY18 full year net profit at the back of increased toll prices and rise in vehicle numbers. The average daily traffic rose to 2.2 per cent, that includes the disruption from upgrade projects including CityLink Tulla Widening (CTW), Monash Freeway Upgrade (MFU), Logan Enhancement Project (LEP), Gateway Upgrade North (GUN) and Inner City Bypass (ICB). For FY 18, proportional toll revenue increased by 8.7% to $2,340 million, in which $182 million growth is from the existing assets on the back of traffic growth and increase in toll price. Further, there is $5 million contribution from A25 since Financial close on 5 June 2018. The proportional earnings before interest, tax, depreciation and amortisation (EBITDA) and before significant items rose by 10.2% to $1,796 million. This is despite 4.5% rise in the total costs, including $24 million increase to help in growth of underlying business and strategic growth project opportunities. Moreover, Linkt tolling brand is now active across Sydney, Brisbane and Melbourne, which incorporated fee reductions and enhanced digital platforms for the customers. In FY 18, the company had continuous focus on the customer experience as the company took initiatives to improve customer assistance and reduce tolling debt and fines and Voice of Customer program improved the customer interactions. Connected Automated Vehicle (CAV) trials are underway across Australia and North America and the first Australian public trials of a highly automated vehicle occurred on CityLink. Further, the completion of the CityLink Tulla Widening and Monash Freeway Upgrade Projects in Melbourne provides saving of travel time to customers. Meanwhile, the acquisition and financial close of A25 in Montreal has provided second geographical market to TCL in North America. A25 activities have commenced and are expected to be completed in FY19.


FY 18 Financial Performance (Source: Company Reports)

EBITDA Margin growth across all segments: TCL in FY 18 has delivered EBITDA margin growth across all the segments. In FY 18, Group EBITDA margin expanded to 74.9% from 73.9% in FY 17, which is an increase of 100 basis point. There is an increase of Melbourne EBITDA due to rise in toll revenue from large vehicle toll multipliers. For Brisbane, the margin growth is tracking in line with the company’s expectation. There is solid margin growth in North America assets due to early stage in lifecycle. Further, FY 18 Group EBT is of 17% due to significant capital investments made by the business and proportional depreciation and amortization and net finance costs paid of more than $1.4 billion.

$10 billion Committed Pipeline: TCL has currently $10 billion committed pipeline and the projects are expected to remain within TCL’s budget as the company has strong balance sheet.


Committed Pipeline (Source: Company Reports)

Potential Next Generation Opportunities: The potential projects of the company include those for North America, as Maryland Department of transportation has planned an extensive network of managed lanes on Maryland side of I-495 and I-270. The company is investigating further in Express Lanes access improvements and is pursuing selective opportunities in key markets across USA and Canada.


Potential Next Generation Opportunities (Source: Company Reports)

Well Positioned to fund growth opportunities: TCL is well positioned to fund growth opportunities as the company maintains a balanced mix of debt and equity. The company has minimal FY 19 debt maturities that require refinancing. The company has already raised $1.9 billion for the West Gate Tunnel Project. The company has raised $2.2 billion of capital market debt, that includes EUR and CHF notes, Private Activity Bonds, US Private Placements etc. Moreover, TCL has raised $1.65 billion of corporate syndicated working capital facilities and $250 million of corporate letter of credit facilities. The company has also raised $676 million of asset level bank debt for the refinance of bank debt. Meanwhile, the company has repaid all AirportlinkM7 debt facilities from the debt raised in Transurban Queensland. Overall, the company’s cost of debt expiring in FY 19 is above average cost of debt.

Strong Distribution Growth: TCL has posted in FY 18, strong distribution growth while the company raised $1.9 billion of equity in order to fund West Gate Tunnel Project. The company has announced the FY19 distribution guidance of 59.0 cps, which will be maintained in the event of a successful WestConnex bid. FY18 distribution is otherwise of 56.0 cents per security (cps). The distribution guidance includes 2.0 cps fully franked. Moreover, for FY 18, the free cashflow coverage is of 101.4, which includes TIFIA interest payments and amortization of the M5 and ED debt along with scheduled capital releases as pre-agreed with state governments.


Transurban distribution growth (Source: Company Reports)

Stock Recommendation: Meanwhile, TCL stock has risen 4.58% in three months as on August 17, 2018. The development projects undertaken by TCL are expected to deliver valuable travel-time savings for the customers. Already the customers are saving on average 14 minutes in travel time from Melbourne Airport to the Bolte Bridge due to the CityLink Tulla Widening Project. Moreover, the company has strong balance sheet to fund the existing $10 billion of pipeline. The company has many development and potential opportunities across Australia and North America. Based on the foregoing, we give a “Buy” recommendation on the stock at the current price of $ 11.880.
 

TCL Daily Chart (Source: Thomson Reuters)

 
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