Stock showdown: How do ASX income plays Transurban and Atlas Arteria compare?
Adrian Atkins helps me weigh up the two ASX listed toll road companies.
Welcome to the next edition Stock showdown, where Morningstar analysts help me compare the business and investment merits of two ASX companies. The purpose of this article is to get you to think deeper about the pluses and minuses of different businesses, and the factors you might consider before making an investment.
Today’s contenders
Beeep. If you drive in Australia, you know what that noise means. It means you’re on the hook for another few dollars to the toll collector.
In many (if not most) cases, the company collecting those tolls will be Transurban (ASX: TCL). But TCL isn’t the only toll road stock in town. Today we’re going to compare it to Atlas Arteria (ASX: ALX) with the help of our analyst Adrian Atkins.
Figure 1: Transurban and Atlas Arteria key numbers. Source: Pitchbook
A primer on the toll road business model
Toll road operators are essentially investment companies.
The investor, in this case Transurban or Atlas Arteria, bids to provide the capital to build a toll road or buy a pre-built road. The former is good for governments because they can improve an area’s infrastructure without needing to fund it themselves. The latter can allow the government to recoup what they’ve spent on a road and reinvest it in other infrastructure.
The winning bidder is granted a concession to operate and collect tolls from the road for a set period of time. These tolls will generally increase over time according to conditions laid out in the concession agreement. During the concession, the toll road operator will be responsible for maintaining the asset. It may also spend money on upgrades like adding an extra lane to increase traffic and revenue from the road.
When the concession ends, the asset is returned to the government debt-free. The operator will generally start paying off debt at a faster pace once they get into the last decade of the concession.
An increasingly popular asset class
Toll road assets have many attractive qualities. Primary among these is that once up and running, they generally throw off a lot of cash. Given that a lot of road use is resistant to weakness in the broader economy, this can provide an annuity-like stream of income for the length of the concession.
Depending on the concession terms, this income is often inflation-protected because of toll increases that are usually linked to measures of inflation like CPI. Meanwhile, there are often opportunities to invest in the road and increase traffic and toll revenue further.
As for moatiness, toll roads often benefit from efficient scale. New competition is deterred because the huge cost to build an alternative road isn’t attractive. The existing asset (or upgrades to it) can already meet demand in the market.
All said, these are moaty assets with long contracts that support a rising and often inflation protected income stream. No wonder they became highly sought after by super funds and other big investors that were starved of yield in a low interest rate world.
How to compare different toll roads
My first question to Adrian was how an investor might compare the quality of two toll road assets. He identified five main things an investor might look at.
Location of the asset. The location of the asset will dictate likely traffic levels and the strength of the road’s value proposition (usually a time saving) offered by the road to drivers. The road’s location will also dictate the tax paid on profits.
Length of concession. Longer concessions are usually best here because they provide certainty for a longer time. When a company owns several assets, Adrian calculates the average concession length on an EBITDA-weighted basis.
The toll schedule. How and when will toll prices be changed over time? Will they track the country’s level of inflation? Will they go up at a fixed rate each quarter? Or will every change have to be negotiated with the regulator?
Maintenance capex requirements. Road systems that are longer or in an area that is hillier or has more extreme weather will require more money to keep running. These expenses are the responsibility of the operator and reduce the cash left over to fund debt payments and dividends.
Organic growth potential. There are two main sources of revenue growth for a toll-road: higher tolls and more traffic. Toll increases will largely come from the contract terms, while traffic can increase for a few reasons. There are ‘free’ sources of extra traffic like population or vehicle fleet growth. Or it could come from upgrades like adding extra lanes or building more on and off ramps. This can be worth doing because negotiations to build these upgrade are free from competition, increasing the chances of a good deal. The deal will usually involve a toll uplift or minor concession extension in return for the operator’s extra investment.
How do Transurban and Atlas Arteria measure up on these factors, then? First, let‘s take a quick look at each company’s toll-road portfolio.
Atlas Arteria’s portfolio
Atlas Arteria is headquartered in Melbourne but doesn’t own any Australian roads. Instead, its portfolio is heavily skewed to France and the US.
Over 80% of Atlas Arteria’s proportional toll revenue came from its 30% stake in APRR, a network of motorways in Eastern France. The concessions underpinning these assets expire in 2035 and 2036. Its other two French road assets - the A79 (1% of revenue) and ALEDEC (2% of revenue) - expire in 2068 and 2060 respectively.
Figure 2: Atlas Arteria’s French motorway assets. Source: Atlas Arteria
In the US, Atlas owns 66% of a concession to 2104 on the Chicago Skyway (7% of 2024 toll revenue) and 100% of a concession to 2056 on the Dulles Greenway concession in Virginia (6% of revenue). It also has a concession to 2052 on the Warnow tunnel in Germany, which represents around 1% of toll revenue.
Transurban’s portfolio
Transurban’s foundational asset is a concession until 2045 on Melbourne’s CityLink. It delivered 27% of the company’s proportional toll revenue in 2024.
