Transurban Group (TCL)
BUY

Back on open road

 7 Feb 2023
Sector: Industrials

1H23 RESULT

Need To Know

  • Record traffic volumes exceeding 2.5m average daily traffic (ADT) volumes in November
  • Upgrading FY23 distribution guidance to 57cps from 54cps
  • CEO to retire after 11 years at the end of CY2023

Transurban (TCL) delivered a result relatively in-line with the market, although underpinned by record volumes, revenue, and EBITDA. TCL also upgraded its FY23 distribution guidance from 53cps to 57cps, largely driven by a capital release from WestConnex (NSW).

Record traffic volumes. ADT exceeded 2.5m for the first time in November 2022. This was supported by freight traffic and weekend travel. Sydney traffic grew by 47.7%, Melbourne traffic increased by 45.7% and Brisbane increase by 10.2%. Airport and CBD related volumes continue to recover, with freight continuing its strength, contributing 41% of revenue and up 12% of FY19 levels.

Record Revenue and EBITDA. Inflation linked toll escalations of >6% in Sydney and Brisbane helped underpin proportional toll revenue of $1,658m, with 80% of the revenue uplift being driven by increased ADT. Group EBITDA margin of 71.8% is the highest since 1H20.

Upgraded distribution guidance. Driven by increased traffic volumes and increased certainty around performance, TCL upgraded its guidance for FY23 distribution from 53cps to 57cps. ~2-3cps of this is from Capital Releases received because of the additional proportional ownership of WestConnex. The 1H23 distribution of 26.5cps is 104% covered by underlying free cash. We believe there is upside risk to the FY24 distribution as traffic volumes continue to grow.

Strong balance sheet. 97% of the debt book is hedged, with the group weighted average cost of AUD debt remaining at 3.9% for the half. Net interest was a $17m benefit to free cash given higher interest rates on cash balances and fixed rate debt.

Asset sell down. TCL entered into an agreement to partner with CDPQ through the sale of a 50% interest in A25 for CAD355m. Montreal has historically ranked in the top 10 most congestion regions, and TCL is committed to deliver value for investors and for Greater Montreal. The sale price was in-line with TCL’s book value.

CEO stepping down. After 11 years in the job, CEO Scott Charlton has announced he will step down at the end of CY2023. The board search for a suitable candidate is on the way.

Investment View

We retain our Buy recommendation. Traffic volumes are recovering significantly, and the inflation-linked tolls are clearly contributing strongly to revenue and margin growth. The company has a well-positioned balance sheet and has a solid pipeline of growth opportunities assets underpinning future cash generation.

Figure 1: Traffic volumes continuing to recover and grow

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Stock Overview

Share Price

Company Overview

Australia-based toll-road operator and developer which operates in Australia (Sydney, Melbourne and Brisbane) and North America.

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