Transurban Group: More of the big one

About the author:

Nathan Lead
Author name:
By Nathan Lead
Job title:
Senior Analyst
Date posted:
28 September 2021, 8:00 AM
Sectors Covered:
Infrastructure, Utilities

  • TCL has increased its exposure to the Sydney region by leading the acquisition of the remaining 49% of WestConnex.
  • We recommend clients take up TCL’s entitlement offer at $13/sh, but rate TCL a HOLD at the current share price. 12 month target price now (login to view).

Event

TCL is undertaking an entitlement offer to part-fund its 50% share of the acquisition by Sydney Transport Partners (STP) of the remaining 49% equity stake in WestConnex (WCX) being sold by the NSW Govt.

The acquisition takes STP’s ownership of WCX from 51% to 100%, with TCL retaining its 50% stake in STP.

STP’s acquisition and funding of 49% WCX

STP has paid $11.1bn for the additional 49% WCX. This is well above the $9.8bn that we had valued the stake, albeit the cost does include $0.8bn of stamp duty. The price was partly validated by CDPQ taking a new 10% stake in STP.

STP is funding the acquisition entirely with equity upfront. Capital releases to STP’s investors will be funded by increases in WCX’s debt over time. TCL says it expects to receive >$600m of potential capital releases until FY25 from its increased stake in WCX (taking total expected releases across all assets to c.$2.3bn across FY22- 25), and intends to use a portion of this to minimise Free Cash dilution.

TCL’s capital raising

TCL’s $5.56bn contribution to STP’s capital raising is being funded by a mix of $4.22bn capital raising and $1.4bn of available cash. The capital raising includes a $3.97bn entitlement offer (1 for 9 at an offer price of $13/s) and a $250m placement to AustralianSuper (offer price $13.07/s).

S&P/Moody’s have reaffirmed TCL’s credit ratings of BBB+/Baa1.

Traffic performance

Weekly traffic data provided by TCL for the initial stages of 1H22 indicates Sydney and Melbourne down c.50% on the 2019 pcw, Brisbane at a slight improvement (ex lockdowns), while North America was c.10-15% below 2019.

We downgrade the traffic recovery profile for Melbourne/Sydney and upgrade for Brisbane. Further clarity will be provided with the 1Q22 traffic data due to be released on 21 October.

Distribution outlook

The WCX transaction is naturally cashflow per share dilutive, given TCL is raising capital to fund the purchase of cashflows that don’t fully ramp-up until CY27 (when the M5 West concession - which is expected to contribute up to 25% of WCX revenue – becomes part of the WCX network).

In addition, the DPS outlook is muddied by the uncertain traffic recovery (particularly Sydney/Melbourne).

TCL has provided first-time DPS guidance of 15.0 cps for 1H22 (vs 2H21A 21.5 cps), but makes no commitment that it will be Free Cash covered. The FY22 DPS is expected to be in line with Free Cash excl. capital releases. We forecast the DPS rising 5% in FY22 to 38.5 cps, growing at 20% pa CAGR across FY23-26F.

Investment view

Our DCF-based target price (login to view), as a result of forecast changes and factoring in the WCX acquisition and related capital raising.

We recommend clients take up the entitlement offer, given c.10% total potential return at the offer price (c.7% upside to target price plus c.3.0% cash yield).

At the current share price, we rate TCL a HOLD given c.-1% potential downside plus c.2.7% cash yield.

Price Catalysts

Potential share price weakness during the retail entitlement offer (closes 8-Oct).

1Q22 traffic data release 21 October.

Risks

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

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

Size of the “meaningful financial contribution” required to complete the West Gate Tunnel Project (we assume an additional $1.1bn above the original project budget).

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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.

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