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Treasure Chest: Transurban Set To Dilute Future Dividends

Treasure Chest | Oct 15 2020


FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Transurban is looking to shore up its balance sheet in difficult times via a capital raising at the asset level.

-Transurban's September quarter traffic weaker than expected
-Potential to introduce equity partners at an unfortunate time
-Future dividends impacted by equity dilution

By Greg Peel

Traffic across Transurban’s ((TCL)) domestic and US toll roads has not rebounded a much as hoped. The September quarter saw mixed result across assets, with Melbourne obviously weakest and Logan Motorway the only asset to show positive year on year growth, of 3%.

With the case-count situation still tenuous in Australia and back on the climb in the US, loss of once reliable toll revenues has put the company’s balance sheet under ongoing pressure. What to do?

The good news is tolling has only just commenced on the M8 in Sydney and NorthConnex, also in Sydney, is expected to come online in the next few weeks. Yet the fact remains traffic numbers remain well below pre-covid and are not about to rush up again soon.

Looking ahead to FY22-25, by which time it is expected things have returned to something more normal (notwithstanding an assumed structural shift towards more working from home), Transurban should benefit from a number of completions including WestConnex stage 3 (Sydney), West Gate Tunnel (Melbourne) and a number of Washington projects.

The company has moved to recycle some capital by removing capital releases from its distributions but Goldman Sachs believes this is likely to prove insufficient.

Last month Transurban successfully completed a US$900m debt issue, leading management to “attempt to”, in Goldman Sachs’ words, highlight the strength of its current capital positon at last week’s quarterly update. But management also has other plans.

Transurban has commenced a process for the potential introduction of equity partners into its Greater Washington Area assets and if successful in acquiring it, the Elizabeth River crossings project in Virginia. Co-partnering is not new for the company, as it has already been deployed for WestConnex and Transurban Queensland.

What is new, Macquarie notes, is releasing capital in one of the existing assets as part of the co-investment.

The co-partnering process has the potential to unlock significant capital, notes UBS. Unfortunately, that capital will be unlocked at a low point in the performance, and thus value, of said assets.

“Our expectation, says Macquarie, “is this will have an impact on dividend growth”.

Goldman Sachs highlights the possible negative timing of such a dilution of the equity interest in the Greater Washington Area assets, which could limit shareholder exposure to an ultimate post-covid recovery in traffic and earnings and thus future distributions as capital is released.

“We view this as a capital raising at the asset level instead of the corporate level,” says Morgans, “unfortunately during a period of extreme weakness for the Express Lanes [in Washington].” Note Washington, like Melbourne, is still under tough restrictions.

Goldman Sachs retains a Neutral rating on Transurban, with a $13.57 target, acknowledging a market preference at this time for structurally defensive low volatility stocks offering dividends underpinned by free cash flow. However, the broker highlights the downside risk associated with the dilutionary impact of potential future capital raisings or asset level equity sell-down.

Goldman Sachs is not an FNArena database broker.

The database shows an even split of ratings. Macquarie downgraded to Hold (equivalent) post the quarterly update while Morgans retains Hold and UBS Buy. Ord Minnett (Accumulate), Credit Suisse (Sell) and Citi (Sell) have not yet commented on the update.

Database consensus is currently for a dividend yield of 2.8% in FY21, rising to 3.9% in FY22. The consensus target is $14.34, in a range from $12.60 (Credit Suisse) to $16.00 (Ord Minnett).

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