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Preferred Westgate Outcome For Transurban

Australia | Dec 21 2021


While the additional costs incurred by Transurban Group on the Westgate Tunnel Project are higher than anticipated, brokers are relieved court action was avoided and now focus upon a steady improvement in traffic numbers.

-Transurban will contribute an extra $2bn to the Westgate Tunnel Project  
-Brokers prefer the contribution over protracted legal proceedings 
-A minimal impact upon dividends is expected 
-A steady recovery in traffic volumes is underway


Mark Woodruff

Transurban Group ((TCL)) will contribute an additional $2bn to the Westgate Tunnel Project across FY23-26 after reaching agreement with the Victorian government and its design and construct subcontractor. This follows issues related to soil contamination during project construction.

The company’s contribution will be funded through corporate liquidity as well as from previously flagged capital releases. Management expects the costs to be capitalised and will not impact free cash flow.

The new completion date is 15-18 months later than anticipated and is now set for the December quarter of 2025.

While the dollar amount was higher than brokers expected, they unanimously agree the transaction is preferable to expensive court action and the agreement removes a major uncertainty for the company.

Jarden notes the additional cost is at the high-end of consensus expectations ($1bn to $2bn) though less than the broker’s assumption of $3bn.

As a result the broker, not one of the seven brokers monitored daily on the FNArena database, raises its target price to $13.90 from $13.50 and retains its Neutral rating.

Morgans points out a key value driver for the project originally was the ten year Citylink concession extension and ten years of Citylink toll escalation, both of which remain intact.

The broker lowers its target price to $14.57 from $14.79 and retains its Add rating after allowing for a higher CPI/interest rate outlook. Given a number of the company’s large assets have fixed toll escalators, this macroeconomic forecast is considered partly negative for the company's valuation.

Morgan Stanley estimates contributions of around -$1.5bn were already reflected in the company’s share price and retains its Equal-weight rating and $14.28 target price. There’s also considered to be a minimal impact to consensus DPS estimates.

Citi believes lower debt costs and a higher proportion of debt in the project helps lower the weighted average cost of capital (WACC) and offsets the cost increases. 

The analyst highlights potential longer-term pricing and volume risk from recent concerns around toll affordability and the potential for work from home to be ongoing and maintains a Neutral rating. The target price falls to $13.49 from $13.78.

Weekly traffic performance 

Citi points out traffic continues to see a steady recovery in Sydney and Melbourne (which accounts for around 70% of revenue) and is now back to levels seen before the most recent lockdowns.  Brisbane traffic continues to be resilient, while recovering North American traffic has been impacted by Thanksgiving in recent weeks.

Macquarie notes traffic has performed right on expectation. With a recovery in airport-linked roads in Australia and assuming no further lockdowns, Transurban Group’s traffic is expected to recover to above 2019 levels, further boosted by the new roads.

The broker reiterates that the group is a quality defensive exposure with a growing and attractive yield and maintains its Outperform rating, while lowering its target price to $14.44 from $14.72.

FNArena’s database has seven broker ratings with five Buy and two Neutral ratings, and a consensus target price of $14.78, suggesting 8.1% upside to the latest share price.


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