Sharp cost control underpins Transurban's solid 1H24 result

Global toll roads operator Transurban (ASX: TCL) delivered a strong half-year 2024 earnings result on Thursday morning, with NPAT up 9% on the same period last year. This was driven by several factors including, on the domestic front, continued population growth spurred by the return of immigration and an improving outlook for global economic conditions.

That's the view of Magellan portfolio manager Ofer Karliner, who spoke with us on the back of Thursday's announcement.

“We’re seeing population and immigration growth and air travel is returning to pre-pandemic levels in Australia and across the globe," Karliner said, noting these factors all bode well for Transurban's motorways.

“They’ve also had inflationary benefits on a lot of their roads, and we haven’t seen their costs push up materially.”

One of only a few large-scale infrastructure firms on the ASX, Transurban ranks among the top five holdings in the global Magellan Infrastructure fund. In the following Q&A, Karliner takes us through the result and explains why he believes the company will remain one of the Magellan fund’s largest holdings throughout 2024 and beyond.

Key results

• Average Daily Traffic of 2.5 million trips, up 2.1% on 1H23. Traffic was supported by growth in all regions and the opening of new assets.
• First-half 2024 interim distribution of 30 cents per stapled security (cps)
• Full-year distribution of 62 cps expected, representing 7% growth on FY23
• Proportional EBITDA of $1,331 million, supported by proportional toll revenue increase of 6.3% to $1,763 million and lower cost growth
• Cost growth kept below inflation at 1.7% through active management of operational costs.
• For more financial data on Transurban head to Market Index.

Note: This interview took place on Thursday 8 February 2024.

1. In one sentence, what was the key takeaway from this result?

It was a strong result, 7.5% EBITDA growth, driven largely by good cost control. Some of that is down to timing, but it’s still a positive in the way management was able to control costs and to reduce its cost guidance for the year.

2. Were there any major surprises in this result that you think investors should be aware of?

The cost control was a positive surprise. It’s something I’ve spoken about with Michelle [CEO Michelle Jablko] previously and she said it was an area of focus. So, to have it start coming through so quickly is something we’re quite happy to see.

I was also a bit surprised they’re still looking at Eastlink – they weren’t listed as a first-round bidder. There’s an inherent conflict between having an argument with the ACCC – though they probably have a good legal case –  and keeping the relationship with the government healthy. There’s also the potential for the North Eastlink coming to market in the future, so I suppose they’re trading those two things off. But I’m a bit surprised to see them still in that running.

3. Would you buy, hold or sell this stock on the back of this result?

Rating: Hold

It’s one of the bigger positions in our fund and nothing from this result will change that, I think it’s a good result. Cost control is very good, traffic is developing as expected – we’re seeing an increase in people returning to the city and using airports – they’re all positive signs.

We’re also seeing some of the opportunity value develop, and that’s certainly a positive for us too.

4. What’s your outlook on this stock and the sector over the year ahead? 

For Transurban specifically, we’re very positive. We’re seeing population and immigration growth, air travel is returning to pre-pandemic levels in Australia and across the globe

They’ve had inflation benefits on a lot of their roads, in terms of increasing tolls, with a lot of value created by that inflationary spike. And we’re probably at or near peak rates, so that’s certainly a positive as rates come down. They’ve got a seven-year average life of debt, and we haven’t seen their costs push up materially.

Absent some sort of supply shock, I think the stock is going to perform pretty well over the next 12 months.

The broader sector has been hurt a little by rising rates globally but the underlying performance of the assets has been mainly in line. As rates stabilise, the attractive cash flows and the resilience of underlying demand will come through, so we’re pretty positive on the sector as a whole.

5. Are there any risks to this company and its sector that investors should be aware of?

In the short term, if you look at what [RBA Governor] Michelle Bullock said yesterday, there is a risk that they raise rates again in Australia – they’re a bit more hawkish than people expected. But I still think we’re at or near peak rates. Absent a major supply shock – that could be from wages or from a broadening of the Middle East war that could see the energy price spike – overall though, it shouldn’t be that material in the longer context of these assets and companies.

You always see a share price reaction to movements in rates, but the fundamentals are still very strong, they’re monopoly or quasi-monopoly assets with very strong demand profiles, so we’re pretty comfortable in the sector overall.

6. From 1-5, where 1 is cheap and 5 is expensive, how much value are you seeing in the market right now? Are you excited or are you cautious on the market in general?

Rating: 2

Within the infrastructure space – in Australia there are probably three stocks we consider to be infrastructure – we certainly see value on the tollroads side of that.

More broadly, across infrastructure generally, there are some very cheap stocks out there but overall, most stocks are in that cheap to fair value range. They're cheap, not super cheap if you balance it out across the entire sector, but there are some names that we regard as very cheap.

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