Australia | May 16 2007
By Greg Peel
Citi is not suggesting that toll road owner Transurban (TCL) is about to be taken over tomorrow. However, by now stock analysts in general are getting sick and tired of their analysis meaning little to a market swept up in private equity mania. Lest their own traditional means of valuation based on earnings potential seem superfluous, it is best to at least identify those stocks which exhibit the sort of features to which private equity is attracted. That way they can’t be caught out as having let down clients. To that end Citi has stated this morning:
“Transurban fits the bill and could be vulnerable to moves by private equity investors”.
This does not mean Citi has suddenly slapped a Buy rating on Transurban and lifted its target by 30%. It has lifted the target – from $7.30 to $7.83 – but the analysts believe a potential suitor could pay up to $10.56. This doesn’t necessarily mean they will, so Citi has remained content with a Hold rating.
The attractiveness of Transurban begins with the general emergence of infrastructure globally as an asset class in its own right. With the likes of Macquarie Infrastructure (MIG) and its imitators having snapped up the best of previously government-owned infrastructure around the globe, supply is now rather thin. Hence attention turns to those corporations (as opposed to funds) that include infrastructure ownership and management within their portfolios. Through ownership of its toll roads in Melbourne and Sydney as well as in the US, Transurban is a target.
Transurban is an independent company – it is not beholden to a parent company or financier and does not “leak” management fees out to such. This practise became a source of criticism of Macquarie Infra and forced it to spin off the Sydney Roads Group, which Transurban has since acquired. With this in mind, Citi then turns to the next two major requirements of a private equity buyout.
Most important is undergearing. If private equity is going to gear its own buyout up to 80% or so then it can’t start by taking over a company that is already seriously financed by debt. The analysts suggest Transurban’s balance sheet has the capacity to take on $960m of debt. The second is growth potential. Outside of its Australian interests, Transurban has moved relatively unchallenged into the US with its DRIVe product and now has the UK in its sights as well. But apart from that which is obvious is that which is not – Citi believes there is a deal of option value embedded in Transurban’s assets. Say the analysts:
“If there is one asset class which is embedded with option value, it has to be toll roads.”
Option value comes from the potential development new suburbs and industrial parks, the connection of other arterials, road widenings and the introduction of electronic tolls. Transurban doesn’t even have to own other road projects to derive a benefit, if their introduction increases traffic on existing Transurban tollways.
Another point about toll roads is that while traffic may ebb and flow along with economic conditions or toll increases, the traffic trend line is always up. Populations in major urban centres do not fall.
With infrastructure at the top of the cycle, Citi values Transurban as high as $9.34. A low-cycle valuation would be $7.35. The analysts have decided to set their 12-month target at the mid of those two points – $7.83. But as far as takeover valuation is concerned, Citi rates this as high as $10.56.
With a 3/3/3 B/H/S ratio in the FNArena database, there is little consensus among Citi’s colleagues. The Buy raters however have not offered takeover potential as their primary motivation. Average target price is $7.90. The stock already trades over $8.00.