Slight congestion

RESULTS

Need To Know

• FY23 distribution of 58.0cps and guidance for 62.0cps for FY24, in-line with consensus
• Proportional EBITDA of $2,448m ~2% below consensus driven by soft 4Q traffic in Sydney and slower than expected recovery in Melbourne
• Inflation linked escalations to positively impact FY24, and guidance could prove conservative given new CEO (CFO Michelle Jablko promoted)

Investment Implications

FY23 ended weaker than anticipated, with Sydney and North American EBITDA in particular disappointing, and the recovery in Melbourne not as quick as expected. The FY23 distribution of 58.0cps and FY24 guidance for 62.0cps were in-line with expectations, however the guidance may be conservative given the newly appointed CEO, Michelle Jablko, who was previously the CFO. 

Sydney traffic was up 24.1% and proportional EBITDA up 36.0% to $1,329m as margins improved. The Toll Review remains in progress, with a final report expected in Q3 2024, including recommendations to the government. A weekly toll cap trial of $60 for M8 and M5 East is expected to commence in January 2024. TCL noted that in the review, "contracts negotiated in good faith by parties in the past need to be honoured" which bodes well for at least the same financial outcome for TCL.

Melbourne traffic increased 24.4% and EBITDA grew 27.3% to $756m. Melbourne still remains -3.6% below FY19 levels in the June quarter, although momentum continues to improve. EastLink is still awaiting feedback from the ACCC, with a decision expected on 7 September 2023. TCL has been working collaboratively with the commission to seek a positive outcome for all stakeholders, and notes there was a similar process during the WestConnex acquisition.

Traffic in Brisbane rose 9.4% and EBITDA grew 18.8% to $380m, with higher large vehicle traffic and >45% of Brisbane's population living within 5kms of TCL's assets. Brisbane remains a strong opportunity given high population growth forecasts and the 2032 Olympics.

North America's recovery is slower, with traffic increasing 6.7% and EBITDA up 7.8% to $129m. Dynamic toll prices were up strong during the year, partly driven by 3x multiplier tolls on medium commercial vehicles in December 2022. We expect further momentum for the express lanes as airport and office activity increase.

FY24 is shaping up to be another year of momentum, with inflation linked escalations seeing the full benefit due to timing. 62.0cps distribution guidance could end up being conservative, especially when net migration forecasts are incredibly strong. The debt book remains 96% hedged with an average cost of debt at 4.1% and has plenty of headroom to fund growth (~$4bn corporate liquidity).

Investment View

Traffic volumes continue to improve, with most roads either meeting or exceeding pre-Covid levels. Inflation-linked tolls are clearly contributing to strong revenue and margin growth, and are expected to further positively impact FY24. 

The pipeline for growth remains strong, with several near-term catalysts to drive higher traffic volumes, including the EastLink acquisition, with a decision expected on 7 September 2023.

Whilst higher for longer interest rates may impact the valuation upside for TCL in the short-term, distribution growth and a healthy pipeline provides a compelling investment opportunity. We retain our Buy recommendation for TCL.