Other key assets in Australia include several roads and tunnels in Sydney, including the M2 (10% of revenue) and M7 (7% of revenue) that both see their concessions expire in 2048. A 62.5% interest in Queensland Motorways provided around 16% of proportional toll revenue in 2024 and has concessions expiring between 2051 and 2063. Transurban’s major development project is the West Gate tunnel in Melbourne.
Figure 3: Transurban’s Sydney assets (operating assets in green and development projects in blue). Source: Transurban
Around 7% of Transurban’s toll revenue in 2024 came from North America, where it owns express lane assets around Washington DC and a normal toll road in Montreal, Canada.
Comparing the two portfolios
The main things that stick out here are that Transurban’s portfolio is more diversified and has longer remaining concession lives, especially on a revenue and EBITDA weighted basis. Leaving concession lengths aside for a moment, Adrian also thinks that Transurban also has the edge on asset quality.
That isn’t to say that Atlas’s stake in APRR isn’t a good asset. Adrian says it is large, hard to replicate and offers a clear advantage to drivers over non-paid routes – drivers can save up to 2 hours on the drive from Paris to Lyon, for example. It isn’t perfect though. The road has relatively high maintenance costs because of its length and mountainous sections. It also has moderate rather than great organic growth potential.
As for Atlas Arteria’s US assets, Adrian doesn’t seem massively keen either.
Chicago has flat to declining traffic volume, and Adrian isn’t sure that Atlas’s shortcut route – which saves drivers around 20 minutes on average – will appeal as much once tolls scale up. Meanwhile, Atlas’s Virginia asset is heavily indebted (15 times trailing EBITDA) and has weak traffic volumes. That isn’t a great combination, and the tolls don’t automatically tick up either. Each increase must be approved by the regulator.
Transurban, on the other hand, owns assets that Adrian says are integral to the motorway systems in Sydney, Brisbane and Melbourne. The toll schedules for these assets are also attractive. The Sydney and Brisbane roads typically see tolls rise with inflation, while the Melbourne assets (CityLink and the new West Gate project) have attractive 4.25% yearly hikes until 2029 before reverting to inflation-linked increases.
All three of these markets have growing populations that should be supportive of traffic volumes and levels of congestion that incentivise the use of toll roads. Adrian also sees plenty of development and organic growth opportunities to be tapped in each region, and likes Transurban’s US investments. These have delivered improving returns as the company has expanded its network of express lanes around Washington DC.
How to value toll-road companies
How might you go about valuing a toll-road company, then?
Adrian thinks that the nature of toll-road assets makes a dividend discount model most appropriate. In his view, these assets resemble “a long-term, inflation-linked, amortising bond with growth options.” As for valuation metrics you might use to compare companies, Enterprise Value to EBITDA (earnings before interest, taxes, depreciation and amortisation) makes sense because of how much debt is used to finance these firms.
Adrian’s $13 per share valuation for Transurban implies an EV to adjusted EBITDA multiple of 21 times. Meanwhile, his stand-alone Fair Value estimate for ALX of $4.80 per security comes out at an EV to adjusted EBITDA of around 10.
That is a big difference, and Adrian says that it mostly comes down to Transurban’s longer concession lives and more certain long-term dividend outlook. When APRR starts to expire in 2035, for instance, he sees Atlas’s dividend falling by two-thirds. While its 7% plus distribution yield may look attractive today, investors need to keep in mind that it is not sustainable longer-term.
Key things to consider in the future
Investors should keep in mind that bidding for toll road concessions is more competitive than it used to be. As a result, concessions bought more recently or in the future will likely be more expensive and have lower returns than older deals.
Another thing to watch out for, Adrian says, is which markets the toll-road companies are allocating most capital to. In the case of Transurban, he wants it to remain focused on the Australian and North American regions and cities where it is already active.
Returns from entering new markets through an acquisition, he says, are typically quite poor to begin with. Over time, however, they can be improved by negotiating developments and leveraging existing operations and road connections.
In Australia, he sees Transurban’s existing operations and assets giving it a cost advantage over other operators. Not just because its staff and systems can be leveraged over more roads, but because of the novel funding options these roads can provide.
Regulators in a city may let Transurban raise tolls or lengthen the concession on one road to subsidise a less profitable one. These projects can add value to Transurban’s broader network and wouldn’t be viable to other operators without this funding option.
One thing you might be expecting to pop up – but that Adrian is not massively concerned about – is the prospect of regulators stepping in to curb toll increases in Australia. Adrian thinks that the contracts in place give Transurban enough protection here.
Gun to head
As is usual with Stock Showdown, I wrapped things up by asking Adrian which asset he’d rather own if they traded at the same valuation.
He opted for Transurban due to the quality and length of its asset concessions. Transurban recently traded hands at around $13.85 per share, or roughly 7% above Adrian’s Fair Value estimate of $13.
Atlas’s recent price of $5.10 was around 6% higher than Adrian’s stand-alone Fair Value estimate of $4.80, and around 6% below his adjusted valuation that accounts for the possibility of a takeover by ALX’s major shareholder IFM.
