Transurban: Empty roads, full of promise

Motorways owner Transurban’s (ASX: TCL) half-year earnings report on Thursday was a slight “miss” for analysts, but there's another reason this company should make you money in the months and years ahead.

Transurban booked $840 million in earnings before income, taxes, depreciation and amortisation for the half, down 23% on weaker toll road income as car travel drove off a cliff last year.

For a company whose profits are 100% leveraged to toll road revenue, through its motorway assets in Australia and the US, such a result was largely expected given the COVID lockdowns of 2020. It’s also priced-in to the share price, says James Nguyen, Portfolio Manager and Senior Research Analyst at Nikko AM.

“Across all its networks, traffic was down between 50% and 60%, but that said, traffic volumes on its road assets in NSW and Queensland are almost back to pre-pandemic levels, and that’s because the government-mandated restrictions have mostly been removed,” he says.

Transurban's US motorway assets, including the express lanes on the Capital Beltway in Washington DC, were a big fly in the ointment. The US was expected to make a slight positive contribution to the group, but was a drag instead, despite the company having already divested around 50% of its US assets.

Australia also blotted the copybook slightly, with management announcing further delays to the West Gate Tunnel in Melbourne. Originally due to be finished next year, Transurban says it now won’t finish the project until after 2023.

“That’s a minor negative, but you’ve got to put it in perspective. That tunnel is worth less than 5% to the group, so is relatively immaterial,” says Nguyen.

He says Australia was largely in line with expectations, but the US was a miss.

“Which was a surprise to some, but not so much for us. I think the market was assuming the US would be negative, but not as negative as it was.”

The prior cautious optimism was based primarily on the more “buoyant” economic figures coming out since Q3. As Nguyen says, the US is still really struggling under COVID, and he expects US tollroads will take a lot longer to recover than those in Australia: “to get to a recovery, the US probably does need the full roll-out of a vaccine.”

Why Nikko Asset Management likes TCL

Nguyen says Transurban is very much a COVID-recovery play, given the virus badly affected the company’s short-term earnings. But he emphasises Transurban holds “long-dated assets of the highest quality and the valuations of the assets themselves haven’t been terribly impacted”.

The Nikko team’s enthusiasm is also spurred by the US divestments mentioned earlier, which transacted at “crazy multiples” of around 40-times EBITDA. Their sale at such levels indicates COVID has inflicted a short-term earnings hit but hasn’t hurt the long-term value.

A natural avoidance of public transport, which is likely to persist over the longer-term, Nguyen suggests, also plays into the hands of Transurban’s toll road assets, particularly as freedom of movement and car trips tick up.

What is Nikko's exposure to TCL?

Nikko resisted buying Transurban until last April, despite having long admired the company.

“Our view has always been that it’s a high-quality company with good management and high-quality assets. But there was always a price for that,” says Nguyen.
“When COVID hit, TCL’s share price went from $17 to $10. That was the first time we owned TCL in over a decade."

“We’ve always loved the assets, but just couldn’t get our heads around the way the market priced the company so highly.”

Currently trading at around $13, Nguyen says the stock remains at a decent discount to Nikko Asset Management’s fair value: “that’s why we’re overweight.”

How important is this result?

Not much can be inferred from this result for other local large-cap listed infrastructure companies Atlas Arteria (ASX: ALX) and Sydney Airport (ASX: SYD).

“But this result shows that a stop-start economy does impact these companies. For things to get back to pre-COVID levels, we need the vaccine so we can move beyond this stop-start," Nguyen says.

For example, the lightning-fast lockdown of Victoria’s borders at the death of 2020, and Sydney’s own brush with “hard lockdowns” amid the Northern Beaches’ Christmas COVID outbreaks took a heavy toll both economically and psychologically.

“Things are improving, but it’s not a linear improvement,” says Nguyen.

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