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Cover Story -----By Grace Moises
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Date Posted: 30/09/03 12:22:56pm
Cover Story
By Grace Moises
Transurban Group Investor Report
Transurban is an international pioneer in the development and operation of advanced electronic toll roads and acknowledged as a leader in the global market for intelligent transport solutions.
Overview
Transurban is an international pioneer in the development and operation of advanced electronic toll roads and acknowledged as a leader in the global market for intelligent transport solutions. Transurban developed and now operates electronic tolling on CityLink, a 22-kilometre urban motorway in the Australian city of Melbourne. Built entirely with private funding, CityLink is the first fully electronic toll road in Australia.. Its successful completion changed the face of the transport system in Melbourne, a city of 3.5 million people and 2 million vehicles. The company transformed toll road travel into an, 'open-road' experience.
Product Uniquness
Over 650,000 electronic toll transactions are processed daily on CityLink. The complex technology and systems integration needed to achieve this are central to CityLink’s success and a key component of Transurban’s expertise.
The sheer scale and complexity of CityLink’s operations established a benchmark in multi-lane freeflow electronic toll road systems, and signalled the arrival of Transurban as a major player in this growing international market.
With its ‘cornerstone asset’ now successfully established, Transurban actively pursues new business opportunities with governments, cities and communities to tailor and deliver transport solutions.
One such opportunity is the company's latest project, the 39-kilometre Western Sydney Orbital (WSO), which, when completed in 2007, will be Australia's longest electronically tolled road. Transurban will also deliver and operate the new road's tolling system. The design and construction will cost AUD$1.5 billion.
The Orbital represents the first major step in Transurban's expansion into new markets, where it aims to leverage its leadership in toll road operation, technology and customer service.
Transurban have a 40 per cent stake in the WestLink Consortium Limited, which will build and run the WestLink M7.
End-to-end capability & expertise
Transurban's unique end-to-end capability is backed by a team with deep knowledge and understanding of what is needed to successfully develop major transport infrastructure projects.
Transurban's key areas of expertise include:
• Acknowledged leadership in toll road customer service models and management
• Experience in operating a major toll road which is a test bed for innovation
• Integration of the technologies required to make advanced electronic tolling work
• Traffic projection and modelling
• Development management
• Concession & risk management
Transurban listed on the Australian Stock Exchange in 1996 and is now one of the Top 100 companies on the exchange. At August 2003, Transurban had an enterprise value of $4.4 billion and a Standard & Poors credit rating of A-.
August 2002
Total market cap 3162.174
Net profit -79.300
EPS - $ -0.132
P/E ratio 2001 -46.97
Dividend - $ 0.0525
EV/EBITDA -126.93
Yield 0.85
Franking N/A
Net Asset Value 2068.46
Bvps 4.06
Price to book 1.53
Debt/Equity ratio 78.71
Return on Equity -3.83
Return on Capital Employed -1.51
Historical Financials
Transurban started the year 2002 as a single-purpose entity, legally restricted to the business of developing and operating Melbourne Citylink. The Group reported a net loss of $67.2 million for the 6 months ended 30 June 2002. The loss before tax for the year was $161 million. The result for the year included several one-off items: revenue of $153.6 million from the settlement of the company's dispute with Transfield Obayashi; recognition of $235.5 million of costs associated with debt refinancing; the effect of a change in the assumptions used to value the Concession Note liability; and the additional depreciation of $35 million from a revaluation of the CityLink asset recorded in the financial statements of Transurban Holdings Limited and the Transurban Holding Trust. Excluding these items, the result was a loss of $79.3 million.
During the year, in line with its restructuring strategy, Transurban reduced its monthly customer service and marketing costs to $2.5 million, down from $3.5 million a year earlier and $4.5 million 18 months earlier. In Sydney, one of the biggest markets in the world for greenfield toll road projects.
The Group secured positions in consortia bidding on three major developments in that city:
The Western Sydney Orbital, and
.
