Road network manager and developer Transurban ((TCL)) is working to bed down recent acquisitions and deliver on its developments, intent on completing $8bn of proportionally funded projects in the next four years.
Transurban’s key competitive advantage, in Citi’s opinion, is the in-house expertise and insight into traffic. While the interest rate environment is favourable, the broker would like leverage to be lower when rates are historically low. The company has pointed to traffic congestion on Sydney’s M2 and M5 which may cause some moderation of growth assumptions in the absence of enhancements.
UBS found nothing in the investor briefing to sway sentiment, noting the stock’s performance over the last six months has probably been driven by a flight to yield, as evidenced by a -0.7 percentage point contraction in the US and Australian bond yields. Deutsche Bank also expects low bond yields will continue to underpin the sector in the short term.
Sydney’s WestConnex opens new M4 tunnels in 2019 and there are new M5 tunnels to be opened in 2020. A proportion of the funding is secured although there is still a requirement for a further $3-4bn of corporate level funding, which is exposed to interest-rate fluctuations.
UBS notes some favourable debt transactions recently. Liquidity and debt markets diminishes the risk and it is possible the company can gradually better its current 4.7% effective interest cost.
Transurban has confirmed it will not participate in the initial stage of the Maryland high-occupancy toll project in the US, considering it too complex and involving a high risk of project delays. Instead domestic road network expansion is a favoured.
Tax
Citi asserts it is none the wiser after the company attempted to address capital releases and tax issues. Capital releases are unknown beyond FY19/20 in terms of timing and quantum.
The company has stated a majority of its distributions will be covered from cash flow but this, Citi suggests, implies a wide range for future capital releases. Transurban has guided to around 5% and 4% growth in distributions in FY19 and FY20 respectively.
Given the reliance on capital releases and a mild tax headwind, Citi believes upgrades to distributions are becoming less likely. The company indicated when concessions are likely to commence paying tax but tax rates are still unknown. UBS agrees the tax outlook is opaque.
Transurban Holdings is not expected to pay tax until 2023. Both UBS and Macquarie note details of the West Gate trust structure are limited, but suspect Transurban will be unlikely to pay the full 30% rate of tax.
In the medium term, Macquarie suggests that instead of accelerated dividend growth the company could also recycle its surplus capital to fund new developments. NSW is the obvious choice but there are also opportunities in Brisbane and Montreal, Canada. Macquarie considers these initiatives carry the most added value for shareholders.
Aside from the question of the impact on traffic, the company pointed out that the take-up of zero emission vehicles could accelerate a drop in Australian government fuel excise collections. If implemented, Morgan Stanley estimates current Labor Party policies for transport emission reductions could mean a fall in excise collection in the order of -25%, adding further pressure on private sector investment in infrastructure.
Technology
There were a number of market dynamics which the company alluded to, including smart mobility, road user charging and motor vehicle technology, supporting cheaper, safer road travel with integrated networks. However, while the company alluded to the long-term opportunity from technology, Macquarie points out this is about decades into the future.
There are three Buy ratings, three Hold and two Sell on FNArena’s database. The consensus target is $12.68, suggesting -5.7% downside to the last share price the dividend yield on FY19 FY20 forecasts is 4.4% and 4.6% respectively.
