Transurban On Solid Ground

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

-Best quarterly volume in years
-Caution urged re low rates, fuel prices
-Attractive yield but price fairly full
 

By Eva Brocklehurst

The road ahead for Transurban ((TCL)) looks firm with the March quarter revealing substantial traffic growth. Traffic across the eastern seaboard was generally above expectations, with widening and network benefits continuing to flow.

The statistics revealed a 42% increase in proportional toll revenue, which reflected the incorporation of Sydney's Cross City Tunnel (CCT) and the Queensland Motorways (QML), that were acquired mid last year. Excluding these two, Australian revenue grew 11%, comprised of 5.5% growth in traffic and 5.1% growth in average toll. Despite the tough environment economically, Citi observes Transurban benefitted from the completion of upgrades and stronger growth in light commercial traffic. Underlying traffic growth on the Brisbane network, excluding the impact from Cyclone Marcia, was 4.4%.

It was a unique quarter, in Macquarie's observation, because it was the first in over five years where there were no road works. As a high yielding stock Transurban also benefits from low interest rates. There was evidence of both organic and pricing growth across the network. Volume growth at 6.1% was the largest Macquarie has witnessed since March 2010.

The broker believes the improvement in the household budget with respect to lower interest rates and fuel prices has been a key contributor to the strength in the quarter, along with a lack of road works and the completion of Sydney's M5 widening. Macquarie cautions that the growth coming from lower rates and fuel prices should be taken in view of the fact that, when the opposite occurred in 2008, growth lagged.

In the US the performance was also strong. I-95 is already generating more revenue than I-495 and has only been open for three months. Revenue was above Macquarie's expectations, boding well for future earnings and providing scope for cash release as soon as 2018.

Macquarie cites Sydney's eastern distributor as the example of organic growth on a mature network. Traffic was up 3.0% versus a 5-year average of 1.7%, yet pricing growth was relatively flat, reflecting both increased truck traffic and shorter trips. Transurban is also paying attention to improving revenue collection. In this aspect, Macquarie found the only source of disappointment was inefficiencies in QML, with revenue growth of 0.2%. Goldman Sachs was also disappointed with QML, despite acknowledging the impact of Cyclone Marcia. Year-to-date growth in QML traffic at 3.4% is tracking below that broker's estimates.

Melbourne's CityLink was the highlight for Morgan Stanley, with growth rebounding to 4.2% over the prior corresponding quarter. CityLink benefitted from higher availability on the Burnley Tunnel, given it was affected by closures in the prior March quarter. The broker observes the US roads were affected by significant weather events but still recorded strong traffic growth off a low base. Morgan Stanley likes Transurban's attractive dividend yield and growth outlook but considers the stock is fully priced.

UBS upgrades FY15 forecasts slightly on the back of the update, but still expects underlying growth will moderate in FY16 to around 9.0% as the CityLink-Tullamarine project gets underway late this year. Revised forecasts imply 102% cash flow coverage for the stock based on the FY15 distribution guidance of 39.5c per security. Transurban is one of the broker's preferred stocks relative to other yield alternatives because of its funding potential and proven network strategy. Transurban is expected to generate 10% per annum growth in cash flow per security over the next five years and UBS retains a Buy rating.

There are five Buy ratings on FNArena's database, with two Hold. The dividend yield on FY15 and FY16 consensus forecasts is 4.0% and 4.4% respectively. The consensus target is $9.70, suggesting 2.3% downside to the last share price.
 

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.

Click to view our Glossary of Financial Terms