Transurban: Interest Rates Are a Headwind but Revenue Is Defensive and Growing

With its share price down 20% in the past six months, wide-moat-rated Transurban TCL now screens as fairly valued. Like REITs and other infrastructure companies, Transurban carries significant debt and is hurt by the rapid and ongoing increase in bond yields. Australian government 10-year bond yields just hit 4.8%, from less than 1% in 2020. Fortunately, Transurban has long-dated debt and extensive interest rate hedging, which will slow the rise in its borrowing costs. Further, revenue is relatively defensive and growing strongly on the back of mostly Consumer Price Index-linked tolls, recovery from the pandemic, population growth, and completion of developments. Transurban reaffirmed fiscal 2024 distribution guidance of AUD 0.62 per security, up 7% from last year and representing a yield of 5.2% based on the current share price.

Traffic volumes continue to improve. Average daily trips, or ADT, in the September quarter of 2023 were 3.2% higher than the previous corresponding period, or PCP. Sydney ADT increased 2.2%, with roadworks on some roads offsetting the benefit of completion of the M4-M8 link. Melbourne ADT increased 3.8% on continued recovery from the pandemic, while Brisbane ADT increased 4.0% on solid underlying demand growth.

We also expect revenue to benefit from elevated toll growth. Tolls in Melbourne increase at a fixed rate of 4.25% annually while tolls in the rest of the country are rising over 6% per year, in line with CPI inflation. With inflation likely to remain high in the near term and a natural lag between inflation readings and toll increases, Transurban should benefit from elevated toll increases for another couple of years.

ADT increased 4.6% in North America in the September quarter, aided by the Fredericksburg Extension. United States roads were hit hard by the pandemic and the recovery got off to a slow start. But momentum is building, providing a foundation for Transurban to ratchet tolls higher.