Transurban: Result 2018

Transurban has reported a dull but worthy 2018, with decent traffic and revenue growth at all its major roads. Underlying toll revenue rose 9% to $2.3bn, while earnings before interest, tax, depreciation and amortisation (EBITDA) rose 10% to $1.8bn.

The Melbourne network was the company's top performer. Traffic rose a meagre 1% over the year, but that hides a sharp improvement in the final quarter, with car traffic up 4% and large vehicle traffic up 9% due to the completion of the CityLink Tulla Widening and Monash Freeway Upgrade projects. Changes to truck toll multipliers led to a 13% increase in revenue and 16% increase in EBITDA.

The Sydney network saw traffic growth of 3%, underpinned by a 4% increase in heavy vehicles. Paired with inflation-linked toll rises and higher tolls for heavy vehicles, revenue and EBITDA rose 8% and 9% respectively.

Traffic growth in Queensland was around 3%. Although toll prices increased during the period, revenue was only up 2% due to changes in how fees are paid to Brisbane City Council. EBITDA rose 4%. Transurban made several improvements that benefit Brisbane customers, such as the introduction of new apps and websites.

Reaching maturity

The company's 95 Express Lanes in North Virginia also had a pleasing year with revenue and EBITDA growth of 7% and 12% respectively. Unfortunately, traffic growth was around 2%, suggesting that the heady double-digit growth following the road's opening a few years ago is now firmly in the rearview mirror as it enters maturity.

Moving north, Transurban finalised the purchase of the A25 toll road in Montreal, Canada. The region offers a developed economy with stable population growth, high population density, and low unemployment, making it ideal for expansion. 

Management was quiet on the A25's performance over the past year but did say it achieved record traffic numbers in the June quarter. With a price tag of CA$1.2bn – 26 times 2017 EBITDA – growth isn't just desirable, it's a necessity.

Transurban's total debt increased from $13.6bn to $14.9bn to fund the West Gate Tunnel project, though the company's gearing ratios improved slightly and earnings grew faster than interest expenses. We note that debt expiring in 2019 has a higher interest rate than the weighted average of 4.9%, so interest coverage should improve further.

Management expects full-year distributions of 59.0 cents in 2019, a 5% increase on 2018, for a partly franked yield of 4.9%. We're raising the price guide slightly and sticking with HOLD.