Transurban Group: Softer Australian traffic growth
About the author:
- Author name:
- By Nathan Lead
- Job title:
- Senior Analyst
- Date posted:
- 14 October 2019, 1:10 PM
- Sectors Covered:
- Infrastructure, Utilities
- We have moderated forecast EBITDA by 1-2% to reflect the softer traffic growth on key Australian roads in the September quarter.
- We have taken the opportunity to revise our corporate tax modelling, with reduced forecast tax paid by Transurban Group (ASX:TCL) more than offsetting the lower forecast EBITDA.
- 12 month target price lifts (Morgans clients can login to view detailed reports and price targets). Distribution forecast remains unchanged.
- With estimated TSR of ~5%, we retain a HOLD rating.
Q1 traffic data
September quarter traffic data indicated ongoing softness in traffic growth in TCL’s key Australian markets of Sydney (+0.1% on pcq ex WestConnex) and Melbourne (+0.6% on pcq).
TCL has noted a tapering in the ramp-up of traffic growth following completion of the $1bn City-Tulla Widening completed in October 2017 (an expansion of TCL’s biggest single asset); thus far the project has not delivered the returns we were expecting. Brisbane traffic (+2.7% on pcq) improved with completion of key road works (GUP, LEP), while North America (+4.5% on pcq) was better than expected (particularly the ongoing strong growth on the A25).
We note some signs of traffic cannibalisation on TCL’s Sydney and Brisbane roads as motorists pursue the cheapest routes (Clem7+AirportLink vs Gateway, M4+CCT vs M2+LCT).
Changes to forecasts result in a net 1-2% moderation in forecast EBITDA. We continue to expect EBITDA growth over the next 5 years of ~10% CAGR, driven principally by capital investment.
Updated corporate tax modelling
TCL’s complex tax structures and limited transparency (see slide 63-73) makes it difficult to forecast tax.
We have revised our modelling by considering TCL’s suggestion that:
- a defensible split of taxable income in its corporate tax group is 70%:30% between tax pass-through (paid in investors hands) and tax paying entities;
- that not all of its capital investment is depreciable for tax purposes (eg. Lane Cove Tunnel); and
- what we estimate to be ~A$1.3bn of corporate tax losses are split between group losses (can be utilised immediately) and transferred losses (utilisation restricted over time by available fraction) (split is not disclosed). On our revised forecasts, corporate tax paying starts earlier (~2022) but does not ramp up to be as significant a cash outflow.
The AGM saw FY19 DPS guidance reaffirmed at 62 cps, implying 4.2% cash yield. We think the DPS can be grown by ~5% CAGR across FY21-26F, albeit some of the DPS will need to be supported by additional borrowings at the asset and/or corporate level.
Falling government bond yields and thus declining discount rates have been a key contributor to TCL’s share price strength. But the negative implications of the lower bond yields are now being reflected in weaker traffic growth (and lower price growth for those roads with CPI-linked toll escalators).
Our DCF valuation would have declined 15 cps to reflect the revised traffic forecasts, but the tax update is significant (+81 cps) and lifts our valuation (Morgans clients can login to view detailed reports and price targets). However, the valuation lifts again if our cost of equity assumption includes a 1% risk-free rate (close to current CGB 10YR yields) instead of the 2.5% risk-free (and all else is held constant).
To view further analysis, Morgans clients can view the full research note. Alternatively, please contact your Morgans adviser or nearest Morgans office for access.
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