Transurban Traveling Strongly

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

-Sydney network driving growth
-Brisbane trammelled by Gateway upgrade
-Melbourne's western distributor potential
 

By Eva Brocklehurst

Toll road operator Transurban ((TCL)) continues to reveal robust traffic and revenue numbers with the Sydney network the highlight in the December quarter, registering benefits from the M5 widening and a better local economy. Overall, first half traffic was up 8.4% while proportionate toll revenue increased by 19%.

Macquarie explains the strength in Sydney traffic as largely because of population growth which reflects the rebound in the economy along with job opportunities. Passenger vehicle registrations grew at 2.2% in the last three quarters, above the five-year average.

Melbourne witnessed some slowing and, while the similar falls in both southern and western links make it hard to attribute much to road works, the broker observes some slowing of demand. Bottlenecks on the Bolte Bridge have affected both roads but the offset is the 5.1% increase in average tolls. CityLink traffic grew 1.9% year on year.

Brisbane traffic appears to be softening too and, with road works around the Gateway feed, no bounce is expected associated with the G20 meeting. Macquarie suspects the second half will be tougher and expects Brisbane will struggle to achieve the core growth of 3.0% per annum, as population growth slows and the support industry for the mining sector shrinks.

This development should be offset by stronger numbers in the US and on Sydney's M2. While softening traffic numbers were always likely and forecasts are reflecting a resumption of trend or slightly lower, the beauty of the stock, in Macquarie's view, is that unless the whole east coast of Australia slows one softer market does not appear to jeopardise revenue growth.

Over the next two years, as road works occur, Macquarie expects net revenue growth should be at least 8.0%. US roads continue to deliver strong growth, albeit from a low base, generating proportionate toll revenue of $80m. The ramp up of the express lanes remains robust with benefits to Transurban coming from a lower Australian dollar as well.

Morgans expected the Sydney roads would be the driver of growth amid strong employment conditions, the NSW government's infrastructure spending program and the roll out of GLIDE. The broker notes the impact on traffic from Melbourne's CityLink widening is not yet evident but the new capacity, due early 2018, the truck toll multiplier increase next year and the potential in the western distributor should all drive longer-term growth.

Brisbane traffic was the weakest, Morgans agrees, which is reflecting more subject economic conditions in that city as well as congestion at the northern end of the Gateway Bridge. The broker notes the Queensland government will undertake the Gateway upgrade this year, completing it in late 2018, and this may have a negative impact on traffic volumes on the bridge during construction, although better flows will be probable once completed.

The broker reduces traffic growth forecasts for the road during construction, to 2.0% from 2.5%, but makes no other material changes to forecasts. Another aspect of the Brisbane numbers Morgans observes is that Brisbane's average tolls grew at less than the allowed toll increase because of car traffic growing faster than truck traffic. Trucks have higher tolls compared with cars and represent a relatively high proportion of traffic in Brisbane compared to other Transurban roads.

Morgans has an Add rating and $10.16 target, highlighting the expectation that Melbourne's western distributor, should it proceed, could add 60-70c per share to valuation. Traffic numbers were above estimates but, despite raising its forecasts, Citi drops its rating back to Neutral from Buy.

Morgan Stanley on the other hand retains an Overweight rating and considers the 12-month forward yield and dividend growth attractive, with a number of growth projects on the horizon underpinning the outlook. The upside emanates from the east coast population growing faster than expected, leading to increased traffic, Morgan Stanley suggests. Downside risks are seen emanating from a worsening economy and if the company’s growth strategy is subject to delays or cost over-runs.

Several brokers are yet to update on these latest numbers and the Buy ratings on FNArena's database stand at three, with three Hold ratings. Macquarie is currently restricted on rating and target. The consensus target is $10.82, suggesting 4.2% upside to the last share price (but as said, not all brokers have as yet updated post the market update). The dividend yield on consensus estimates is 4.3% for FY16 and 4.7% for FY17.

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