Transurban (ASX:TCL) reported its first half of FY24 results on the 8^th of February, sharing its financial results and operational insights. The report revealed significant growth in earnings and an estimated FY24 distribution of 62 cents per share which represents approximately 7 per cent growth on FY23.

Here are some of the key observations:

• Transurban delivered cash earnings of about $952 million, up 13 per cent year-on-year and only slightly below market estimates. Earnings before interest, tax, depreciation, and amortisation (EBITDA) was $1,331 million, in line with consensus.
• Transurban achieved a cost beat of almost $470 million, as it reduced its overhead costs related to its development arm Tidl and toll collection business TollAust by around $20 million.
• Transurban maintained its balance-sheet leverage at 36 per cent, consistent with the previous financial year. It also had a high hedging ratio of 95 per cent, which protected it from rising interest rates. Note, however, refinancing will be required from FY25 onwards, as the company will have to repay about $2 billion per year or about five per cent of its debt book.
• Transurban did not increase its dividends, reflecting the impact of roadworks across Sydney and Melbourne, which affected its traffic volumes and revenues.
• Transurban indicated that some of its cost savings were due to lower development activity, which could resume in the future.
• It also appeared that Transurban would have to use some of the capital released from Westconnex to support its current dividend, which lowered its quality.
• Transurban did not announce any change in its dividend policy, which was expected by some analysts.
• Victoria’s population grew, employment grew, and car registrations in Melbourne reached a record high, creating a favourable environment for Transurban.
• Transurban revealed that it had about $1.8 billion of capital expenditure commitments, down from $2.4 billion previously. This compared favourably to its capital releases ($1.2 billion) and liquidity ($3.4 billion).
• Transurban’sbalance sheet debt continues to benefit from being 95 per cent hedged, which means any pressure on costs is gradual. While financing costs increase gradually, the company’s cash holdings result in rising interest income.
• Interest income was up $20 million.

Sydney

• Rozelle interchange is in its early stages, and WestConnex traffic has exceeded expectations for the quarter.
• Sydney’s M7 traffic in the second quarter was impacted by roadworks, which are likely to continue affecting traffic for three quarters. Re-routing of traffic also has a negative impact on the Cross City Tunnel and the Eastern Distributor.
• WestConnex traffic should emerge stronger with the Sydney Gateway opening at the end of CY24 and then M6 Stage 1 at the end of CY25.
• Traffic on the M7 will benefit further from the lane widening and opening of a second airport in FY27.

Brisbane

• Management called out favourable population and employment growth as a positive backdrop.
• EBITDA growth exceeded expectations, rising 12 per cent year-on-year, underlined by strong margins.
• Transurban is still waiting for an update from the government on the widening of Gateway and Logan Motorway, which is expected to cost around $1 billion. The change of Premier may have slowed progress, but congestion remains problematic.
• Once the project is approved, Transurban estimates it will take another 12 months to finalise the construction pricing and concession changes. The concession changes will likely include new ramps, extensions and possibly a change in tolls.

North America

• Transurban reported a strong revenue performance for all its North American roads, exceeding its expectations. Traffic on the I495 was below 2019 levels, but pricing leverage resulted in revenue growth, which the NEXT extension will further boost,
• I-95 was outstanding, with revenue well ahead of expectations and the benefit from the Fredrickson extension starting to show in 2H24.
• Management noted many opportunities to expand in North America but preferred brownfield developments.

Victoria

• The ACCC and Victorian Government’s opposition to the company’s Eastlink ‘bid’ implies Transurban now has surplus capital. This, of course, will be utilised elsewhere – perhaps the Northeast link road slated to open in 2028.
• Roadworks on Melbourne’s CityLink remained a drag on the western section, where 4Q traffic was up less than one per cent compared to nearly four per cent previously. The lost traffic may just be a timing issue, as it’s expected to be recovered with the opening of the West Gate Tunnel in FY26.
• West Gate tunnels have been completed, and major bridge structures are in place. Timing remains 2H25, which is CY26.

The Montgomery Small Companies Fund and the Montgomery [Private] Fund owns shares in Transurban. This blog was prepared 14 February 2024 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.