Transurban Group: The recovery continues
About the author:
- Author name:
- By Nathan Lead
- Job title:
- Senior Analyst
- Date posted:
- 15 April 2021, 4:00 PM
- Sectors Covered:
- Infrastructure, Utilities
- The March quarter 2021 data painted a picture of varied traffic performance.
- Forecast changes deliver a 1-3% increase in forecast DPS across FY21-23F. However, longer term forecasts are impacted by the uplift in market interest rates outpacing the increase in CPI expectations.
- Target price declines 1 cps (login to view). HOLD retained.
- Next key events are the NSW Govt’s sale of its remaining 49% WCX stake commencing 2QCY21 and TCL’s Investor Day on 3 May.
March quarter traffic performance mixed across regions
Average daily traffic (ADT) on Melbourne’s Citylink, which is Transurban Group's (ASX:TCL) single largest asset (~32% of EBITDA) and the key supporting cashflow for its corporate debt, was down -15% on pcq and -21% on the 2019 pcq.
COVID-19 movement restrictions were lifted in Melbourne in mid-February, which should support sustained ADT improvement since the Q1 low.
Brisbane ADT was up 3% on the pcq or 1% on the 2019 pcq, even though there were two short lock-downs during the quarter. The Logan Motorway (+14% on 2019 pcq) was the key growth driver for Brisbane (benefitting from the Enhancement Project completed in 2019) and had the strongest growth across TCL’s road portfolio.
Excluding new roads (NCX, M8/M5E), Sydney ADT was down -1% on the 2019 pcq but up 4.5% on pcq; this was a solid result given the floods that affected the region in March.
North America continued to be impacted by movement restrictions, with traffic on the Express Lanes down ~40% on pcq and average tolls down 16-33% on pcp. The A25’s ADT was 10% below the 2019 pcq (Montreal is still subject to movement restrictions).
Thinking about the macro
Market interest rates have lifted materially off their 2020 lows (i.e. 7 year swaps +75bps).
If sustained, they will impact TCL as its existing debt and/or interest rate swaps mature and are replaced at market rates (but the impact is mitigated by TCL’s long-term staggered maturities).
We expect TCL’s average cost of debt to continue to trend down (evidenced by recent debt issues), but not by as much as previously. The increase in interest rates has been partly driven by an increase in inflation expectations.
Roughly half of TCL’s toll revenues escalate with CPI, with the vast bulk of the remainder subject to fixed escalation of 4.0-4.25% pa. The benefit of the fixed escalators declines as CPI expectations rise.
We have updated our 1H21 traffic forecasts to reflect growth rates seen in Q1.
We continue to assume that traffic recovers to trend by CY22F (later for the airport-linked roads), and grows at 2% pa long-run until constrained by capacity limits (albeit slowing population growth and working-from-home may impact this outlook).
We have also factored in the higher rate expectations implied in the interest rate and CPI swap curves. Our forecast of EBITDA across FY21-23 has lifted by 1-2%, and of DPS by 1-3%. We forecast CY21 DPS of 47.75cps (+54%), growing at 14% pa CAGR across CY22-25F.
Our DCF-based target price (7.3% cost of equity) decreases 17 cps due to the compound impact of the higher implied real interest rates in our modelling.
Six month valuation roll forward offsets this by 16 cps, such that our 12 month target price ultimately declines by 1 cps (login to view). At current prices, we estimate a 5 year investment IRR of 6% pa, which is ~430 bps over the 10 year risk free rate of ~1.7% pa.
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