Scott Charlton is trying to get the market to see Transurban as more of a growth stock than a bond proxy and has eight years of 10-per-cent-plus distribution growth and a potential $21 billion growth pipeline ahead to back his case.
Today’s 2 per cent increase in distribution guidance to 51.5 cents a share helped the stock (TCL) climb 5 per cent to $10.90 a share, or some 14 per cent above November’s low of $9.58 a share.
Transurban’s stock plummeted 24 per cent from an August high of $12.54 a share when the market woke up to the fact that the bond market rally was over and, other things being equal, yields will be higher rather than lower for the foreseeable future.
The Trump inspired equity rally is based on the new President unleashing faster growth in the US which means higher interest rates which are normally a negative for toll road stocks like Transurban.
That explains why Charlton would like the market to see the company in a different guise.
There are $9bn in already contracted projects on the go and $21bn in potential roads which Transurban could logically build.
Last half cash flow totalled $680 million or 33.3 cents a share, which more than covered the 25 cents a share distribution.
But $174m of this came in via the North Western Road Group project in Sydney as part of the agreed deal with the NSW Government to increase the road’s gearing from 21 to 26 per cent.
But some, like Citi’s Anthony Moulder, viewed the cash release as an indication that cash flow isn’t as certain as Charlton likes to present it as.
Anyway you look at it, Transurban more than covers its distributions.
The other negative was a slight fall in earnings margins from 74.7 per cent to 73.7 per cent.
This is because the low margin roads in North America and Brisbane, with margins of 71.1 per cent and 58.3 per cent are growing faster than the cash flow kings like CityLink in Melbourne at 80.9 per cent.
Still, with no tax to worry about just yet (due to its corporate structure), Transurban is producing growth, cash flow and margins which most if corporate Australia can only dream about.
The next leg is technology, with driverless vehicles and the like to boost earnings even more because they are more reliable in terms of traffic flow.
Technology is also on display in the company’s Virginia toll road where the average toll for the 30-mile road is $US6 but this can increase to as much as $US30 when the traffic flow increases.
The more people use the road, the higher the toll becomes because Transurban is trying to talk people out of using the road.
Charlton acknowledges he needs to explain the benefits of toll roads better, unlike in the US where drivers see traffic on alternate routes sitting still and can thus assess the benefit of paying for the trip, there is no easy comparison in Australia.
His big campaign is to get the market to see the stock as a growth vehicle not a utility and today’s numbers help sell that story.
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