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Transurban’s (toll) road to riches

You might want to buy shares in Transurban — the company is flush with your cash anyway.

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 staff.”

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.

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  • 1
    Roger Clifton
    Posted Tuesday, 5 August 2014 at 1:36 pm | Permalink

    Tollways in somebody else’s city are Good Thing. For a start, the rest of us don’t have to pay for them. There is another reason …

    Consider the possibility that it is congestion which limits the growth of big cities. There comes a point when people decide that they’re spending too long in traffic and would rather live in a smaller - or newer - city. The big city in the meanwhile reaches its equilibrium capacity with its infrastructure of water supply, sewerage, parking, hospitals, traffic jams etc. Our population and industries can instead expand into cities with capacity left in their infrastructure.

    Of course the landowners in the big cities would much prefer that the rest of us pay to temporarily relieve the congestion with another billion-dollar freeway, so that more come in to pay them higher prices or rents, regardless of collapsing infrastructure. No thanks!

  • 2
    AR
    Posted Tuesday, 5 August 2014 at 7:58 pm | Permalink

    It is utter madness that we continue to attempt to pretend to ‘relieve congestion’ in two cities bigger than the majority of european cities (including some capitals)and that 90% of our population squeezes into what seems determined to become a Judge Dredd megapolis from Newcastle to Werribee.

  • 3
    DaveinPerth
    Posted Tuesday, 5 August 2014 at 10:24 pm | Permalink

    Western Australia -
    No toll roads.
    15% of our gas production is set aside for local use.

    What are you waiting for Australia ?

  • 4
    Posted Wednesday, 6 August 2014 at 1:35 am | Permalink

    Many of us on the east coast are waiting for the West to get economically responsible. In addition to its inefficient gas set aside and failure to make private road users pay for their environmentally destructive road use, the West’s shopping hours are too restrictive.

  • 5
    Liamj
    Posted Wednesday, 6 August 2014 at 8:02 am | Permalink

    Tollroads run as a tax dodging price gouging closed shop with Lib-Lab collaboration? But thats how most of Oz’s economy runs, why not roads too.

    @ Gavin Moodie - given that economics ignores some v.large uncosted impacts of LNG shipment, such as opportunity cost of the energy wasted in liquifaction, appeals on efficiency grounds are nonsense.

  • 6
    Posted Wednesday, 6 August 2014 at 8:08 am | Permalink

    Surely exporters of gas have to pay the full cost for it to be liquified.

  • 7
    Liamj
    Posted Wednesday, 6 August 2014 at 12:57 pm | Permalink

    @ Gavin - I don’t believe so, but have no link/ref. I have been told that exporters pay royalties on volume exported & purchasers pay on volume delivered, NG consumed to power liquifaction (20-40%) is not priced. NG that boils off in transit is also uncosted, as are extraction & production leakages.

  • 8
    Posted Friday, 8 August 2014 at 3:00 am | Permalink

    This is is no more than argument that exporters should pay the full cost of the resources they export. Presumably that is widely agreed. I also believe they should pay a resource profits tax, which of course is contested by the exporters and their supporters.

    The issue is whether domestic consumers should also pay these full costs (and taxes) of the resources they consume. To exempt them from the full costs either explicitly or by a set aside amounts to a hidden subsidy. If a subsidy is to be paid I would prefer it to be explicit and open.

    But I don’t think a subsidy should be paid for domestic consumption of natural resources. It would make, for example, aluminium smeltin cheaper in Australia than it would be overseas where it may be done more efficiently. That would direct investment away from activities in which Australia is better at to activities in which Australia is less better at.

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