Transurban Group: Flagship project blows out

About the author:

Nathan Lead
Author name:
By Nathan Lead
Job title:
Senior Analyst
Date posted:
20 December 2021, 9:30 AM
Sectors Covered:
Infrastructure, Utilities

  • While the size of Transurban Group's (ASX:TCL) financial contribution to complete the WGTP (West Gate Tunnel Project) will be disappointing for investors, resolution of the dispute removes a major uncertainty.
  • ADD retained. c.10% potential return, including 8% upside to (login to view) target price.

Event

Transurban Group (ASX:TCL) has reached agreement with the Vic Govt and its D&C subcontractor on the West Gate Tunnel Project (WGTP) dispute, resulting in it making a material financial contribution to the project in order for it to progress to completion.

TCL has also provided an update on weekly traffic performance through to the week commencing 5 December vs the 2019 pcp, which offers hope of further improvement following the lifting of restrictions in October in NSW and VIC.

WGTP (mostly PFAS) dispute

TCL will contribute an additional $2bn to the WGTP across FY23-26 (which should dovetail with the timing of improved traffic generation). Its contribution will be made after the Victorian Govt initially makes an additional $1.7bn contribution. TCL estimates the D&C subcontractor has foregone c.$1.6bn in revenue and margin. 

TCL says it will fund its additional contribution from corporate liquidity. At HYE-21, it had c.$1.1bn of corporate cash of which c.$590m will be spent in early 2H22 on 1H21 distributions.

In addition, it expects to receive c.$2.3bn of asset capital releases across FY22-25 (some of which we had expected would be used to fund growth projects) and says it has debt capacity within credit rating constraints (we agree with this as we expect credit metrics to improve as traffic recovers).

WGTP tunnelling is expected commence in early 2022, with tolling operations now expected to commence with the new project completion date in late 2025 (18 months later than we had previously assumed).

The key value driver for the WGTP was the 10 year Citylink concession extension (until 2045) plus 10 years of 4.25% pa Citylink toll escalation (until 2029), both of which remain intact. The tolling structure for the West Gate Tunnel and West Gate Freeway also remains unaffected.

TCL says the project’s fixed price/fixed time D&C sub-contract remains in place with a liquidated damages regime for delays.

Traffic update

A recovery trend is evident in Melbourne (TCL’s single largest asset), Sydney is exceeding 2019, while Brisbane remains broadly in-line with 2019. See chart on page 4. TCL expects traffic to return to long-term trend by 2023.

Forecast and valuation update

TCL’s additional WGTP contribution is $0.9bn above what we had previously assumed, but the NPV impact is partly reduced by the later phasing of the spend and also by the increased tax depreciation shield it creates until concession end. Interest costs lift permanently higher as we assume the cost is funded by debt.

Minor upgrades to short-term earnings forecasts following upgrade to forecast Sydney traffic. We expect TCL to pay a 35.0 cps DPS over the next 12 months, 1H22 DPs of 15 cps and 2H22 forecast Free Cash ex capital releases.

We have factored in a higher CPI/interest rate outlook, which is partly negative for TCL given a number of its large assets have fixed toll escalators.

12 month target price reduces 22 cps to (login to view).

Investment view

ADD retained. We view TCL as a high quality pure-play toll road infrastructure portfolio benefitting from employment and population growth, urbanisation, and the value of time, with particular exposure to the east coast capital cities in Australia.

12 month and five year estimated total return of c.10% and 7.5% pa, respectively.

Price catalysts

1H22 result released on 17 February (including Q2/H1 FY22 traffic performance).

Risk

Traffic risk, with heightened uncertainty from short and long-term COVID impacts. 

Macro drivers (population and employment, interest rates, inflation, AUDUSD). 

Capital management, including both sources and uses of capital.

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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.


Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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