Incredible though it may seem in view of the current financial crisis affecting European community members, Transurban is off this week to a European Debt Investor road show.

As an investor with 22 grossly overvalued securities, this trip is not going to affect my almost worthless investment. But, on viewing the road show information brief, I was amazed at the misleading information offered to potential European investors. Under “strong, stable earnings growth”, Transurban quotes toll revenue FY09 to FY11. But, revenue is not earnings. Moreover over these three years, the total toll revenue was $2289.3 million but net earnings were $161.73 million or 7.1% of the revenue, an exceptionally poor result understandably not quoted by Transurban.

Distribution policy is said to be “aligned with free cash flow”. This is another myth. Distributions can be shown by statistical analysis to be aligned much more significantly with market capitalisation than with free cash flow. Distributions have always exceeded earnings over 2000-2012.

This has tended to create the false expectation of future earnings growth unrelated to the actual profitability and, at the same time divert attention from the true source of the distributions, which will now be revealed as increased borrowings.

Despite the claims to the contrary by the CEO Christopher Lynch to Ticky Fullerton of the ABC Lateline Business program in February, distributions have always been and will continue to be paid out of borrowings. Such a practice brings into question the sustainability of Transurban, a matter that has been swept under the carpet by Transurban through its promotion to a respectable but undeserved rank in the Dow Jones Sustainability Index (DJSI)

In order to make it clear to investors that distributions are being paid out of borrowings, I suggest that they add up all the distribution amounts over 2000-2011. The sum is $1933.4 million. Add to this the corporate net debt of $1972 million as at  February 18, 2005 due to the acquisition of the M2 Motorway. The total is $3905.4 million. But the non-current interest bearing liabilities as at 2011 are $4035.817 million; the discrepancy is only about 3%.

Had the distributions been paid in another way other than by borrowings, the discrepancy in this calculation would have been very much greater.

With total liabilities of $8401 million in FY11 and free cash only $412 million, there is a looming solvency problem and zero probability that the debts will ever be repaid. This result should discourage European debt capital providers to stay away.

European investors should also note that the high price of Transurban securities is completely unrelated to the poor profitability. Nevertheless this price creates the illusion of financial viability. It is about $5.40 (14/10/11), and depends on intangible assets for 81 % of its asset backing. There is no market for these assets and the debt capital lender would therefore have little or no collateral security.

The recognition of these realities should help the investor see behind the spin that Transurban is using in a desperate ploy for survival. The Canadian road last year show was a failure and it is odds on that this European one will suffer the same fate.

Peter Fray

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