Infrastructure opportunities as the RBA pivots – Transurban Group (TCL)
Toll road operator TCL is the most covered and arguably loved stock of today’s three, although it hasn’t moved since COVID. This month, the company provided an out-of-cycle traffic update showing Group traffic up +3.6% in Oct-Nov YoY with growth in North America +6.4%, followed by Sydney 4.7% and Brisbane +3.0%, while Melbourne returned to positive +2.0%. Sydney’s improvement was the most encouraging, following an average growth of +1.2% over the past year, including the WestConnex ramp-up tailwind. We like the update, but the market remains happy with TCL around $13.
The uncertainty in NSW toll reform is causing a valuation discount on TCL, but this increasingly feels like a low-risk opportunity. While there are still risks to cash flow if, for example, tolls are lowered with compensation in the form of concession extensions with an election looming, we believe over the medium term, FCF (free cash flow) growth will increase more than the market is currently factoring in.
- We like TCL when a more defensive stance toward the ASX is warranted over the coming year (s) aided by a 5% yield over the coming years.