Transurban, like other large-scale infrastructure projects with huge up front investment costs, Melbourne CityLink will run a paper loss for a number of years, however, the company is cash-flow positive, and able to make distributions. In March, the company made a 10 cent distribution as part of the proposed 20 cent distribution. The second instalment should come August 2003.
Current State of Market Sector
The private sector must change its approach to delivering road infrastructure or governments will stop handing it responsibility for new projects, according to Kim Edwards, managing director of Australian toll road developer, owner and operator, Transurban.
Speaking at a national infrastructure investment finance forum in Sydney recently, Mr Edwards said that it was important that industry understood and responded to major changes in the way that governments and communities viewed private investment in transport.
"Unless we adapt, we in the private sector will not continue to be given the responsibility for vital infrastructure we have enjoyed in recent years," he said.
Mr Edwards said many governments worldwide were still reluctant to embrace private funding and that much of the Australian community remained unconvinced.
With the benefits of hindsight the toll road industry now recognised that too little focus had been placed on the operational phase of new projects.
A "focussed, robust owner and operator with a long-term view is important to all stakeholders," said Mr Edwards.
Mr Edwards said that Transurban had developed an understanding of the things that mattered to government, and how to deliver on them.
"I would go as far as saying we have realised we are not just in the roads business," he said.
"Transurban are helping deliver better social, economic and environmental outcomes for the community – and we are making money for investors by doing it."
The company believes the best way to attract new customers and maintain strong relationships with existing ones is to continuously review and refine the range of tolling products and services to keep up with market needs.
Since its inception, CityLink has become a testing ground for new technologies and innovation in the development and delivery of tolling products and services.
Transurban believes that Australia, as an early adopter and innovator, has a competitive advantage in private sector involvement in the provision of infrastructure.
Because of the success in pioneering the CityLink project, the company is a recognised world leader in the implementation of electronic toll collection. In addition, it has one of the largest skill bases in Intelligent Transport Systems (ITS) in Australia.
Transurban is therefore in a strategic position to exploit global opportunities on these fronts. In the year to June 2002 alone, CityLink hosted more than 20 groups from Europe, Asia, South America and North America looking at ways of involving the private sector in road projects.
Right now, the worldwide market for ITS is exploding and Australia is currently one of the largest international markets for this type of activity.
Analysts’ Recommendations
Despite inherent reluctance, increasingly governments are turning to the private sector to help provide infrastructure, as they are either unable, or unwilling, to raise the funds required for new projects. As a result the demand for private sector investment continues to expand.
Privately financed electronic toll roads allow governments to provide the fast, efficient transport systems their communities require without increasing public debt.
According to Wilson HTM Investment Group, the 12 month target share price has increased 12 per cent to $5.60 while cash-flow and distribution forecasts have also increased.
Due to the high depreciation charge it is well anticipated that negative NPAT figures should be recorded for the next few years. However, free cash flow is forecast to stay at high levels ( $100 million in 2003 and $120 million in 2004) as CityLink revenues grow while operating costs and interest expense are contained.
Risk profile
Toll road projects require substantial investment up front. But once operating, they provide low risk, predictable income streams, which are typically protected from inflation:
• There are risks in all investments, but in toll roads the risks decline dramatically once construction is complete;
• Toll roads are built and operated on the basis of a 'concession agreement' with a government. Concession agreements typically allow tolls to rise in line with local consumer price indexes, and so revenue streams – and therefore distributions to investors – are protected from inflation;
• In developed countries, traffic levels on major urban roads have historically grown faster than the economy overall.
.The $2.23 billion Western Orbital to be built by Westlink consortium includes Transurban (40%), Leighton (10%), Abigroup (10%) and Macquarie Infrastructure Group (40%).
Under the contract the Transurban Group has invested $392 million in the project. The investment is funded from the recent $430 million issue of convertible adjustable rate securities (CARS).
The Western Sydney Orbital provides Transurban Group with increased diversification and exposure to another toll road as well as the Sydney market.
