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Aussie Stock Opportunity - Transurban Group

Transurban Group is a leading toll road owner/operator, with a portfolio of assets in Australia and North America. Concession lives are fixed, with toll roads handed back to their respective governments debt-free at the end of the concession. The weighted average concession life of the portfolio is around 30 years. Toll roads have high barriers to entry and benefit from rising traffic volumes and tolls, which increase in line with the consumer price index or higher. Transurban is a stapled security, with a considerable portion of its net cash flows distributed to security holders pre-tax.

Transurban Group Ltd fully owns, or has stakes in, 18 toll roads in Australia and North America. This portfolio includes City Link, which joins three of Melbourne’s major motorways, seven roads in the Sydney orbital network, stakes in six roads in Queensland, and four in North America. TCL is constantly developing options to grow its operations (such as the West Gate Tunnel project in Melbourne and WestConnex in Sydney).

The outbreak of COVID-19 and the partial shutdown of non-essential travel in Australia had a significant impact on the patronage on Transurban’s toll roads for the months of March and April. Since the week ending the 12th of April, Average Daily Traffic across the Group has started dropping at a reducing rate, which reflects a trend of people transitioning back to work in the city. Recent data from China on highway congestion levels indicate a progressive recovery. China Highway traffic has rebounded faster than public transport, suggesting that social distancing is encouraging more people to commute using their own vehicles. The duration of the lockout and any following economic downturn will be key to Transurban’s recovery.

TomTom published its 2019 traffic index, which ranks 416 cities across 57 countries for urban congestion and provides key insights into traffic related issues. Sydney ranked 86th on the index with a rating of 33 per cent, making it the most congested city in Australia ahead of Melbourne at 30% and Brisbane at 25%. Transurban Group Ltd generate over 70% of their revenue from Sydney & Melbourne and is best placed to take advantage of this high level of congestion.

Transurban has sufficient liquidity and funding available to meet debt refinancing obligations at the end of Financial Year 2021 and is committed to maintaining an investment grade credit rating.

This has been achieved by arranging $3.7 billion AUD in new facilities (bank debt and capital market issuances) during March and April 2020 for general corporate purposes, funding the development pipeline, and to fulfil upcoming debt refinancing obligations.

Dividend guidance for the FY2020 2nd half dividend has been withdrawn, and it’s their intention to distribute in line with Free Cash Flow, excluding capital releases.

Transurban is well placed to capitalise on business recovery in Australia’s major cities and will be a leading indicator for those regions.

Capital Releases

Transurban’s business model provides scope for balance sheet optimisation as assets mature, given upfront equity funding of major developments. As traffic ramps up on each asset, credit metrics improve due to increasing cash flow against a fixed debt balance. Capital releases are pre-agreed with governments and undertaken within credit metric parameters. FFO/Debt is the metric of relevance, as Funds from Operations (FFO) increases as a proportion of debt, at a prearranged level, a capital release is actioned. Capital is withdrawn from the asset and distributed to the stakeholders.

Half Year Results 1H2020

Free Cash Flow for the first half of 2020 was strong, $927m, which was an improvement of $310m on the prior period, largely due to a capital release of $160m from Lane Cove Tunnel in Melbourne and $52m from Hills M2 in Sydney. In addition to these two project capital releases, Transurban enjoyed a $49m distribution from non 100% owned assets and $31m from M5 West in Sydney. Excluding Lane Cove & Hills M2 Capital Releases, Transurban reported 15.8% growth in FCF. Distributions of $847m were 15% funded via capital releases.

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