Transurban Drives Revenue As Traffic Remains Robust

This story features TRANSURBAN GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: TCL

-Sydney, US traffic networks stand out
-Positive catalysts ahead in Victoria
-Queensland demand seen more elastic
 

By Eva Brocklehurst

Toll road developer and operator Transurban ((TCL)) continues to drive revenue, delivering 13% growth off a 2.0% rise in traffic in the March quarter. Excluding Queensland's Legacy Way and the US portfolio, which are ramping up, the underlying Australian portfolio grew by 10%, reflecting 1.0% traffic and 8.0% toll inflation.

UBS notes, despite a slowing in traffic growth in some areas in the quarter, largely reflecting the impact of an early Easter, revenue was strong. Hence, forecasts are unchanged for 15% growth in proportional earnings in FY16.

The broker likes the franchise value from the company's ongoing development opportunities, with four networks providing options as well as barriers to competing funding sources. UBS considers the business capable of generating 10% growth in cash flow over the medium term.

The Sydney and US networks stood out for Macquarie, with traffic growth of 6.8% and 19.0% respectively. Weakness in Queensland was expected, but the strength of major roads in Logan and Gateway more than offset weak roads in the city such as Clem7 and Go Between, the broker contends.

Macquarie was disappointed the company omitted the historical performance of Brisbane's Airportlink and remains concerned about Legacy Way, given it is in ramp-up mode. Higher tolling may explain some of the movement on Legacy Way but it could also reflect a slowing in the economy.

The company suggests the weakness in Brisbane's city roads is from the diversion caused by the opening of Legacy Way and this may continue for another six months. Positive catalysts ahead for brokers include the recently announced upgrade to the Monash Freeway and a commitment by the Victorian government to the Western Distributor project.

The company has changed its reporting metrics, blending fee and toll revenue. Notwithstanding the changes, Macquarie considers the underlying demand trends remain positive. Toll growth is harder to measure but the broker observes a clear impact of technology improvements in Melbourne and Brisbane.

Better technology is capturing more light trucks, adding 150 basis points to growth. Sydney's M7 continues to benefit from the truck toll ramp. At this stage the broker finds little evidence of road works being a drag on numbers but suspects this will become more pronounced in the fourth quarter for Melbourne's Citylink.

As an aside, Macquarie observes there is no sign demand trends are falling, unlike aviation, while there is scope for the stock to surprise on the upside around dividends, especially in FY17. The $5.7bn in capital works is expected to provide the next wave of earnings growth. The broker considers the scope to invest is considerably larger than for the company's peers such as APA Group ((APA)) and Sydney Airport ((SYD)).

Morgans does not include uncommitted projects in its target price but acknowledges the increasingly likely Western Distributor proposal could add 60-70c to valuation. The broker is impressed by the strength of Sydney's traffic demands and also the marked increase in average toll revenues on the express lanes in the US.

This counteracts some negative impacts from Brisbane's roads and Melbourne's Citylink, where the Tulla widening is in train. The broker expects the negative impact of the timing of Easter in the March quarter will reverse in the June quarter.

The Tulla widening is likely to temper inbound city traffic on the company's largest single asset, Citylink, for around 18 months, Morgan Stanley agrees. Also, the Queensland network remains the least robust in terms of growth, which the broker attributes to works on the Gateway and higher demand elasticity in Queensland compared with elsewhere.

The stock remains a top pick for Morgan Stanley, given its distribution outlook as well as growth projects, particularly in a low interest rate environment. The current catalysts are considered the ongoing re-rating of the Virginian roads in the US and progress on the Western Distributor.

Transurban has four Buy ratings and three Hold on FNArena's database. The consensus target is $11.40, suggesting 0.7% upside to the last share price. Targets range from $10.20 (Deutsche Bank) to $12.90 (UBS).
 

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