Transurban Group: 3Q22 traffic, 95 Express Lanes, WCX capital release

About the author:

Author name:

By Nathan Lead

Job title:

Senior Analyst

Date posted:

19 April 2022, 9:30 AM

Sectors Covered:

Infrastructure, Utilities, Banks

• We review Transurban Group's (ASX:TCL) 3Q22 traffic data and take the opportunity to factor in TCL’s detailed long-term forecasts for its 95 Express Lanes and update our WCX debt modelling for the asset’s recent debt issue and capital release.
• DPS forecasts upgraded. We expect the DPS to increase by more than one-third over the next 12 months, with growth of 12% pa CAGR over the following 4 years.
• 12-month target price lifted to (login to view). Even with recent share price strength, potential returns remain appealing given TCL’s high quality asset portfolio.

Analysis

The speed and extent of traffic recovery from COVID-related impacts (and longterm growth rates thereafter) is a key value driver. However, Sydney and Brisbane traffic in 3Q22 was distorted by severe wet weather. Sydney traffic was 5% below pcp and 6.6% below 2019 (+15% above 2019 after including new assets).

Brisbane volumes were effectively flat against both the pcq and 2019. While showing a meaningful Q3 uptick, volumes on both Citylink and the Express Lanes were c.16% below their 2019 pcp (and the dynamic pricing of the Express Lanes still has a long way to recover).

Across the overall portfolio, traffic was close to flat on the pcq and was c.3% lower than the 2019 pcq (or c.9% lower than 2019 ex. new Sydney assets). See Figures 2-5 for a detailed summary.

TCL has recently published long-term traffic, earnings and debt service forecasts alongside its 95 Express Lanes bond issue (see Figure 6). Factoring these into our modelling delivers upgrades to the asset’s long-term forecasts and valuation.

TCL recently announced that WestConnex (TCL 50%) had raised an additional $540m of debt, whose proceeds would be paid to its investors as a capital release. This sits within the envelope of $1.5bn capital release we expected from WCX in FY22.

However, to be conservative with timing we have pushed the remainder of the release into FY23, which we expect will coincide with the M8/M5E refinancing.

Forecast and valuation update

We downgrade our short-term Sydney and Express Lanes traffic forecasts as Q3 volumes were less than we’d expected but upgraded Citylink as its traffic strength surprised on the upside.

This resulted in c.1% forecast EBITDA downgrades across FY22-24F. We expect EBITDA to grow from $1.84bn in FY21 (1H22A $805m) to $2.86bn in FY24F, as a result of traffic recovery, toll escalation, and operating leverage, partly offset by increasing corporate costs.

We upgrade our DPS forecast across FY22-24 by 5-11%, as a result of:

1. Increased Free CF from assumed ongoing capitalisation (vs expensing) of interest expense related to the debt funding of the West Gate Tunnel Project; and 
2. Incorporating TCL’s intention to use a portion of WCX capital releases in the first two years following the 2021 acquisition to minimise Free CF per share dilution from the capital raising.

We now forecast the DPS lifting from 36.5 cps in FY21 (1H22A 15 cps) to 66.5 cps in FY24; over the next 12 months we are targeting DPS of c.50 cps.

June 2023 DCF valuation (= 12-month target price) lifts (login to view), as a result of forecast changes and reduced dilution from smaller DRP take-up.

Investment view

TCL’s share price has lifted c.5% since our last note, compressing potential returns.

However, with our revised DPS forecast and valuation we estimate potential 12- month and 5-year returns of c.9% and 7.5% pa, respectively. ADD retained.

Price catalysts

TCL Investor Day on 2 May.

Risks

• 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.
• Project cost over-runs, noting discussions with FredExt builder are underway.

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