Transurban/TCL

The TCL half year is out. A beat at the adjusted EPS line. Dividend upped.

ADT volumes continue to rise; a) a recovery from the pandemic, visible there in the time series plot below and b) strong population growth in more recent halves.

Revenues are unchanged since 4 years ago. But that does mask a pretty dramatic COVID impact. The recovery simply took a very long time. Construction revenue a bit smaller today than 4 years ago, masking some of the impact in toll revenue normalisation.

Throw in some asset sales, & you’ve got the story of “it ain’t a growth company” based on simply comparing revenues point to point. But that longer run population story (Brissy to be 40% larger in time), + accounting for above adjustments/issues, starts to sound more compelling.

1H cost growth was below inflation, a very good outcome, as a result, EBITDA expanded by 7.5%…

…and margins rose to 74.2%.

The new Rozelle interchange highlights some of the value that users derive, namely convenience and time savings. Having roads that work is obviously essential, compared to “free alternatives”, but the main part of the thesis is a) pricing power b) network effects c) population growth that drives employment growth that drives traffic activity.

Transurban’s debt duration is ~6.5 years. So, although bond yields have rocketed higher over the past few years, TCL’s cost of debt has stayed roughly the same.

Since revenues and margins are expanding, the ability to service the debt has gotten easier. In other words, the debt is being eroded over time by inflation.

The market didn’t really like the result, and the worry is twofold 1) longer run growth, particularly since the regulator prevented TCL from bidding further in Victoria (EastLink) on competition grounds, and 2) that the traffic volumes, despite being strong, were weaker than the market expected.

The weaker traffic volumes are well addressed below; good growth, but plenty of disruption due to works, that should come back over time as works progress…

…as to the longer run growth concerns, well, it’s a big world out there, I don’t really doubt TCL’s ability to find inorganic opportunities, and locally, with large domestic population growth expected, it seems fair to assume that new work, new networks, will become necessary overtime, for which TCL will capture (in all likelihood) it’s fair share.

There was also the concern that the issues with the Rozelle interchange (local traffic appears horribly backed up on non-TCL roads) winds up impacting TCL. This does present a modest concern, and I’m not sure the mgmt answer was totally encouraging. It isn’t likely to be a major issue, but in the hunt for problems, this does seem like one.

Overall, we see TCL as a solid defensive play, with strong cashflows…

…at a time when we are nervous on the outlook for the Australian economy. CPI+ linked toll roads, long dated concessions, well managed debt levels, underpinned by population growth, at a 4.5% yield, make for an attractive story, to our mind.

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