Transurban (TCL) Update

Transurban (TCL) has a share price target of $7.10 from Australian stockmarket analyst Macquarie Research Equities.

Transurban (TCL) The case for cutting distributions

Market already seems to be pricing the likelihood of a cut to distributions:

At $5.48, TCL is trading on an FY08E OpCF yield of ~4.4% & growth of 7.3% pa to FY20E (total return ~11.7% pa). This compares to an FY08E distribution yield of ~10.4% & growth of ~1.6% pa to FY20E (total return ~12.0%) on current profile.

Market no longer rewarding TCL for its re-gearing strategy:

Despite this, we estimate TCL's need for additional debt to support its current distribution profile is only ~$600m (over 12 yrs to FY20E) after considering: 1) DRP (40% participation); 2) sell-down of DRIVe (~$A$150m); 3) buyback; 4) additional debt (~A$200m from current facilities); and 5) asset sales. Although we note the DRP is not in security-holders interests at current prices and in long-term.

Pressure on management to act to address market concerns:

TCL is exposed to a higher cost of debt (~95% of portfolio in Australia) which is a concern given ~50% of its debt portfolio matures in the next ~5 years and it has a lower duration portfolio (than say MIG). TCL's re-gearing strategy appears to be coming at a cost and whilst the market may be over-doing concerns about the strategy, management may be over-estimating the impact of cutting distributions.

Valuation: $7.12 (DCF SOTP) / PT: $7.10 (DCF SOTP less 5% discount)

Our PT is $7.10, which is our 12-month roll-forward valuation and includes $0.25 for upside from the US funds management strategy and a 5% QFM discount. Concern around sustainability of distributions and execution of DRIVe funding are the two key drivers for TCL. We expect clarification around both of these in the coming months under the stewardship of the new CEO. We retain our Buy rating.