TCL - Transurban Group

[Bill M]

To understand why their losses are high, it is best to read this news story:

"A major contributor to the net loss for the period is depreciation and amortisation. It is normal for companies with significant investment in infrastructure assets to incur a disproportionally high depreciation charge in the early years of operation. In the case of toll roads an amortisation charge is generally recognised over the estimated term of the right granted to operate the road rather than the useful life of the asset. This has the effect of realising a higher charge than would otherwise be recognised on a useful life calculation.

Depreciation does not affect the underlying operational contribution of the business which is extremely healthy.Transurban’s reported net loss after tax for FY07 was $151.2 million, compared to $60.9 million for the prior corresponding period."

Source, click on pdf file dated 22 august 2007.

 

[urgalzmine]

Hey Bill

Thanks for that, but why would the market crucify this share?

Well we know in the long term as long as the tunnel/roads dont collapse this is sure bet

 

[michael_selway]

Hey Bill

Thanks for that, but why would the market crucify this share?

Well we know in the long term as long as the tunnel/roads dont collapse this is sure bet

Hm using debt to fund fund dividends...

Earnings and Dividends Forecast (cents per share)
2007 2008 2009 2010
EPS -17.2 -1.0 -2.1 -2.0
DPS 54.0 57.0 58.0 60.0

thx

MS

TOLL road operator Transurban has become the first of an expected long line-up of major infrastructure companies to go to the sharemarket for a handout, after it yesterday announced plans to raise around $1 billion in capital in an effort to reduce the level of debt on its balance sheet.

In a stark reversal to Transurban's deliberate strategy of gearing-up its balance sheet under former chief executive Kim Edwards in late 2006, the group's new CEO Chris Lynch said the model of using debt to fund distributions was "not sustainable in this market".

http://business.smh.com.au/toll-road-operator-shifts-into-reverse-20080619-2tkv.html

 

[Kieran]

But in a rude shock to Transurban unit holders reliant on the distributions paid by the company, it said distributions would fall to 22c next financial year.

- News Article linked in post above

That puts it at 4% Dividend Yield at the current share price of $5.50 which isn't brilliant at all. When you consider Julia's comment about the share price going anywhere I'm reconsidering my idea of buying in!

 

[Wysiwyg]

Takeover proposal from 2 Canadian pension investment fund managers has popped Transurban (TCL) up from its 2007 downtrend. Average volume from September rose but could have been for any reason.

5 November 2009

Canada Pension Plan Investment Board and Ontario Teachers’ Pension Plan Confirm Indicative Proposal to Acquire Transurban

Further to the announcement made by Transurban today, Canada Pension Plan Investment Board (“CPPIB”) and Ontario Teachers’ Pension Plan (“OTPP”) confirm that on 27 October 2009 they submitted an indicative proposal to acquire 100% of Transurban securities by way of a scheme of arrangement (“the Proposal”).
CPPIB and OTPP believe the Proposal provides Transurban security holders with compelling value for their investment. The Proposal would allow Transurban security holders to choose between a cash price of A$5.25 per security, an unlisted scrip rollover and top-up alternative or a combination of both.
The cash price of A$5.25 represents a premium of 20% to the Transurban security price at the close of trade on 4 November 2009 and a 25% premium to Transurban’s Volume Weighted Average Price (VWAP) for the three months prior to that date.

 

[Smurf1976]

Dividend on TCL last year was 29.5 cents. Based on current share price of $5.94 that's a yield of 4.97%

A search using Etrade brings it up correctly based on dividend yield, but "Dividend Yield After Tax" shows a yield of 30% which is quite a difference.

Is this a calculation error? Or is there something unusual about taxation of dividends from this company? Or something I've misunderstood?

 

[piggybank]

Closed today at $7.21, it's highest since 2007.

 

[coolcup]

In my view, one of the best "sleep at night" investments on the ASX. Strong result and excellent business model. Long term growth appears sound underpinned by traffic growth (driven by population growth) of 2-3% pa plus CPI-type toll increases of 2-3% pa plus leverage gets you comfortably to 8-10% pa distribution growth in a steady state. Operational improvements at roads such as LCT and Cross City Tunnel are additive to this with the potential for accretive acquisitions down the track. Really like this stock and am very long, while bond yields remain depressed.

