Transurban: Result 2013

There were no surprises in Transurban’s result, as its performance had already been well flagged (see 10 Jul 13 (Hold – $6.80)). Underlying toll revenue increased 5.0% to $991m, chiefly due to a 2.4% increase in traffic on the company’s crown jewel, the Melbourne CityLink, which produces around 60% of the company’s total revenue. Operating profit increased 5.6% to $828m, and a final distribution of 15.5 cents was declared (ex date already passed), bringing the full year distribution to 31 cents for a current yield of 4.5%.

The Pochohontas 895 toll road in Virginia, USA, which was written off by $138m in 2012, continues to bleed cash. Though the state's Department of Transportation is providing funding for new on-ramps, this asset is unlikely to materially impact Transurban’s value. Having largely wasted capital spent abroad, hopefully the relatively new chief executive Scott Charlton will stick to expanding the company’s highly profitable and reliable Australian network.

Hero assets perform

While the hero of the result was Melbourne’s 22km CityLink, the company’s expanding Sydney network produced a decent result despite reduced traffic from construction work and widening the much shorter M5 motorway. Revenue increased 4.3% to $189m on the M5 despite traffic falling just under 1%, showing the pricing power afforded by CPI-linked toll prices.

The performance of the M2, also in Sydney, which is slightly shorter than the M5, was hampered by upgrades that should produce higher profits now that they’ve been completed. Traffic increased 1.4% with operating profit increasing 3.1% to $117m. Traffic on the M7, again in Sydney, increased 3.4%, in turn increasing operating profit by 7.8% to $170m. The babies of the Sydney network, the Lane Cover Tunnel and Eastern Distributor, also increased profits by 4.0% and 9.6% respectively, despite weak traffic growth.

Growth ahead

Transurban still has room to grow. The extensive upgrade and maintenance work carried out over the past year should increase traffic volumes as the network becomes better connected. Management was keen to point out that Sydney’s northwest corridor should produce particularly high growth.

Transurban will also be investing in CityLink to alleviate congestion on the Western Link, which is just the sort of reliable investment that the company should be focused on. The share price has increased slightly since 10 Jul 13 (Hold – $6.80) and we’re sticking with HOLD.