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Toll and traffic growth drive Transurban profit

Andrew Main
Wednesday, February 08, 2017

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By Andrew Main

Transurban Group yesterday turned in a very solid half-year profit result as a solid example of what happens when a utility demonstrates tight discipline in how it throws its money around.

The toll road operator saw the price of its stock kick up 20 cents on yesterday’s open to $10.58 (and moved up from there to close 6.36% higher at $11.04) on a report that saw traffic growth vying with increased tolls to have the bigger effect on top line earnings, EBITDA.

CEO Scott Charlton announced a first-half distribution of 25 cents a share and noted the full 2016-7 year guidance had moved up to 51.5 cents a share, an increase of 13.2% on the 45.5 cents paid out after the 2015-6 result. The previous guidance was for 50.5 cents.

Transurban holds a portfolio of toll roads on the east coast of Australia and in Washington DC, and because of its stapled security structure and continuing investment in new and existing projects, it doesn’t expect to start paying tax until, as Mr Charlton put it, “the early 20s”.

That’s not great news for franked dividend hunters, who, for instance, will only see franking on 1.5 cents of the last 25 cents a share payout due to hit investors’ accounts on Friday. But more on that later.

The company reported a statutory operating profit of $88 million, which appears to compare with $22 million for the previous half.

The real standout numbers were that the company’s proportional share of toll revenue jumped by 10.9% to $1.065 billion, while average daily traffic was up by 4.8%.

So more vehicles are on the road and they’re each paying more to be there. There’s an extra positive, for instance, in Sydney’s Lane Cove Tunnel, M5 and Westlink M7, in that large vehicle toll multipliers are now at three times those of cars.

So, won’t big trucks avoid toll roads if the operators start to find the charges a bit steep?

Mr Charlton chose that well-known Melbourne rat race, the Tullamarine Freeway between the Bolte Bridge and Melbourne Airport, as an example of why they won’t, even after a toll rise on April 1.

Daytime section tolls for heavy vehicles will increase from 1.9 times the cost of an equivalent car trip, to 3.0 times.

(Regular users know very well that Transurban is widening the Tullamarine Freeway and that, for the moment, usage has actually shrunk slightly).

“There will be a 30 minute time saving, or will be, on a return trip when the road is at full capacity,’’ he said.

To back his point, in the December quarter in Melbourne, Transurban’s car traffic decreased by 3.5% and large vehicle traffic increased by 14.4%.

The company is a worked example for investors to see there’s more to life than franking, assuming they are looking at the bigger picture.

Melbourne-based Transurban owns all of the Melbourne CityLink, Sydney’s Lane Cove and Cross City tunnels and the M2 Hills Motorway, plus two tollways in Washington DC.

And that’s before you look at part-owned assets such as the 75% owned Eastern Distributor in Sydney, a clump of previously maligned tunnel assets in Brisbane, and a 50% stake in the new NorthConnex tollway in Sydney designed to relieve Pennant Hills Road.

As Scott Charlton put it in a call to analysts yesterday, “a quarter of our portfolio has been picked up out of receivership.

“We’d rather be the one taking assets out of receivership than the alternative.”

In other words, Transurban managed to dodge the silly financial engineering-led flurry of tunnel construction in Sydney and Brisbane that caused so much pain for big investors most of a decade ago.

Remember how traffic volumes on projects such as Clem7 in Brisbane, the Cross City Tunnel and the Lane Cove Tunnel in Sydney were nowhere near what had been modelled?

Transurban has enjoyed what you might call a second mover advantage.

Interestingly, Charlton noted that there aren’t many professional traffic forecasters left in Australia given the liability issues involved.

He added however that Transurban does its own numbers, with a crew of “rocket scientists,’’ as he called them, “who sometimes say things I don’t understand’’. More power to them, I’d say, and to Charlton for admitting it.

He said that missing out on the big I-66 tollway project in the US, a major traffic artery outside the Washington beltway, was the first project in four-and-a-half years that Transurban had bid for and missed out on.

“We did lose by a considerable amount,’’ he said, adding ominously for the winner that “we continue to remain disciplined” about bidding on projects.

Star performer among recent broker reports has to be the one from Morgans, which on January 30 upgraded the stock from Hold to Add.

Runner up is Credit Suisse, which had had it as an Outperform and keeps it on a price target of $12.50. The January 17 report does indicate that “Transurban is not expected to upgrade dividend guidance at the upcoming interim report release,’’ but holders will be happy to forgive that outburst of caution.

The stock did run up past $12 in July of last year before dropping back to just above $10 in November thanks to nerves about interest rates going up in the wake of Donald Trump’s plans to borrow heavily to rebuild US infrastructure.

That concern didn’t take up a lot of time during the analysts’ call yesterday, not least because upward rate moves aren’t now being seen as an imminent disruptor of Transurban’s plans as they were.

The big project heading Transurban’s list of likely starters is the giant $5.5 billion Western Distributor proposal, which will see Transurban partner with the Victorian Government on cutting a corner between the West Gate Freeway and the Tulla Freeway, cutting out the Bolte Bridge.

Transurban is expected to provide details of the financing arrangements shortly. Credit Suisse is talking about a $1 billion raising in the current half. 

That sounds like a lot until you note the company’s capitalised at well north of $20 billion and, to quote Credit Suisse, “the share market will treat it positively.’’

Published: Wednesday, February 08, 2017

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