Today toll road owner Transurban (TCL announced their first half 2023 results.A good set of results included an upgrade to FY23 distribution guidance which was a pleasant surprise.

Key Points:

  • Profits Flat: Profit Up: Record half-year profit up +53% to $1.23 billion; given the prior period was impacted by lockdowns; the more meaningful measure is to compare this result to the pre-CV19 period six months ending December 2019. Here TCL is tracking +12% ahead of their pre-CV profits due to a combination of higher traffic, increased tolls and new roads. Sydney and Brisbane continue to be the jewels in the TCL empire, with Melbourne yet to fully recover.
  • Balance Sheet:  Gearing stable at 36% with a weighted cost of debt of 3.9%. With refinancing moves made over the half, TCL’s debt has a maturity of 7 years which is 97% hedged.
  • Dividends significantly increased: No surprises at 26.5 cents up +6%, reflecting the business’ recovery and in line with the guidance given in August.
  • Inflation: 68% of TCL’s revenue is linked to inflation, with the residual (Melbourne CityLink) increasing at 4.25% until 2029; after that, CPI, with fixed long-life debt, should result in near-term profit increases. Sydney and Brisbane tolls all went up +6% on January 1st.
  • Changing Assets: TCL announced that they had sold 50% of a toll road in Montreal to a Québécois Pension Fund for $383 million. This will likely be invested in buying Melbourne’s M3 EastLink, a 39km toll road with inflation-linked tolls and a concession that expires in 2043. We would view this as a good trade, selling a low-growth stand-alone Canadian road to buy a toll road that feeds into TCL’s existing assets.
  • Management Change: Long-term CEO Charlton announced that he would retire at the end of the year. Succession planning is not a concern, with CFO (and former NAB CFO) Michelle Jablko likely to be appointed CEO and would be a safe pair of hands.
  • Guidance:  Management upgraded FY 23 distribution guidance by 7.5% to 57 cents = 4.1% yield. Atlas expected this as the guidance given in August looked very conservative. The full benefits from the current inflationary environment are yet to flow through to TCL.

Transurban is held in several of the HNW portfolios. We are attracted to Transurban due to its high quality, long life, and monopolistic infrastructure assets. The company has demonstrated an ability to grow distributions ahead of inflation by both raising tolls and developing existing assets by adding extra lanes to accommodate the additional traffic. TCL’s revenues are generally linked to the greater of +4.25% or CPI and trades on an attractive dividend yield of 4%. Profits will accelerate over the next 2-3 years as Sydney’s WestConnex and NorthConnex ramp up and traffic on existing roads returns.

JHG finished flat today and is up 8.9% since January 1 2023