Transurban Group: COVID-19 impacts take #1

About the author:

Nathan Lead
Author name:
By Nathan Lead
Job title:
Senior Analyst
Date posted:
02 April 2020, 1:45 PM
Sectors Covered:
Infrastructure, Utilities

  • COVID-19 has significantly impacted traffic on TCL’s roads. We assume a full recovery does not occur until CY22.
  • 2H20 DPS guidance has been withdrawn; the DPS is now dependent on Free Cash ex capital releases. At current prices, we think TCL may deliver a yield of 2.2% over the next 12 months, but the DPS rapidly grows as traffic recovers.
  • 12 month target price falls (login to view). HOLD retained, even though value looks attractive at current prices. There is a risk of traffic deteriorating further, asset distribution lock-up, and a capital raising to support the credit rating.

COVID-19 impacted traffic update

Ahead of the Q3 traffic release due 16 April, TCL reported that COVID-19 traffic impacts have been observable from early March. March Wk4 data showed a dramatic decline compared to the deterioration seen in previous weeks (March exit run-rate of 35-40% decline on pcp). The Express Lanes (USA) have been particularly impacted given lack of congestion on adjacent general purpose lanes. We have made material downgrades to FY20-21F traffic, including an assumption that traffic doesn’t fully recover until CY22.

Earnings

Offsetting the traffic decline is continuation of contracted toll escalation on all roads, except the A25 (tolling suspended under compensation mechanism) and Express Lanes (dynamic pricing exacerbates the revenue impact of traffic deterioration). Thus far, large vehicles have declined less than cars, which is important given LVs typically have a toll 3x that of cars. FY20-22F downgrades to EBITDA (-7% to -26%) and Free Cash (-8% to -35%) are more material than for traffic due to TCL’s operating and financial leverage; Free CF could be further negatively impacted if capital releases cease. While TCL’s Australian assets should be robust, we think there is heightened risk of lender distribution lock-up of TCL’s North American assets (contributed 4.6 cps of Free CF in CY19). TCL’s Free Cash definition (and thus distributions) does not adjust for cashflow lock-up.

Balance sheet

TCL says it has sufficient liquidity to meet capex and debt refinancing requirements until end-FY21. It has raised an additional $1.3bn of working capital facilities in the last week to support liquidity, and believes debt capital markets are open for refinancing. We think TCL will defend its BBB+ credit rating, whose downgrade trigger we believe is 7.5-8% FFO:debt. While the ratings agencies may take a pragmatic view, there is a risk that FFO:debt breaches this trigger for a sustained period (FY20-21 on our forecasts), thus requiring a capital raising and/or retaining instead of distributing a capital release.

Distribution outlook

2H20 guidance of 31 cps has been withdrawn. 2H20 DPS is expected to be paid in line with Free Cash ex capital releases; at this stage we expect 14.75 cps. Assuming capital releases are retained for balance sheet support, we think the FY21F DPS could decline to 35 cps but then the DPS surges from FY22 as traffic recovers.

Valuation

DCF-based target price reduces, as a result of forecast changes and higher assumed cost of equity. At current prices, the 5 year equity IRR is ~9% pa. DPS growth across FY20-23F lifts to 3.5% pa CAGR. 

More information

Morgans Clients can login to view our detailed report on Transurban (ASX:TCL). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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