Transurban Group: A mixed bag

About the author:

Nathan Lead
Author name:
By Nathan Lead
Job title:
Senior Analyst
Date posted:
10 August 2021, 10:30 AM
Sectors Covered:
Infrastructure, Utilities

  • Transurban Group (ASX:TCL) released its FY21 result, with no surprise that COVID travel restrictions continue to hamper traffic and hence earnings recovery. The market may be surprised by the size of the financial contribution TCL may need to make to complete the West Gate Tunnel Project.
  • TCL says it will undertake an entitlement offer if its consortium is successful in bidding for 49% WestConnex (a 1H22 event).
  • HOLD retained, with 12 month target price increased 38 cps to (login to view).

FY21 result detail

4Q21 traffic was flat on 4Q19, but entered FY22 materially down vs FY19 due to recent lockdowns.

Group EBITDA decreased -3% on pcp, in-line with our forecast. Sydney (+18% on pcp, or +7% ex-new assets) and Brisbane (+10% on pcp) were the key growth drivers, with Melbourne (-21%), North America (-54%), and corporate costs a drag.

Free Cash excl. asset sales and capital releases declined -14% to 36.5 cps, 8% below our forecast. Free Cash entirely covered the FY21 DPS of 36.5 cps.

Key credit metric FFO:debt was 8.9% vs minimum 8% for S&P’s BBB+ credit rating. S&P has said it expects FFO:debt to be 9.5-10% in FY22. Assuming TCL targets 8.5% for headroom, this implies existing assets have $1.6-2.5bn of debt capacity (even more if earnings from these assets recover quicker than S&P assumes).

Outlook indications

Transurban Group (ASX:TCL) intends to continue paying distributions in line with Free Cash excl. capital releases. We forecast 49.5 cps in FY22F (+36% on pcp) and 62.25 cps in FY23F, implying a yield at current prices of 3.5% and 4.4%, respectively.

Targets >$2bn of capital releases out to 2025 (incl. WCX’s $280m in FY21).

Other key points of interest

West Gate Tunnel Project (WGTP) issues: TCL says an independent analysis has estimated the D&C contractor’s construction costs may overrun by c.$3.3bn (the D&C contractor’s claims are higher). “In order to reach a commercial settlement, the Group believes all project parties would be required to make a meaningful financial contribution.”

We now assume TCL contributes $1.1bn to the solution in CY22 (equivalent to 40 cps upfront, 24 cps post-tax NPV).

49% WestConnex (WCX) sale: The two-tranche sale process is expected to conclude towards end-Sept-21. TCL says it will likely undertake an entitlement offer if its consortium is successful. We value TCL’s existing stake in WCX at $5.15bn.

Forecast and valuation update

Downgrades to FY22 given latest Australian COVID lockdowns. We assume traffic recovers to trend by CY22 (one year further delayed for the airport-linked roads), and grows at 2% thereafter until capacity constrained. Across FY23-26F, we forecast EBITDA and DPS CAGR of 11% pa and 15% pa, respectively.

Our 12 month DCF-based target price has increased 38 cps to (login to view). Implied EV/EBITDA is c.24x vs EBITDA-weighted average concession life of c.25 years.

Investment view

HOLD. While we have a positive view on TCL’s asset base, management, and growth drivers, we think the share price adequately balances the COVID, WCX and WGTP risks.

Price catalysts

Outcome of WestConnex bid in Q3. 1Q22 traffic data release 21 October.

Risks

Volume risk, with heightened uncertainty from short and long-term COVID impacts albeit comfort from volume rebound in Brisbane/Sydney during limited restrictions.

M&A with TCL as both the predator (eg. WCX) and potential target.

Interest rates, with mitigants being staggered debt maturities (delays impact of market rates on actual cost of debt) and DCF assumption of 3% pa risk free rate (vs c.1.2% pa spot for 10 year CGBs).

Inflation rates (45% of revenue is CPI linked, costs/debt partially linked to inflation).

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