Since starting life in 1996 as the operator of Melbourne’s CityLink, Transurban (ASX:TCL) has come a long way. Taking advantage of falling interest rates, TCL has expanded its portfolio and now operates lucrative urban toll roads in Sydney, Melbourne, Brisbane, Canada and the U.S. The company is a strong dividend payer and continues to be a rewarding long-term investment.

Since listing, Transurban’s share price has outperformed the S&P/ASX 300 Accumulation Index. While the stock price fell with the rest of the market at the beginning of 2020 due to the impact of COVID-19 lockdowns, Transurban has since benefited from the subsequent return to normality.

Operating cashflows and shareholder distributions have also benefited from the rebound in traffic growth and the purchase of Sydney’s WestConnnex. As domestic and international inflation reached multi-decade highs, the insertion of clauses in renewed government contracts enforcing quarterly and annual inflation-linked toll rises has provided another welcome tailwind to revenue growth. 

Transurban has a considerable interest expense servicing its large debt pile which finances those high-quality infrastructure toll roads. While this is commonly known in markets, the interaction of these factors in the current environment produces an evolving situation of significant interest. In the past few years, Transurban’s management took advantage of low interest rates and extended its debt maturity profile to lock in lower rates for at least three years.

Fixing a large expense at cyclical lows, while experiencing rebounding traffic growth and toll rates, provides an opportunity for shareholders to receive increasing distributions. We anticipate the increase in free cashflow to flow through to increased distributions, especially should inflation remain somewhat sticky at elevated levels.

While any of these points would individually add value to shareholders, the combined effect of these internal and external factors may provide the opportunity for earnings to grow at a faster rate in the short term should inflation-linked toll increases outpace increases in interest expense.

And despite higher interest rates globally, the recent acquisitions, by global pension funds, of Sydney Airport and telecom mobile towers highlight the continued demand for quality infrastructure assets.

The rare combination of growing organic volumes, a partly fixed short-term cost base and accelerating revenue, makes Transurban an attractive investment opportunity.

The Montgomery Funds own shares in Transurban. This article was prepared 13 February 2023 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Transurban you should seek financial advice.