With a sustainable yield of 5% that has grown at 10% per annum over the last 5 years, Transurban is a stock that has performed through the market cycle. Global Head of Listed Infrastructure, Peter Meany, tells Livewire why.
The company driving infrastructure
Transurban (ASX:TCL) is driving a number of the key infrastructure projects in Australia. The toll road projects in Melbourne, Sydney and Brisbane will add significant capacity to congested corridors and should lead to faster, safer and more reliable trips for people and goods. In turn this may lead to higher earnings power for Transurban investors.
No project (or investment) comes without risk. Large-scale construction may incur engineering challenges or skilled labour shortages, causing delays and cost over-runs. Communities may challenge the location or scope or even the need for the project. Traffic forecasts may not meet expectations. Transurban has committed $6bn over the next 5 years to deliver its share of $15bn in project spend, requiring a significant call on debt and equity capital.
As investors we earn a return for taking calculated risks. Fixed price – fixed term contracts help to mitigate construction risks. Transurban has a good track record of forecasting traffic and managing community relations and their social license to operate. Equity dilution is now captured in the price.
For Transurban, the market is concerned about the size of the bid for WestConnex. We acknowledge Transurban paid a full price to cement its presence in the Sydney market. Similar to the 2014 acquisitions in Brisbane, we expect the stock to recover once the large rights issue is digested and further details on cost control, debt structures and future connecting projects come to light. The market is also concerned about project delays, due to politics on West Gate Tunnel or construction on NorthConnex. We believe anyone who has endured a peak-hour crawl on the West Gate Bridge or Pennant Hills Rd sandwiched between two semi-trailers will understand the value of these projects.
With these key risks discounted into Transurban’s valuation, investors should have greater confidence in future returns.
Transurban offers exposure to high quality urban toll roads with limited economic sensitivity and pricing linked to inflation or better. In a global context, the company has long-term concessions in countries with low political or regulatory risk and robust legal systems. Management and the Board have executed well and understand the need to balance medium-term cash flows with long-term value creation. With a sustainable yield of 5% that has grown at 10% per annum over the last 5 years, Transurban is a stock that has performed through the market cycle.
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