Transurban Group: Reverting to trend
About the author:
- Author name:
- By Nathan Lead
- Job title:
- Senior Analyst
- Date posted:
- 03 May 2021, 10:30 AM
- Sectors Covered:
- Infrastructure, Utilities
- Transurban Group (ASX:TCL) hosted its 2021 virtual investor day.
- New Target Price (login to view). 12 month potential yield of c.3%, with forecast growth of 15% pa CAGR across CY22-25F. 5yr IRR of 5.5% pa at current prices.
- While we continue to view TCL as a highly attractive toll road portfolio, we think the share price appropriately reflects the risk/return balance. HOLD retained.
Traffic…painting an optimistic picture
Management is bullish that traffic is reverting to trend. Brisbane and Sydney have seen volumes at pre-COVID-19 levels, while in the last month Melbourne traffic was down only in the teens (%) compared to pre-COVID-19.
Peak periods are returning (using Brisbane as an example this is with public transport recovering to 70-80% of pre-COVID-19). Commercial volumes, including construction and light commercial vehicles, have proven resilient.
TCL’s traffic forecasters believe there has been no long-term fundamental change arising from COVID-19. Working-from-home concerns are over-exaggerated, and may provide opportunity to shift trips out of the peaks. Advances in technological development, while coming, have been slower than expected.
Overall, this ties in with our assumption that traffic recovers to long-term trend in Australia by CY22 (or CY23 for airport-linked roads), and grows at 2% pa until capacity constrained.
Numerous investment opportunities
The most imminent large-scale potential investment is the NSW Government’s sale of its remaining 49% stake in WestConnex, with TCL noting the asset’s strong fundamentals (traffic drivers, 4% pa toll escalator until 2040, long-dated concession) and only c.$500m cost-to-completion of the M4-M5 Link (100% WCX-funded basis).
Identified potential projects over the next 5 years include Sydney’s M7 widening and M7/M12 interchange, widening of the Gateway and Logan Motorways in Brisbane, and the US$3-4bn Phase 1 of Maryland Express Lanes (60% TCL, but expect new partners to dilute TCL to c.30%).
No indication of dramatic change to capital management
TCL’s new CFO noted that the balance sheet and capital management settings had served TCL well during the pandemic, and continue to provide TCL with the ability to pay growing distributions and fund investment.
TCL continues to expect c.$2bn of capital releases between FY22-25 ($250m by CYE-21) to support TCL’s funding requirements, unchanged by the 50% Express Lanes sell-down that added $2.5bn to TCL’s liquidity.
Immaterial changes to forecasts, after updating our Transurban Queensland modelling for its recent bond issues and the 1.7% Brisbane CPI for the March-21 quarter (impacts the 1 July annual toll escalation on all Brisbane roads except Airportlink).
We forecast CY21 DPS of 47.5 cps (+53%), growing at 15% pa CAGR across CY22-25F. Key drivers are recovery, organic growth, and new roads coming on-line (M4-M5 Link, WGTP).
12 month target price lifts (login to view) as a result of the forecast changes. The valuation grows over future years as it approaches stronger free cashflows.
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