EUR 850.00 For Business Accounts Only

Morningstar | U.S. the Star for Transurban in the 3Q

Transurban reported proportional traffic growth of 2.3% in the March quarter, with solid growth across most regions. We marginally upgrade a few of our short-term traffic growth assumptions and reduce our medium-term interest rate expectations following recent weakness in global bond yields. We estimate Transurban can issue 10-year debt at interest rates around 4% at present, and forecast rates normalise towards 5.8% over the longer term. Our fair value estimate increases 4% to AUD 11.50. At current prices, Transurban is modestly overvalued. Transurban is a high-quality company, warranting a wide economic moat rating. The main risks are rising interest rates over the longer term and significant expansion late in the economic cycle.

In North America, traffic on the 95 Express Lanes was largely flat in the quarter, but average toll prices rose 15%. The 495 Express Lanes was even better, with traffic up 4.3% and toll prices up 12.2%. This is better than expected, leading us to upgrade our near-term forecasts in the Greater Washington Area. We forecast ongoing strong toll price increases for these assets but not much traffic volume growth, a function of their design. These are tolled express lanes on heavily congested untolled motorways. Transurban is contractually obliged to maintain high average travel speeds, and does this by using higher toll prices to limit demand. Traffic volumes on the recently acquired A25 in Montreal continue to grow at a healthy mid-single-digit rate.

Sydney traffic volumes continue their steady growth, up 2.1% in the March quarter and in the fiscal year-to-date. Transurban has a lot going on in Sydney, with the massive WestConnex project and NorthConnex. The new M4 tunnels extending the M4 east are almost finished and other projects are progressing. NorthConnex is on track to complete in line with its revised completion date of mid-2020.

In Melbourne, the benefit from upgrades to feeder-routes is wearing off. Traffic growth on CityLink slowed to a still good 3.1% in the quarter, down from 4.1% in the fiscal year-to-date. Tunnelling on the West Gate Tunnel project is expected to start mid-year. This project needed parliamentary consents, including a longer concession and increased toll growth at CityLink, which have now been received, in line with expectations.

In Brisbane, traffic volume growth remains subdued due to disruption from roadwork on the Logan and Gateway motorways. Average daily trips increased 1.1% in the March quarter, with trucks doing a bit better than cars. In the fiscal year-to-date, traffic is up just 0.5%. Roadworks on both motorways should finish in mid-2019, allowing volumes to rebound. We expect mid-single digit traffic growth in fiscal 2020, slowing below 3% in the subsequent year.