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

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