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Traffic slowdown trims Transurban's fair value

Lex Hall  |  15 Oct 2018Text size  Decrease  Increase  |  
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A slowdown in US traffic growth has forced Morningstar to trim its fair value estimate for wide-moat toll road operator Transurban.

September quarter results for Transurban's US roads, particularly in and around the capital Washington DC, were the chief sticking point, says Morningstar analyst Adrian Atkins.

However, the stock remains fairly valued despite a 4 per cent drop in the fair value estimate to $11. At 1pm Sydney time, Transurban (ASX: TCL) was trading at $10.72.

westconnex transurban tcl toll roads

Transurban's FVE adjustment comes amid a report Sydney is Australia's most congested city

In addition to toll roads in Sydney and Melbourne, Transurban's portfolio includes roads in the greater Washington area, namely the 495 Express Lanes and the 95 Express Lanes.

Traffic volumes fell 0.4 per cent on the 95 Express Lanes and 1.2 per cent on the 495 Express Lanes in the September quarter, which was punctuated by the category-four storm, Hurricane Florence. Toll increases, however, on the 495 were better at 3.2 per cent.

"Even backing out of the impact of Hurricane Florence, which we understand detracted around 0.8 per cent from growth, the results are disappointing," Atkins says.

"Average tolls also disappointed on the 95 Express Lanes, with an increase of just 0.9 per cent."

Revenue soared at the 495 and the 95 Express Lanes soon after opening in 2012 and 2014 respectively, but that has since fallen dramatically, prompting Morningstar to downgrade revenue growth for both to mid-single digits to high-single digits.

Atkins is pleased with Transurban's returns from its assets in the greater Washington area, and is buoyed by the 395 Express Lane Project, which is set for completion late next year. Meanwhile, in the Canadian city of Montreal, the newly acquired A25 beat expectations with 7.5 per cent traffic growth.

"Our main concern is that Transurban is expanding too aggressively late in the cycle," Atkins says. "With so many current and potential developments in existing markets, where the firm should generate good risk-adjusted returns, we'd prefer Transurban stopped buying more, expensive roads. Too many expensive acquisitions will sap financial strength and dilute returns."

Locally, Melbourne was the strongest performer. The completion of the recent upgrades on CityLink and feeder routes helped push traffic volumes to an impressive 5.5 per cent in the quarter, which Atkins expects to continue.

In Sydney, traffic growth was weaker than expected at 2.5 per cent, compared to more than 3 per cent in fiscal 2017 and more than 7 per cent the year before that.

Atkins says demand may suffer from a mix of factors, among them cost-of-living pressures, including higher mortgage rates, higher fuel prices, higher insurance premiums and higher tolls.

The adjustment to Transurban's fair value comes amid a report that Sydney is Australia's most congested city when average speeds are compared to free-flow speeds.

The Australian Automobile Association report also shows the road to Melbourne's airport is more congested than the route to any other Australian capital city airport.

The cost of congestion to the national economy is projected to rise to $37.3 billion by 2030 without major policy changes.

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Lex Hall is content editor, Morningstar Australia

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is content editor for Morningstar Australia

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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