Transurban’s Capital Beltway Project Is A Winner

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This story features TRANSURBAN GROUP LIMITED.
For more info SHARE ANALYSIS: TCL
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

Since the start of the credit crunch around the middle of last year infrastructure companies have found the going more difficult given the significant borrowings they have in place, with toll road player Transurban ((TCL)) a prime example as the stock has fallen from more than $8.00 per share last June to less than $6.50 now.

But according to Austock Securities there are reasons the company should be considered a Buy at current levels as the group has long life assets, is developing scale in its US operations and the yield on offer is very attractive.

The broker has recently completed its analysis of the group’s Capital Beltway project in the US and this supports its positive view on the stock as it suggests guidance from management as to the asset’s returns will prove to be very conservative.

The project will see additional High-Occupancy Toll or “HOT†lanes added to the existing Beltway, which should ease bottlenecks on one of the more crowded sections of road in the US.

On the broker’s numbers the project should generate an internal rate of return of a little over 16% but management has guided for a return of 13%, the broker suggesting given the lack of any toll price caps and the area’s high income demographic there are likely to be real toll price rises in the future.

This leads the broker to predict the indicated real revenue growth rate of 1.3-1.5% will prove to be too low, as historical traffic volumes on the road show annual increases of around 5% over the past 20 years and independent forecasts suggest volume growth of 2.5% annually for the next decade is likely.

As well, management’s guidance is for relatively constant margins but the broker takes the view with a fairly fixed cost base any toll increases should mean margins move higher over time.

Overall the broker’s estimates for revenue growth from the asset are around twice the guidance of management, but it suggests the risk remains to the upside as it may take higher toll increases to prevent traffic congestion.

The major negative with the project is it won’t open until 2013, meaning while the outlook appears good the market has little reason to pay up for it now, particularly in light of the continued volatility in financial markets.

There is also an impact on cash flows and earnings per share in the medium-term given the capex requirements of the project, though taking a longer-term view Austock points out the project will result in increases in both measures.

On the broker’s calculations the Beltway project adds 61c to its net present valuation, though allowing for the impact of higher interest rates in Australia and lower rates in the US the overall valuation impact is only an increase of 9c per share to $8.09.

Given the group’s financial structure earnings in EPS (earnings per share) terms will remain negative in coming years, so EBITDA (earnings before interest, tax, depreciation and amortisation) is a more instructive measure. On this basis the broker is forecasting an increase from the $395 million recorded in FY07 to $502 million this year, $599 million in FY09 and $625 million in FY10.

Distributions are also expected to increase, the broker forecasting payouts of 57c this year, 59c in FY09 and 61c in FY10, putting the stock on a FY10 yield approaching 10%.

The broker’s target price on the stock is $8.10, which compares to the average price target according to the FNArena database of $7.48, with Deutsche Bank the highest at $8.50 and GSJB Were the laggard at $6.44.

The database shows the stock as rated Buy four times, Accumulate once and Hold five times. Shares in Transurban today are slightly higher and as at 11.35am were up 3c at $6.37.

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