Transurban has a $850 million deal with the State Government to widen the western part of CityLink. ONE of the best ways to teach children the benefits of delayed gratification is to use jelly beans.
Give them one jelly bean that they can either eat straight away or lend back to you and get two tomorrow.
The disciplined kids quickly work out that they can get a whole jar if they wait long enough, the less disciplined gobble down one jelly bean and that’s all they get.
Which is exactly what has happened with Transurban’s $850 million deal with the State Government to widen the western part of CityLink.
The Government gets to munch on a nice jelly bean just once, as it gets $850 million of road infrastructure built without having to dip into its own pockets (or more precisely, our pockets). That is said to translate to a community benefit of $14.5 billion, no doubt using some heroic assumptions.
So far, so good but how many jelly beans does Transurban get down the road by delaying its gratification?
The first and most obvious jelly bean is that the wider road will allow around 30 per cent more traffic to flow along the western part of CityLink, resulting in higher toll revenue.
That is a big jelly bean indeed given that CityLink scooped up $535 million in toll revenue in 2013-14, a number that is already rising by around 8 per cent a year and should rise faster from 2018 when the road widening is due to finish.
It is the gift that keeps on giving, with the size of the jelly bean growing every year all the way through until 2035.
The second jelly bean is the ability to keep charging even while the roadworks are underway. While most of the work will happen at off-peak times, drivers could still face significant traffic delays for two or three years but will still pay full tolls.
The only concession made is to freeze quarterly toll increases for the core two years but then make that back by lumping together the foregone increases over a further two years.
Another jelly bean comes in the form of an extra year in which Transurban can increase tolls by either 4.5 per cent or the rate of inflation, whichever is higher.
The fourth jelly bean comes in the form of adding an extra year during which Transurban can charge tolls before handing the road back to the government in January 2035.
It is hard to tell how big this bean will be from this distance but at current growth rates CityLink will be collecting well north of $1 billion a year in tolls by 2035.
The fifth and final jelly bean is to significantly jack up the toll multiplier applying to trucks from 1.9 times to three times during the day and two times during the night.
That change happens from April 2017 and with 14,000 trucks using the western part of CityLink alone every day, it will be another exercise in compound interest rewarding delayed gratification.
All of which makes Transurban a buy after another sensational deal.
TCL Price at posting:
$7.79 Sentiment: Hold Disclosure: Held
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