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Transurban In A Sweet Spot

Australia | Apr 18 2023


Toll road operator Transurban is enjoying a combination of rebounding traffic, falling bond yields and CPI-linked toll pricing.

-Transurban shares have benefited from falling bond yields
-Operationally the toll road operator is enjoying a sweet spot
-Share price is trading above most price targets set by brokers

By Greg Peel

The Australian ten-year bond yield peaked in November at 4.16%, and while there has been a lot of volatility in between, was back at 3.92% at the beginning of March. Then came the SVB collapse, sending the yield down to 3.19% earlier this month.

While the yield has since begun ticking back up again, the overall fall in yields in 2023 has offered a tailwind to toll road builder Transurban ((TCL)). The stock is up 15% year to date, including 5.6% in April to date.

While Transurban is an infrastructure builder, and thus resides in the industrials sector, its revenues come from collecting tolls on its roads here and in North America, which makes it a bond-proxy stock more akin to a utility. Revenues reflect volume of vehicles x toll prices, and in the latter case the company’s various tolls reflect fixed quantum and/or CPI-linked increases.

Given an elevated CPI, toll prices have been rising. As the world recovers from covid, traffic numbers have been rising. The resumption of migration in Australia is also adding to the mix. Transurban is enjoying a sweet spot of combined tailwinds.


Across the company’s global portfolio, traffic rose 12.9% year on year in the March quarter, broken down as North America 15%, Brisbane 14%, Melbourne 13% and Sydney 12%. Compared to 2019 (pre-covid) levels, Sydney is up 23%, thanks to new roads added, Brisbane 14% and North America 3%, while Melbourne’s CityLink still lags at -6% which management puts down to disruption from constructing the Westgate Freeway.

Macquarie nevertheless suggests Melbourne is being more affected by the work-from-home shift than other cities.

In Sydney, traffic numbers reported for the first time included the WestConnex to M8 tunnel, opened in January, linking the M4, M8 and M5, and allowing vehicles to travel across all three at a capped price. Construction on the WestConnex will not be concluded until the opening of the Rozelle Interchange in 2024.

Road works on the Lane Cove Tunnel-Eastern Distributor have otherwise created a drag, and have two-three years still to run.

Macro conditions are positive for Australian toll roads, Macquarie suggests. Population growth has resumed, which translates to better vehicle registration, with Brisbane and Melbourne seeing the best growth rates in 3-4 years. Employment growth across all regions is 1.6-2.3%.

The only negative is wage inflation is at around 3.4%, which compares to toll growth at CPI inflation, but even this is mitigated in NSW by increased cash-back for toll road usage and fuel price growth slowing.

Back in Melbourne, Transurban has indicated its interest in acquiring a stake in the existing EastLink, which can use up some of the company’s latent debt capacity. There are others sniffing around as well, including private equity. Transurban is seen as the obvious operator, but its east coast domination has ruffled the feathers of the ACCC in the past.

North America

The story is the same for the A25 in Canada, although Transurban has since sold off -50%.

In the US, traffic has rebounded on Transurban’s roads but remains some -20% below September quarter 2019 levels. However, toll pricing has leaped up 26% on the I95 and 41% on the 495, providing a balance back to 2019 in real terms.

As traffic starts to come back, tolls are likely to track even higher, Macquarie suggests.


While a higher CPI in the near term and a lagged impact of CPI to tolls is likely driving further revenue growth, Citi believes the strong rally as well as Transurban’s participation in a potential bid to acquire a stake in Eastlink caps near term share price upside.

The broker therefore downgrades to Neutral, though Transurban continues to be its preferred infrastructure stock.

UBS (Buy) is happy to stay positive on the stock while traffic and tolls are growing strongly, and the relative security of Transurban's cash flow attracts investors looking to reduce broader macro risk exposure.

Macquarie (Outperform) notes bond rates remain a major driver of Transurban’s performance, and the ideal scenario is emerging of falling bonds with inflation remaining elevated. Upside remains around any Eastlink acquisition.

Morgan Stanley remains at Equal-weight, while Morgans (Hold) and Ord Minnett (Lighten) are yet to update on the latest numbers.

They may well be awaiting the company’s investor day, to be held on May 1.

There are thus two Buy or equivalent, three Hold and one Sell rating for the stock in the FNArena broker database, for a consensus target of $14.53, which is slightly below the current share price.

That’s nevertheless on a spread from Ord Minnett (Sell equivalent) on $12.50 to Citi on $16.20. The latter has pulled back to Hold.

On current forecasts, the stock is offering a 3.9% yield for FY23 and 4.2% for FY24.

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