Average daily traffic volumes across Transurban’s TCL portfolio rose 1.8% in the March quarter 2025, compared with the same quarter last year. Brisbane was the outlier, with traffic volumes down marginally because of ex-tropical Cyclone Alfred. In the nine months to March, traffic volumes were up 2.2%.

Why it matters: Overall traffic volumes are tracking closely to our expectations. Brisbane was a little weaker, but US roads were a little stronger. Our full-year earnings forecasts are largely unchanged.

The bottom line: We maintain our $13 per security fair value estimate and consider the stock roughly fairly valued. Distribution yield is a solid 4.6%, mostly unfranked.

Key stats: Sydney traffic growth of 2.4% in the quarter was driven by strong growth on WestConnex as the Rozelle interchange ramps up. Some Sydney roads recorded lower traffic volumes, caused by disruption from roadworks and cannibalization from WestConnex.

  • Melbourne’s traffic growth of 2.0% was driven by stronger discretionary travel and solid truck volumes. The 0.4% fall in Brisbane’s traffic volumes was due to bad weather. Apart from affected weeks, car and truck traffic volume growth in Brisbane was solid.
  • The strong recovery continues in North America, with traffic volumes increasing 3.8%. With improving demand, US Express Lanes can lift toll prices significantly. Average tolls increased by 17% on the 95 and 12% on the 495.

Cost containment and growing revenue stream bode well for Transurban’s long-term margins

Transurban is a major toll road investor with concessions to operate motorways in Australia and North American. Concessions grant the right to operate the roads and collect tolls for predetermined amounts of time. The core Australian roads are integral parts of the motorway networks in Australia’s three largest cities: Melbourne, Sydney, and Brisbane. The roads benefit from strong competitive advantages, and the assets generate attractive returns on initial investment, warranting a wide economic moat rating.

Granting toll road concessions allows governments to use private capital and expertise to provide necessary improvements to road networks. Typically, concession life and toll profiles are set in negotiation prior to the road’s construction, with the intention of providing a fair return for investors. Tolls increase in line with the consumer price index or at an agreed fixed rate, though some roads with meaningful competition have dynamic tolling, such as Transurban’s US investments. When concessions end, the company returns the roads to the government for no consideration, after repaying all related debt.

Operating cash flow should increase strongly during concession lives, as solid revenue growth, driven by rising tolls and traffic volumes, is leveraged over a mostly fixed cost base. Cash flow available for distribution to investors increases in line with a road’s operating cash flow until about 10 years before the concession life ends; thereafter, a portion of operating cash flow is used to repay debt. Cash flow stops when concessions end. Concessions on the Australian roads are set to end between 2026 and 2065. Including the long-life US assets, the weighted average is about 28 years. To extend its existence, Transurban will look to build new roads or undertake road upgrades that may require new equity issues or increased financial leverage, given that the firm currently pays out all free cash flow as distributions to investors.

Typically, cash flow is defensive and grows strongly, but returns are lower than they appear at first blush, given that the road concessions have finite lives.

Transurban bulls say

  • Core Australian roads generate defensive revenue that grows with traffic volumes and toll price increases, which are at a minimum pegged to inflation. Solid revenue growth and a high fixed-cost base translate to strong cash flow and distribution growth.
  • Transurban owns high-quality infrastructure assets with limited regulatory risk.
  • There are attractive organic growth opportunities, such as potential widening of roads.

Transurban bears say

  • Building and acquiring new roads can destroy equity value as a result of overbidding and overly optimistic traffic forecasts.
  • Transurban faces risk from the coronavirus outbreak, given high financial leverage coupled with a major hit to revenues as countries go into lockdown to prevent the spread of the disease.
  • Bond yields are likely to trend higher, detracting from profitability and the attractiveness of its distribution yield.

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