Transurban About To Cut Distributions?

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This story features TRANSURBAN GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: TCL
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

It has been a rough past few weeks for shareholders in toll road group Transurban ((TCL)) as the stock has fallen by about 25% since the beginning of April. Macquarie suggests much of the weakness is the result of the market speculating the new MD, Chris Lynch, is likely to cut dividends given the group’s debt constraints.

The broker notes a recent rating report by S&P is giving increased weight to this view as it suggests the group has little headroom in terms of the ability to take on new projects while retaining its BBB+ credit rating, so anything new would likely require an equity raising of some kind. This is particularly the case as the broker estimates the group may be considering as much as $750 million in capital commitments over the next three to four years.

The problem here, as the broker points out, is new projects are not immediately cash accretive, which puts the current level lof dividends under further pressure. As it is a new MD and the usual course of action in such a situation is to make any write-offs or changes necessary to set up a better outlook there is an increased possibility Lynch will take the course of lowering payouts even though this would fly in the face of guidance given back in February.

While such a move would then likely disappoint shareholders and could bring about some selling pressure for the stock the broker suggests it won’t actually matter in valuation terms, as its $6.91 valuation is based on asset values and not the level of payout.

Indeed, given the share price discount to its valuation the broker sees the stock as attractive relative to peers at present, though it concedes any change to payout ratios is likely to increase volatility in the share price in the shorter-term.

What the company should do, in the broker’s view, is re-base the dividend to something closer to cash earnings. This would be similar what management at Macquarie Airports ((MAP)) has done: slowing the rate of dividend growth until the company’s position had improved. Macquarie has done exactly that with its forecasts, now estimating a Transurban payout in 2010 of 28c, down from a forecast 57c this year and 58c in 2009.

A similar cut to distributions is expected for Asciano ((AIO)) when it releases its full year result in a couple of months time.

UBS agrees the market is pricing in a cut to distributions but rather than rate the stock as Neutral like Macquarie the broker considers Transurban a Buy. Even if management address the dividend issue UBS sees the stock as offering good value at current levels.

Merrill Lynch also agrees and has gone as far as suggesting distributions are maintainable, while the potential for a further sell-down of the group’s stake in DRIVe offer some valuation upside. As a result the broker also rates the stock as a Buy, having upgraded from Neutral towards the end of last month.

Overall the FNArena database shows Transurban is rated as Buy five times, Accumulate once and Hold four times, with an average price target of $7.09. Thomson One Analytics shows a median price target of $7.10. Shares in Transurban today are stronger in line with the broader market and as at 11.35am the stock was up 14c at $5.20, which compares to a trading range over the past 12 months of $5.01 to $8.35.

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