Investment Thesis

• Hard to replicate critical infrastructure assets.
• TCL is well positioned for a higher inflationary & rising interest rate environment, given: (1) TCL’s exposure to interest rate exposure is low due to hedging policy, with 99% of TCL’s existing debt book hedged as at 31 Dec-21 and the majority of the debt which expires out to FY25 is above TCL’s weighted average cost of debt; (2) 68% of TCL’s revenue is linked to CPI price escalations as part of their concessions.
• Consistent growth in earnings driven by four key factors: 1) Traffic (with mature toll roads delivering on average 2-4% annual traffic growth); 2) Prices (with escalation set with agreements with governments); 3) operational efficiency improvements; and 4) development contribution from new assets.
• Solid yield – steady and growing distribution stream.
• Integration of technology and systems to enhance operations.
• Growth by asset acquisition and/or development of greenfield and brownfield projects.
• Exposure to infrastructure assets in the U.S.
• Strong management team with experience in deploying the developer-operator business model
• West Gate Tunnel dispute is a drag on share price.

Key Risks

• Bond yields experience a significant increase in the short term and track upwards over the long term.
• Valuation appears full at current levels.
• Project development cost blowouts.
• Reduced traffic volumes.
• Regulatory changes within the sector.
• Unfavourable financing arrangements.
• Poor acquisitions (derived from inaccurate modelling of traffic).

Key Highlights: Relative to the pcp and on a constant currency basis: 

• Average daily traffic was down -4.8% vs pcp. Proportional toll revenue of $1.2bn was mostly unchanged on pcp with lower volumes offset by price escalations and resilience in commercial traffic. 
• Total free cash for the half of $459m was down -1.6% on pcp (predominantly driven by Covid impacts on TCL’s 100% owned assets and higher working capital) and covered the first half distribution of 15cps. There were no capital releases during the period.
• 1H22 proportional EBITDA of $805m was down -4.1% on pcp, with higher toll revenue more than offset by higher costs – with operational costs up +5.6% YoY driven by insurance premiums and investment in new capabilities (data analytics, cyber and other technology). A change in accounting of Software as a Service also contributed to the cost increase. 
• Proportional EBITDA margins at the group level were down -310bps to 65.9%, driven by Covid restrictions impact on traffic in TCL’s largest markets. Management expects to see group margins return towards a more normal range 73-74% as restrictions lift and traffic again returns to pre-Covid levels. 
• Company maintained a solid balance sheet, with Gering of 34.6% (most unchanged on pcp), liquidity of $3.8bn and debt book is 99% hedged (which provides protection in a rising interest rate environment).

Company Description

Transurban Group (TCL) develops, operates, and maintains urban toll road networks in Australia and the United States. The company holds interest in 15 roads in Melbourne, Sydney, Brisbane, and Virginia. Transurban Group is headquartered in Docklands, Australia.

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