Leading toll road operator, Transurban (ASX:TCL), has released robust financial results, reflecting steady growth and promising prospects. The company’s operational performance, strategic investments, and upcoming projects, such as the Westgate Tunnel and 495 North, position it for further expansion. Despite challenges like inflation and finance costs, Transurban’s solid performance and growth initiatives will mean it retains its position in The Montgomery Fund’s portfolio.
Financial analysis
Transurban has reported strong financial performance last year, and we expect consistent growth projected into 2025. In 2023, the company achieved a proportional revenue of $3.314 billion, which increased to $3.535 billion last year, and we expect the company to reach $3.765 billion in 2025. Earnings before interest, tax, depreciation and amortisation (EBITDA) also showed steady growth, rising from $2.448 billion in 2023 to $2.631 billion in 2024. We believe $2.842 billion of EBITDA is achievable for 2025. Similarly, earnings before interest and taxes (EBIT) increased from $1.029 billion in 2023 to $1.232 billion in 2024, and is anticipated to grow to $1.426 billion in 2025. Earnings per share (EPS), adjusted for extraordinary items, improved from $0.63 in 2023 to $0.73 in 2024, with $0.78 forecast in 2025. Finally, dividends rose from $0.58 per share in 2023 to $0.62 in 2024, and are projected to reach $0.65 in 2025.
Noteworthy developments include an inflation rate of 3.8 per cent, a 1.7 per cent increase in traffic, and a slight rise in proportional finance costs to 4.5 per cent. The company released $505 million in total capital, including funds from the completion of the WestConnex construction project. Additionally, Transurban plans to open the Westgate Tunnel and 495 North in 2025. Operating cost growth has improved, rising by 3.6 per cent for the year, while average daily traffic in Sydney rebounded, supported by government rebates.
However, there are potential risks to toll increases in New South Wales due to a government review focused on environmental, social, and governance (ESG) factors. This singular cloud is what the market will require more clarity on before adopting a more bullish posture.
The secondary risk is the possibility of further interest rate rises. If investors begin to adopt the view that interest rates in Australia and the U.S. will begin to decline, they will more comfortably buy Transurban.
Longer term, and in the absence of onerous changes to contracts with New South Wales, Transurban is poised for further growth, driven by substantial capital expenditures (CapEx) and sound strategic initiatives, including over $12.0 billion earmarked for multiple road extensions, upgrades, and widenings (we note the recent Logan Motorway widening as an example) over the coming years, underpinning potential traffic growth.
Meanwhile, opportunities in the U.S. and Canada for public-private partnerships (PPP) provide ongoing optionality.
Valuation
On a required normalised yield of 4.5 per cent, and based on FY25’s forecast distribution, Transurban is valued at $14.50 per security. This is in line with comparative company required yields.
There are always risks, and for Transurban, they include the progress of new projects, traffic volumes, interest rates, fuel prices, CapEx commitments, offshore acquisitions and changes to distribution policy.
Conclusion
Transurban’s recent financial results highlight a period of solid growth and strategic investments, positioning the company well for future expansion. Challenges for the shorter term are an absence of near-term positive catalysts, but in the medium and longer term, we believe the company’s strong operational performance and strategic initiatives, including substantial CapEx and PPP opportunities, present a promising outlook.
Disclaimer
The Montgomery Fund owns shares in Transurban. This article was prepared 9 August 2024 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Transurban, you should seek financial advice.