Transurban’s tollways continue to generate dependable, inflation resilient cash flows

About Transurban Group Limited

Transurban Group Limited (Transurban, the Group, ASX: TCL) builds and operates government-mandated toll roads in Melbourne, Sydney, and Brisbane, as well as in Greater Washington, United States and Montreal, Canada. The company was founded in 1996 and is headquartered in Melbourne.

Long-life, defensive assets prove inflation-resilient

The pricing power of Transurban’s $36 billion investment in tollways is illustrated by the 6.7 percent increase in proportional toll revenue generated from a 1.7 percent rise in average daily traffic during FY24.  Proportional EBITDA of $2,632 million is up 7.5 percent on higher toll revenue of $3,535 million, reflecting Transurban’s high EBITDA margin of 73.1 percent. This is an improvement from the 72.4 percent margin earned in FY23. Operational costs were contained to a 3.6 percent rise in the 2024 financial year. These numbers are impressive given the relatively subdued economic activity levels in Australia at present. For example, Transurban’s tollway assets in the US, where the economy is stronger, grew traffic volume by 5.65 percent and revenue by 8.7 percent in FY24.

The FY24 distribution is 7 percent higher than FY23 at 62 cents and is payable from free cash flow of 63.2 cents per security. Security holders can expect 65 cents in distributions in FY25. The 32 cents distribution covering the 6 months to June 2024 will be paid on 13 August 2024.

Weighted average cost of debt is 4.5 percent with all floating rate debt hedged against the prospect of higher interest rates. The Group maintains a strong balance sheet with $4.2 billion in corporate liquidity.

Growth assets

Eighty five percent of Transurban’s portfolio of tollway assets can physically be expanded, supported by increasing demographics and favourable incremental value metrics. Enhancement of existing assets through widening or extension is low-risk compared to new projects. $12 billion in projects are currently under delivery of which 3 projects are expected to open by calendar year 2026 and 2 other major projects are currently under detailed negotiation. Estimated committed project spend in FY25-26 is $1.4 billion. This expenditure is adequately funded with $1.5 billion cash and $2.7 billion in undrawn debt facilities at 30 June 2024. These are high quality, high margin assets with a proven track record of long-term tollway pricing and volume growth.

High degree of certainty in an uncertain world 

Distributions are based on traffic performance which continues to be resilient and generates consistent inflation-linked cash flows that are readily modelled and highly predictable. For example, Transurban financial modelling shows that there is a low correlation between tollway traffic volume and fuel price increases. However, the Group is not immune from macro-economic impacts, but with an average monthly unlevered Beta of 0.63 over the past 5 years, it is less susceptible to share market disruptions than many other ASX stocks.

Transurban is 67 percent institution owned and so has a liquid and stable share register. A reason why institutional investors are attracted to Transurban is because the business is not labour intensive and annual capital maintenance expenditure (business-as-usual capex) is much lower than many other businesses. Average revenue per employee is above $1.1 million and so the Group is not impacted by Australia’s tight labour market. The average concession life of Transurban’s tollway assets is 28 years, resulting in a low annual asset amortisation expense as a percentage of revenue.

Transurban has the confidence and trust of various State governments that provides a pathway to ongoing asset growth. More tollways and rising traffic volumes supported by population growth and inflation-linked toll pricing should deliver steadily increasing distributions to Transurban unit holders over the long-term.