Transurban Travelling Well

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

-Strong distribution growth expected
-Solid suite of assets and growth projects
-Key transport pick for several brokers
 

By Eva Brocklehurst

Transurban ((TCL)) travels from strength to strength. A combination of yield and growth is underpinning its performance and brokers expect the outlook to remain that way, while interest rates are favourable.

CIMB considers the stock should be a top pick in the transport infrastructure arena. Transurban is in the middle of an upgrade cycle and the broker suspects the market is yet to fully appreciate the number of sound projects on the table. Distribution growth over FY14-17 is forecast at around 9.5%, driven by brownfields expansions and acquisitions. Free cash flow was strong in FY14, providing 97% coverage of the distribution. The company reiterated FY15 distribution guidance of 39c per share and expects this to be 100% cash covered, although several brokers consider this expectation may be a little stretched. Deutsche Bank forecasts 97% coverage of 38c per share, highlighting the timing issues and other cash items such as reserve releases which make it difficult to accurately forecast free cash flow.

JP Morgan has upgraded earnings but underlying free cash cover is calculated at 37.5c per share, still short of the company's guidance for distributions. Overall, the result was stronger than expected, both from a bottom line and cash flow perspective. Operating and maintenance expenditure figures seemed too good to be true and JP Morgan suspects they may not be sustainable. Earnings missed BA-Merrill Lynch's forecasts but the difference was in over-estimating fee and other revenue. The broker takes issue with Transurban's assertion that underlying costs increased just 3.7% in FY14. Merrills calculates costs differently, believing they were 10.3% higher. This aside, the broker expects macro factors will drive the stock and total returns should remain similar to the past five years, provided the interest rate environment is favourable.

UBS likes the stock. Transurban offers low risk, 10% per annum, medium-term growth and favourably compares with other Australian yield stocks. Financial close on Sydney's NorthConnex and Melbourne's CityLink-Tulla widening projects are important catalysts as well as the Brisbane AirportLink. The broker does point out that from a portfolio perspective, the share price is highly sensitive to movements in bond yields and increasing volatility is likely. Morgan Stanley finds the resilience of the assets, largely intra-urban roads, and strong growth projects should make the stock appealing to investors but retains an Equal Weight rating, given Transurban appears fairly valued at current prices.

Macquarie also observes dividend growth beyond the current 5-year horizon should be maintained near 10%, as the company remains in an investment phase. Moreover, cost initiatives and the ramp-up of the US assets justify a premium rating for the stock and the broker retains an Outperform call. Macquarie envisages the Brisbane AirportLink will be the next major opportunity as part of the QML acquisition, providing both revenue and cost benefits.

On FNArena's database there are five Buy ratings and one Hold (Deutsche Bank). The consensus target is $8.14, suggesting 5.8% upside to the last share price. Targets range from $7.08 to $8.83. The distribution yield on FY15 and FY16 forecasts is 5.1% and 5.6% respectively.

See also, Transurban Bound For Strong Upside on July 11 2014.
 

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