How high will the Toll go?, page-3

Transurban's proportional toll revenue increased 37% in the December quarter to AUD 385.4 million on the Queensland Motorways acquisition and solid organic growth. We make only minor changes to our forecasts, and our AUD 6.50 fair value estimate is unchanged. Transurban remains overvalued, which we believe is a function of the ultra-low global interest rate environment. TStill, this narrow moat-rated firm owns a good quality portfolio of toll roads and is considered a defensive investment.

Overall, the quarter was broadly in line with expectations, with the Sydney network strongest. The near-term outlook remains good for Sydney as completion of the M5 upgrade should continue to support traffic growth on the orbital. Longer term, growth should slow on all roads as they mature. The best performer in the core Australian portfolio continues to be the Hills M2, which grew toll revenue 15.2% above the same quarter last year following its widening in 2013. Adjoining roads on the Sydney orbital - the Lane Cove Tunnel and the Westlink M7 - also performed well, with toll revenue up 10.4% and 11.2%, respectively. The M5 South West Motorway is picking up after its upgrade completed progressively in late 2014 with revenue growth of 6.6%, and we expect growth to improve more markedly in 2015 on the full impact of the upgrade. The M5 upgrade should also benefit the M7 Westlink given the two roads connect.

CityLink in Melbourne, Transurban's largest asset, grew traffic volumes 3.2% and toll revenue 8.0%, a good performance. The Queensland assets, which were bought in July 2014, remain fairly subdued given the Queensland economy faces headwinds from the cooling mining and gas industries, though performance is improving after postponing roadworks. Toll revenue increased 6.1% on the Gateway Motorway and 1.9% on the Logan Motorway.