Transurban provides a relatively low risk investment with a strong revenue growth outlook from its core activity, the CityLink toll road in Melbourne and its second major project, the Western Sydney Orbital toll road (WSO). Wilson HTM Investment Group recommends Adding on the basis of:
• Attractive valuation and indicated 12 month return
• Increasing, +5.0 per cent distributions (tax deferred)
• Revenue growth virtually assured from the compound impact of toll increases and traffic growth
• WSO value to Transurban of 37cps with excellent upside
• Ability to participate in new projects, the immediate prospects being Melbourne’s Mitcham Frankston FreewayKey to Transurban's success is its understanding of risk and how to manage it. The greatest risks in any toll road project are in the early years of development.
These risks were clearly demonstrated on the CityLink project, as was Transurban's ability to manage them and deliver solutions:
• When a dispute between two major construction contractors threatened to delay the project, Transurban stepped in to ensure a settlement;
• When companies contracted to manage customer service failed to meet expectations, Transurban took the job on itself and delivered the service customers expected;
• When design and construction issues with the contractor led to major problems in the Burnley Tunnel, a key section of the Link, Transurban again stepped in to ensure the problems were fixed.
For Transurban, the challenge does not end with the successful completion of a project.
There is further potential for growth in the Australian market. One estimate indicates Australia is spending about $2 billion less per year than is needed to keep up with the transport needs of business.
Solutions to traffic problems are increasingly involving Intelligent Transport Systems (ITS), 'smart' traffic technologies that improve infrastructure performance and make it more convenient for customers to use.
Transurban has an edge in the field, having implemented purpose-designed technologies across all CityLink operations, from traffic incident detection to electronic tolling to customer management. As one of the pioneers in ITS, the company has gained valuable knowledge and skills through continually consulting with users and other stakeholders on the elements that make a road smart, safe and also simple to use.
Balance Sheet Strengths
Quarterly increases in tolls have had no demonstrable effect on traffic levels. Revenue on CityLink is projected to be about AUD$230 million for the 2002-03 financial year, and the concession from the Australian state of Victoria extends for 34 years.
This is typical of the long life of this asset class. The combination of long life, low operational risk and the protection of the concession agreement make Transurban an attractive company for many investors.
The support for Transurban among Australia's major financial institutions reflects the relative maturity of infrastructure as an investment sector in the country
What makes Transurban particularly attractive to investors is the company's end-to-end approach. The skills and expertise put the company in a unique position to manage risks and extract the maximum value from each project for its security holders.
Operating performance
The most recent indications of performance, for theyear ending 30 June 2003, have been positive.
Average daily transaction volumes on CityLink grew 6.8 per cent for the year while average weekday transaction volumes were up 6.6 per cent. Toll and fee revenue for the same period was $232.1 million (net of GST), an increase of 11.2 per cent over the previous year.
The average daily transaction volume for the June quarter 2003 was 566,187 a 5 per cent increase over the June quarter 2002. This is a good result as there were 61 weekdays in the June quarter 2003 compared to 62 in the June quarter 2002. Traffic levels are higher on weekdays than on weekends.
Toll and fee revenue for the June quarter 2003 was $58.6 million net of GST, an amount that includes year-end revenue adjustments of $0.6 million relating to prior periods. Excluding these adjustments, the revenue for the quarter was 8.8 per cent higher than for the June quarter 2002.
Earnings outlook
Transurban generated free cash flow of $54 million in the first half 2003 and paid a distribution of 10 cents per security. Wilson HTM Investment Group have forecast a free cash flow of $60 million for the second half and a distribution of 10 cents per share.
Earnings and cash flow are forecast to increase again in FY04, to be capable of supporting an increase in distribution to 23 cents for the year.
At this point, it appears that cash flow in FY05 will be reduced by approximately $45 million by the expiry of the infrastructure bonds, leading to a reduced distribution of 24 cents per share.
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