 

[skc]

In my view, one of the best "sleep at night" investments on the ASX. Strong result and excellent business model. Long term growth appears sound underpinned by traffic growth (driven by population growth) of 2-3% pa plus CPI-type toll increases of 2-3% pa plus leverage gets you comfortably to 8-10% pa distribution growth in a steady state. Operational improvements at roads such as LCT and Cross City Tunnel are additive to this with the potential for accretive acquisitions down the track. Really like this stock and am very long, while bond yields remain depressed.

I can never understand this stock. It doesn't own the toll roads, it owns toll road concessions which are of limited lives. Some of these concessions must be returned to the government free of debt. How do they pay the debt when they payout most of the free cash flow as dividend? Does the NPV style analysis actually stack up?

 

[coolcup]

I can never understand this stock. It doesn't own the toll roads, it owns toll road concessions which are of limited lives. Some of these concessions must be returned to the government free of debt. How do they pay the debt when they payout most of the free cash flow as dividend? Does the NPV style analysis actually stack up?

The point you raise is certainly valid. In the early phases of concession life banks don't need much of the debt paid off as the terminal value is so far away in the net present value of the asset. Typically, as TCL's roads have progressed through their lives, they have also become more congested requiring further expansion and extensions to the existing concession as a result. These extensions are highly NPV accretive as the cost of widening the road to add capacity is typically paid back by higher traffic flow over the original concession life. For assets which do reach the end of their concessions, I expect TCL will set aside cash for debt amortisation but I doubt this will happen in most of the Sydney assets at least - traffic here is horrendous!

 

[Wysiwyg]

Transurban looking forward to a profitable year ahead. Nice chart. More sellers please.

 

[skc]

I can never understand this stock. It doesn't own the toll roads, it owns toll road concessions which are of limited lives. Some of these concessions must be returned to the government free of debt. How do they pay the debt when they payout most of the free cash flow as dividend? Does the NPV style analysis actually stack up?

Interesting article about the chase for yield on SYD, TCL and MQA.

http://harnessam.com.au/wp-content/uploads/2015/10/On-yield-stocks-Oct-2015.pdf

I have the same question... and that was back in Aug 2014, when the share price was <$8. I didn't put on a strategic short or anything, as some of the takeover price on toll roads are bothering on ridiculous. But it still illustrate 2 important.

1. You may be "right" but the price can be "wrong" for a long time.
2. If this was ever to reverse... it could go back down a long way.

This is one of those trades that you can't make a false start... you need to wait for the tide to turn. And that's assuming you are correct!

 

[Ves]

Thanks skc, that is a great read and your additional comments are also very relevant.

 

[skc]

I have the same question... and that was back in Aug 2014, when the share price was <$8. I didn't put on a strategic short or anything, as some of the takeover price on toll roads are bothering on ridiculous.

MQA sold some assets at a very high price again.

Another day, another eye-popping tollroad multiple

Anyone who thought Australia's IFM Investors was "nuts" for paying 32-times earnings for an American tollroad in March should check out the sale result at the interconnecting Chicago Skyway.

Three Canadian pension funds agreed to pay $US2.8 billion for the Chicago Skyway over the weekend, which analysts reckon is a whopping 35-times 2015 expected earnings before interest, tax, depreciation and amortisation.

Read more: http://www.afr.com/street-talk/anot...llroad-multiple-20151116-gl0m9t#ixzz3rkWaLai3
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I know we are in a ZIRP forever scenario... but 35x EBITDA?! How can it possibly stack up? The concession on Skyway (according to the article) is 88 years.

TCL itself trades at around ~24x EV/EBITDA. And according to my quick sum... it has a weighted (by revenue) average concession life of ~28.5 years. So I did a few quick spreadsheets just to get my head around the numbers:

1. Simply look at the most simple business... making FCF of $100 per year for 30 years, with 2% annual growth, and you want a return of 8%. The NPV is simply $1475... or <15x FCF. To value it at 24x, you need to increase annual growth to 3% and lower the required return to 5%.

But TCL's FCF is nothing like EBITDA... it pays a lot of interest and it pays tax (not to mention maintenance capex, but let's assume that is zero for the moment). It is also geared up to the tune of ~8.5x EBITDA. So I did another back-of-envelop calculation of a business with the following numbers...

