Transurban Group: Reverting to trend

About the author:

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

  • Transurban Group (ASX:TCL) hosted its 2021 virtual investor day.
  • New Target Price (login to view). 12 month potential yield of c.3%, with forecast growth of 15% pa CAGR across CY22-25F. 5yr IRR of 5.5% pa at current prices.
  • While we continue to view TCL as a highly attractive toll road portfolio, we think the share price appropriately reflects the risk/return balance. HOLD retained.

Traffic…painting an optimistic picture

Management is bullish that traffic is reverting to trend. Brisbane and Sydney have seen volumes at pre-COVID-19 levels, while in the last month Melbourne traffic was down only in the teens (%) compared to pre-COVID-19.

Peak periods are returning (using Brisbane as an example this is with public transport recovering to 70-80% of pre-COVID-19). Commercial volumes, including construction and light commercial vehicles, have proven resilient.

TCL’s traffic forecasters believe there has been no long-term fundamental change arising from COVID-19. Working-from-home concerns are over-exaggerated, and may provide opportunity to shift trips out of the peaks. Advances in technological development, while coming, have been slower than expected.

Overall, this ties in with our assumption that traffic recovers to long-term trend in Australia by CY22 (or CY23 for airport-linked roads), and grows at 2% pa until capacity constrained.

Numerous investment opportunities

The most imminent large-scale potential investment is the NSW Government’s sale of its remaining 49% stake in WestConnex, with TCL noting the asset’s strong fundamentals (traffic drivers, 4% pa toll escalator until 2040, long-dated concession) and only c.$500m cost-to-completion of the M4-M5 Link (100% WCX-funded basis).

Identified potential projects over the next 5 years include Sydney’s M7 widening and M7/M12 interchange, widening of the Gateway and Logan Motorways in Brisbane, and the US$3-4bn Phase 1 of Maryland Express Lanes (60% TCL, but expect new partners to dilute TCL to c.30%).

No indication of dramatic change to capital management

TCL’s new CFO noted that the balance sheet and capital management settings had served TCL well during the pandemic, and continue to provide TCL with the ability to pay growing distributions and fund investment.

TCL continues to expect c.$2bn of capital releases between FY22-25 ($250m by CYE-21) to support TCL’s funding requirements, unchanged by the 50% Express Lanes sell-down that added $2.5bn to TCL’s liquidity.

Forecast update

Immaterial changes to forecasts, after updating our Transurban Queensland modelling for its recent bond issues and the 1.7% Brisbane CPI for the March-21 quarter (impacts the 1 July annual toll escalation on all Brisbane roads except Airportlink).

We forecast CY21 DPS of 47.5 cps (+53%), growing at 15% pa CAGR across CY22-25F. Key drivers are recovery, organic growth, and new roads coming on-line (M4-M5 Link, WGTP).

Valuation update

12 month target price lifts (login to view) as a result of the forecast changes. The valuation grows over future years as it approaches stronger free cashflows.

Find out more

Download full research note

If you would like access or more information, please contact your adviser or nearest Morgans office.

Request a call  Find local branch

Need access to our research?

You are also welcome to start a two-week trial of our online platform, which provides access to detailed market analysis and insights, provided by our award-winning research team

Create trial account 

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.

  • Print this page
  • Copy Link