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Transurban’s (toll) road to riches

Crikey, 5 August 2014

Australia's biggest toll road operator, Transurban, is raking in the cash again, with traffic, revenues and earnings all up significantly in 2013-14. More growth is also on the way as the giant integrates Queensland Motorways, which it bought for $7 billion in April, and looks to build new roads.

Transurban chief executive Scott Charlton this morning unveiled what he
called a "no-surprises" profit result and confirmed a full-year distribution of
35c per share, up 12% on the year before, and the outlook is for the same growth
again in 2015, to 39c. This year Australian traffic rose 6% year on year,
overall road revenues rose 13% to an even billion dollars, and earnings before
interest tax depreciation and amortisation rose likewise to $934 million. Free
cash flow jumped 29% to a massive $572 million. Transurban has delivered more
than 10% since 2008-09.

Profit margins on the Australian toll roads are obscene — ranging from 66%
to 95%. It's a truism that the only way to stop yourself getting ripped off by
banks is to buy some bank shares, and perhaps the same must now be said about
Transurban, given it is almost impossible for most drivers to avoid the
company's road network. It is now the undisputed king of Australia's private
tollways, with almost 1200 so-called "lane kilometres", up from 737 kilometres
last year.

Transurban operates Melbourne's massive CityLink, six of the nine roads in
Sydney's orbital network (the M2, M5, M7, Lane Cove Tunnel, Cross-city Tunnel
and eastern distributor), four Brisbane roads, including the Gateway and Logan
Motorways and CLEM7, as well as highways in the United States, where ownership
has been restructured.

Transurban is well placed to benefit from increased road-building and
privatisation, encouraged by the recent federal and state government budgets.
The affable Charlton was predictably supportive of new investment in road
infrastructure in Melbourne, Sydney, Brisbane and Perth, saying there were
"missing links in all of those cities". But, he says, there needs to be
co-ordination between the states "so you don't end up with a boom bust cycle"
and the market could handle the work efficiently. "It needs to be sequentially
planned, we believe." Charlton also called for new road building to be done
concurrently with provision of public transport and rail freight infrastructure,
saying "it can't just all be about roads".

Transurban is already widening the CityLink between Melbourne and Tullamarine
airport, which will increase traffic capacity by 30% (there are no figures yet
on the expected revenue increase), and will start building Sydney's NorthConnex,
linking the F3 and M2, when the environmental impact statement process is
completed later this year. The company is positioning itself as the private road
infrastructure "partner of choice" and is weighing development opportunities,
including stage two of Sydney's WestConnex and Brisbane's AirportlinkM7.

It's a different story for Melbourne's controversial East-West Link:
Transurban has already ruled out participating, given the Victorian government
is pursuing an "availability model" in which the taxpayer takes the traffic
risk. The availability model was meant to attract private investment after the
failure of roads like Brisbane's Airport Link and Sydney's Cross-City Tunnel —
bought by Transurban this year for under half a billion dollars — but Charlton
today confirmed Transurban was still not interested because "we like traffic
risk". The stance had nothing to do with the engineering risk on the project, he
said, when asked about Leighton's announcement last week it would not tender for
construction work.

The results did not reflect a contribution from Queensland Motorways. While
Charlton said full integration would take a couple of years, so far there were
"no hidden issues … It was obviously a well-run company with quality

Transurban shares were unchanged at midday at $7.65, albeit in a down market,
but have risen roughly 15% since the start of the year and almost doubled since
the post-GFC lows around $4. They're on a roll.