Is Transurban (ASX: TCL) a stellar infrastructure stock pick?

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Australian Economy, Macro Economics

The infrastructure giant, Transurban Group (ASX: TCL) has witnessed a stock price fall of about 1% on June 08, 2018 while it recently reached a milestone under its strategy to set a second market in North America. The group has reached a financial close on the acquisition of the A25 toll road asset and concession in Montreal, Canada. TCL has appreciated the Quebec government’s move with regards to recognizing new, multi-modal transportation solutions being set for addressing Greater Montreal’s infrastructure needs.

However, the recent decision by the Australian Competition and Consumer Commission (ACCC) on continuing with the review of the proposed acquisition by a Transurban-led consortium of a 51 per cent interest in the WestConnex assets slated for sale by the NSW Government, has made many ponder over the potential outcomes, and thus TCL’s performance. While ACCC’s Statement of Issues does not identify any ‘issues of concern’ as such, however, the process is still open ended. Meanwhile, TCL is providing all the required support to ACCC to enable them to complete the review. At the moment, it looks that many of the concerns flagged can be addressed by government and/or TCL undertakings.

On macro level, the recent interest rate held at 1.5% by the Reserve Bank of Australia is also having some impact on latest price movements, as group’s positive revenue is stimulated by rising inflation environment with push from increased employment that drives traffic growth and higher commercial activity. The performance is also dependent on wage growth. Thus, the current scenario does not look to be promoting the performance at a decent scale, as of now.

Transurban Group is currently trading at the market capitalization of $ 26.16 billion and has a decent dividend yield of over 4.7%. It thus has a strong standing in terms of market capitalization among peers (including Sydney Airport, Brambles, and APA Group that are also ASX-listed companies) and has achieved significant growth in last ten years with decent returns made to the shareholders. The group has highlighted for $11.4 billion of new developments and asset enhancements along with $7.7 billion of acquisitions. It has the ability to continue to provide new value-accretive opportunities.

The group owns or operates 15 of Australia’s 19 toll roads. Its NorthConnex project (with total cost of $2.9 billion and TCL’s contribution of $1.05 billion) is structured for near-term distributions and long-term value creation at the back of Truck toll multipliers through M7 and LCT and concession extensions through M7, LCT and M2. On the other hand, capital releases of about $100 million are expected in FY19 for Transurban Queensland.

Based on the recent financials, the group has indicated that a distribution totaling 28.0 cents per stapled security will be paid for the six months ending 30 June 2018. This will include 25.5 cents distribution from Transurban holding trust and controlled entities with 2.5 cents from Transurban Holdings Limited and controlled entities.

With infrastructure projects underway, Transurban’s strategy and competence assists its government partners in navigating project-specific issues. The investment in capabilities sets it apart in the infrastructure arena. The group is also expected to benefit from the favorable 30-year population growth forecasts across its five markets. Despite the latest shortcomings, the opportunities for the group are vast; and with RBA anticipating better economic scenario going into 2019, TCL is expected to leverage from the economic framework along with its resilient capabilities in the long run.

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Opportunities across Key Markets (Source: Company Reports)


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