Transurban on a road with more certainty than bank dividends and better growth than a property trust
November 24, 2015 9:00pm
Terry McCrannHerald Sun
Transurban is for investors wanting ‘supercharged utility’.
JUST under 16 years ago, on the third day of the new century, Transurban pulled in its first dollar in tolls from Melbourne’s CityLink. In the first six months it scooped up all of $30 million.
This year its total toll revenue will approach $1800 million and it will pay out nearly a billion dollars of that to its security holders.
Both figures are going to keep marching relentlessly on, in at least the high single digits this year, next year, every year — before accounting the gains from more acquisitions like yesterday’s, which will add $100 million or so of tolls in its first year, and from ‘build-outs’ like its Western Distributor proposal to the Victorian Government.
In short and in sum, as John Donne could have written all those years ago: don’t ask whom the bill tolls, if you live in Melbourne, Sydney or Brisbane — and now also Washington DC across the Pacific — and drive a car, it almost certainly tolls you.
There are two sides to the Transurban story — the money it rakes in from drivers, and the money it pays out to investors. It has become the ‘go-to’ stock for investors wanting what I might term a ‘supercharged utility’.
By this I mean it has the regular income of a utility. Just as people turn on their lights and light the gas cooktop every day, generating regular-as-clockwork revenues for gas and electricity utilities, people will turn up every day to use its roads.
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This sort of certainty produced solid if unspectacular income growth in the 20th century; in the 21st it is both increasingly rare and highly desirable.
But what Transurban has succeeded in doing is to supercharge that core utility income base by building an almost unique four-tier revenue and profit — but still, a regular-as-clockwork utility — growth model.
The tiering starts with the utility base — underlying physical traffic growth of 3-4 per cent each year on its toll roads.
Good luck or good targeting? That all of them are located in cities with relatively strongly growing populations — the three capital cities down our east coast and Washington (the city not the state) in the US?
You then add the price escalators in their concession agreements, usually related to inflation, which have been running similarly at 3-4 per cent a year, and perhaps 1 per cent or so a year from improved operating efficiencies, and you get ‘guaranteed’ revenue (and mostly) profit growth of 8 per cent or so a year.
But there’s also a fourth tier — the extra revenue it will generate when it adds ‘missing links’ in its networks and most especially when it ‘builds out’ existing capacity. Because this doesn’t only add more cars and trucks and tolls on the new roads, but it also adds them to its existing roads; so it has the effect of leveraging up those growth rates detailed above on its existing asset base.
This works even when Transurban is spending its money to improve what are linked but un-tolled publicly owned freeways. The most striking example was the building of fourth lanes on the un-tolled Monash freeway. This put more cars and trucks on the free road and where did they end mostly going? Onto Transurban’s CityLink.
You couldn’t ask for a more graphic example of Kevin Costner’s ‘build it and they will come’ reality. That’s, come and pay.
Further, as we see with the Western Distributor proposal, you end up with a reality that no one else can now build new additional freeways or toll roads in Melbourne, Sydney or Brisbane.
Because they lack any ability to leverage off the existing network, no one could make sense of the Western Distributor as a stand-alone project — the costs of building it, having to wait several years before you get any income, and then relying on its tolls and its tolls alone.
As we’ve seen across the country in the last decade, stand-alone toll roads invariably fall over; and then Transurban can pick them up at discount — the $1.9 billion it and its partners are paying for the Brisbane AirportlinkM7 is just barely 50 per cent of the $3.7 billion actually spent to build it.
Then you wrap all this up in the bonus element that, unlike just about everybody else in the 21st century and even traditional core utilities, there’s limited risk of someone coming along and stealing its customers. There’s little prospect of someone building parallel roads; and it’s hard to imagine how an Apple or an Amazon could offer drivers in these four cities an ‘online alternative’. It doesn’t even face synthetic competition like what the power and gas suppliers now do.
The bottom line is reflected in the terms of its $1 billion share issue to fund the acquisition. It can be comfortably priced at a very small discount to its existing — and arguably fully priced — share price.
The $9.60 issue price is just a 4.9 per cent discount to the distribution-adjusted market price. Absent some sort of bizarre meltdown, an investor knows that $9.60 will be getting an (admittedly, taxable) distribution of close to 90c a year, and rising relentlessly.
That’s got more certainty than bank dividends and better (all-but guaranteed) growth than a property trust. Truly this has been the road that grew
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