Transurban Bound For Strong Upside

This story features TRANSURBAN GROUP LIMITED. For more info SHARE ANALYSIS: TCL

-Scope for toll revenue growth
-Number of investment options
-Strong distribution, yield
 

By Eva Brocklehurst

A year ago Transurban ((TCL)) attracted two Buy ratings on the FNArena database. There are now five. This signals the toll road operator is a solid, defensive proposition, in broker parlance. The latest quarterly traffic statistics are the launch pad for a re-statement of that confidence.

UBS expects revenue growth rates to moderate to 7% on an organic basis in FY15, with the recent acquisitions of Sydney's Cross City Tunnel (CCT) and Queensland Motorways (QML) boosting the rate of growth to 38% on a proportional basis. The stock's distribution growth and near-term catalysts are underpinning the broker's Buy rating. Highlights for JP Morgan included the NSW toll road assets. Sydney's M2, Lane Cove Tunnel and M7 continued to benefit from the completion of the M2 widening.

Transurban has acquired the Fluor stake after the restructure of the I-495 and I-95 assets in the US and was the only subscriber to the US$280m re-capitalisation. This will take Transurban's stake in I-495 to 94%. The associated equity requirements will be funded from corporate debt but while forecasts have been changed to allow for the increased funding cost, UBS calculates this has been offset by a greater share of asset cash flows. Macquarie notes the performance of I-495 was above expectations in the June quarter and, while revenue still needs to double, the trend is positive.

Closer to home, quarterly traffic was softer in June, reflecting the impact of the timing of Easter and ANZAC Day, but trend growth is on track. Benefits are accruing from the widening of Sydney's M2 which ensures revenue growth for the Australian assets of 11.9% in FY14, in Macquarie's estimates, with 6.2% coming from price and 5.3% from volume. FY15 is the last year Melbourne's CityLink will deliver 4.5%, until the lane widening is completed. As a result price growth drops to 3.6% in FY15 and then 2-3% in FY16 and FY17, on Macquarie's calculations. Offsetting this is expectations from NorthConnex, with financial close at the end of the year, and the re-pricing of trucks on the M7.

Macquarie expects the breadth of investment opportunities open to Transurban is likely to lead to positive revisions to internal rates of return and longer-dated earnings, as they are realised. The company offers multiple growth fronts, with the recent acquisition of QML, NorthConnex, a stage of WestConnex and concession extensions at CityLink all providing scope. Macquarie expects 10% distribution growth over the next five years. After dilution from the issue of equity for QML, Macquarie estimates the acquisition is neutral to slightly positive for investors. Down the track there are latent options which could enhance returns further.

On a slightly more subdued note, BA-Merrill Lynch notes the 0.9% growth on CityLink traffic was at the low end of historical rates, after normalising for the holiday impact, and this is a sign that flows are reaching capacity on that road. Transurban will begin construction on the widening in mid 2015 and over the construction period of two years Merrills forecasts a 2% decline per annum in traffic. Still, CityLink, M2 and M7 were the drivers of tolling revenue growth in FY14 of 12.6% and Merrills expects FY14 proportional earnings to be up 15%, driven mainly by 39% growth for the M2. The broker is comfortable with a Buy thesis and notes the stock's returns compare favourably to Australian long bonds.

Growth is supported by acquisitions and asset enhancements and the stock has an attractive mix of yield and growth, in CIMB's opinion. FY14 was a busy year, the broker observes, and FY15 is shaping up to be another, with the M5 widening and the I-95 express lanes development in the US by the end of 2014 and the integration of QML and CCT, as well as NorthConnex. The broker expects these transactions will drive ongoing earnings growth and underpin forecasts for 9% distribution growth per annum over the three years to FY17. CIMB retains the stock as a top pick in transport infrastructure because of its "unparalleled suite of assets".

UBS notes, following a number of investments to be completed this year, Transurban will enjoy 50-100% of 14 toll road concessions with a weighted average expiry in 2043. Much of the portfolio is mature. Traffic has declined in importance but widening and upgrading of roads remains a catalyst for brokers. On FNArena's database the consensus target price is $7.85, suggesting 3.2% upside to the last share price. The dividend yield on FY14 and FY15 forecasts is 4.6% and 5.1% respectively.
 

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