Australia | Apr 16 2012
– Transurban posts weak quarterly traffic data
– Minor changes to forecasts post the update
– Positive ratings continue to dominate broker views
By Chris Shaw
Poor weather in Sydney in particular, soft economic conditions in both New South Wales and Victoria, and road work disruptions during the period impacted on quarterly traffic data for Transurban ((TCL)). Performance for all roads fell short of most expectations in the market.
Despite this, Macquarie notes overall Transurban delivered growth in proportional revenue of 5.1% across its assets, which in the broker's view highlights the resilience of the group's portfolio. The other positive was the result highlighted the relative price inelasticity of Transurban's roads, as despite weaker traffic numbers the tolling increase/mix change was positive to the tune of 6%.
As an example of this inelasticity, Macquarie points out a price increase of 15.7% on the M5 resulted in a car traffic decrease of just 1.3%. This meant revenue for the road increases by 13.1% for the period. JP Morgan also picked up on this, viewing Transurban's result as reasonable given the currently difficult operating environment.
Weaker traffic numbers meant some minor cuts to earnings estimates, JP Morgan trimming its earnings per share (EPS) forecasts by 1.5% for this year and BA-ML making a similarly small cut to its numbers. Consensus EPS forecasts for Transurban according to the FNArena database now stand at 14.4c this year and 17.4c in FY13.
More important than earnings estimates are dividend expectations and here estimates are largely unchanged. The range over the next two years is for distributions of 29-30c per share for FY12 and 30-34c for FY13. This implies a yield on Transurban shares of better than 5.0% this year and up to 6.0% in FY13. Dividends are not fully franked.
The conclusion of Macquarie post assessment of Transurban's quarterly is solid revenue growth can be expected to continue, even in periods of slower traffic growth. This is the result of Transurban's ability to pass through inflation plus type increases in tolling while continuing to improve the toll mix over time.
The key with respect to any investment decision on Transurban, according to BA Merrill Lynch, is the group has traditionally been more resilient to weak economic conditions relative to other sectors. This implies the current period of weak traffic numbers offers a good opportunity to own the stock.
Given the combination of a solid dividend yield and defensive earnings brokers have remained positive on Transurban post the quarterly traffic result. The FNArena database shows a total of five Buy ratings compared to two Hold recommendations. The consensus price target for Transurban is $6.02, with targets ranging from Deutsche Bank at $5.60 to Macquarie at $6.63.
UBS sums up the Buy case by arguing Transurban remains attractive relative to peers such as Sydney Airport ((SYD)) and relative to 10-year government bonds, even allowing for further near-term traffic weakness.
Macquarie also points out aside from the distributions, Transurban offers some upside when the economy along Australia's east coast eventually improves. In the meantime, an expected focus on cost control should sustain distributions.
In a weaker market today Transurban shares are trading 2c higher at $5.65 as at 12.00pm. Over the past 12 months the stock has traded in a range of 4.54 to $5.87, the current share price implying upside of around 7% relative to the consensus price target in the FNArena database.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.