2. EBITDA per year = $100, growing @ 2%, 30 year life. Debt = $850 @ 3.5% interest. DA per year = $50 (assumed constant), Tax rate 28%. Using a required return of 8%, I calculated NPV = $972, or ~<10x EBITDA. Note that debt is $850 so equity value is only $172.

If I increase growth to 3% and reduce required return to 5%, NPV = $1540 or ~15x EBITDA.

To get to anywhere like 24x, I'd need to assume growth @ 4.5% and return of 3.5%... to get NPV = $2,350.

TCL's operating cashflow doesn't even cover the distributions, so it's not repaying any debt. But at the end of the concession, the toll road is supposed to return to the government debt free? So the question is... what am I missing? Have a made a gross error somewhere?

Do pension funds buying these toll roads value it using different tax rate? Or much lower interest costs? Or may be not all concessions need to be returned debt free?

FWIW, something like DUET group, which is similar infrasturcture asset but with a perpetual life (i.e. no end of concession and no need to repay debt) trades at ~11x EBITDA. Why would someone want to buy TCL @ 2.5x DUE's multiple when it only has a 30 year weighted lifespan?

 

[Ves]

Hi skc

I've often wondered the same thing. I think one of the advantages that a lot of good infrastructure assets have, due to consistent, predictable (compared to other assets at least) cash flows, is a lower cost of capital.

I had a quick look at Macquarie's broker report for TCL (FWIW, I wouldn't trust their predictions, but it's a good starting point for what the market may be thinking).

They're saying FCF, EBITDA and other profitability measures are going to grow at between 10-15% per annum up to 2021. They don't provide any forecasts after that period. But they are claiming that there are lots of growth capex initiatives either in the pipe-line or already underway (such as new toll roads, or expansion of existing toll roads).

TCL's assets may not be infinite life-time, but TCL as a company itself isn't necessarily a finite company because of those restrictions. It's a manager of toll roads, and uses existing revenue streams to create new revenue streams. It's no different to any business, customers aren't forever so you get new ones. They will add value if they can keep deploying cheap capital to high profitability projects.

I'm not really interested in TCL myself, and I agree, some of these multiples being paid look ridiculous at face value. There seems to be a lot of trust that they can source highly profitable new road projects well in excess of their current portfolio.

 

[skc]

TCL's assets may not be infinite life-time, but TCL as a company itself isn't necessarily a finite company because of those restrictions. It's a manager of toll roads, and uses existing revenue streams to create new revenue streams. It's no different to any business, customers aren't forever so you get new ones. They will add value if they can keep deploying cheap capital to high profitability projects.

That's probably the analogy used by the analysts... although I'd be extremely surprised if they don't use a NPV type calculation to arrive at some valuation.

The big difference here is that, TCL needs to return the concession to the government free of debt. Based on the current cashflow profile... most cash generated is used to pay interest and dividends. There is no repayment of debt from what I've seen. The banks aren't going to just roll the debt when the underlying concession is expired, right?!

Sydney house prices are currently trading at ~30x EBITDA... and we are talking about a bubble. Not to mentioned that the buy owns the house forever (as opposed to just 30 years).

I am still hoping to be convinced that TCL is merely expensive and not impossible.

 

[VSntchr]

Very interesting posts above SKC, interesting to look at the situation from a few different perspectives.

MQA just released their 2015 investor pack. They say it is designed to help analysts build their models. Maybe some of the answers to the seemingly absurd valuations lie within THIS .

 

[Muschu]

After a great run recently is this a correction on the back of no news occurring?

I am no chartist and hold TCL and would be pleased to get an opportunity to add more.

Anyone with TA experience care to suggest where the next support level is?

Many thanks.

 

[Triathlete]

After a great run recently is this a correction on the back of no news occurring?

I am no chartist and hold TCL and would be pleased to get an opportunity to add more.

Anyone with TA experience care to suggest where the next support level is?

Many thanks.

Looking at the weekly chart suggests that the stock has pulled back on a number of occasions 38.2% retracement from recent highs before continuing higher.

If the same occurs this time $10.60 seems like a support level to me.

Just an opinion not advice though.

 

[Muschu]

Looking at the weekly chart suggests that the stock has pulled back on a number of occasions 38.2% retracement from recent highs before continuing higher.

If the same occurs this time $10.60 seems like a support level to me.

Just an opinion not advice though.

Thanks TA... But worth more than 2 cents