Transurban (TCL.AX / TCL AU)

Transcription

1 Asia Pacific/Australia Equity Research Highways & Railtracks Rating OUTPERFORM Price (16-Jan,A$) Target Price (A$) Target price ESG risk (%) NA Market cap (A$mn) 21,183.3 Yr avg. mthly trading (A$mn) 1,168.7 Projected return: Capital gain (%) 20.5 Dividend yield (net %) 5.2 Total return (%) 25.7 Target price is for 12 months. Research Analysts Paul Butler paul.butler@credit-suisse.com Gretel Janu gretel.janu@credit-suisse.com Total return forecast in perspective 40% 20% 0% - 20% 12mth Volatility 52 Week Hi- Lo *Target return Share Price CS Target Rtn Mean Source: Company data, Thomson Reuters, IBES, Credit Suisse estimates Performance 1M 3M 12M Absolute (%) Relative (%) Transurban (TCL.AX / TCL AU) FORECAST INCREASE WestConnex and fresh equity for growth Forecasting $1bn equity raising to fund investment pipeline: Transurban is due to announce a final agreement on the Western Distributor investment (~$5.5bn) in Feb-Mar. It may use this as a catalyst to raise equity. We now forecast a $1bn equity raising in 2H FY17. This would give flexibility to do Western Distributor and other deals (WestConnex and Dulles Greenway). It could create significant value from these deals, and we expect an equity raising to support growth would be strongly supported. Reiterate OUTPERFORM rating and $12.50 TP. Deep dive into Westconnex, another opportunity for Transurban: The NSW Government has appointed advisors for options on selling at least part of its $16.8bn toll road project, WestConnex, in Transurban is likely to be keen and has advantages over other bidders (better traffic knowledge and owns South-West M5 until 2026 that is part of Stage 2). We value the entire WestConnex project at $3.0bn, with Stage 1 at $3.5bn and Stage 2 at $2.9bn, but Stage 3 (M4-M5 Link) has negative value of $3.4bn due to high tunnel construction costs and low toll price levels. Not expecting dividend guidance upgrade at 1H FY17 results: Transurban reports its 1H FY17 results on Tuesday, 7th February. This is the first time 2Q traffic and revenue results have not been pre-released. We forecast proportional toll revenue growth of 11.4% and proportional EBITDA growth of 13.1%. We are not expecting an upgrade to the FY17 dividend guidance of 50.5 cents per share. Risks to our OUTPERFORM view include risk of sharply rising bond yields, overpaying for assets, project delays and cost overruns. Financial and valuation metrics Year 6/16A 6/17E 6/18E 6/19E Proportional revenue (A$ mn) 2,006 2,218 2,427 2,621 Proportional EBITDA (A$ mn) 1,398 1,678 1,868 2,055 Proportional EBIT (A$ mn) 811 1,067 1,186 1,342 Net Income (Adj.) (A$ mn) EPS (Adj.) (Ac) Change from previous EPS (%) n.a EPS growth (%) n.m Consensus EPS (Ac) P/E (x) Dividends (Ac) Dividend yield (%) Price/Book (x) Proportional Net debt/ebitda (x) Proportional EV/EBITDA (x) Source: Company data, Thomson Reuters, Credit Suisse estimates DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

2 Transurban (TCL.AX / TCL AU) Price (16 Jan 2017): A$10.37; Rating: OUTPERFORM; Target Price: A$12.5; Analyst: Paul Butler Income Statement 6/16A 6/17E 6/18E 6/19E Revenue 2,210 2,155 2,361 2,558 EBITDA 1,248 1,580 1,771 1,964 Depr. & Amort. (584) (619) (691) (721) EBIT ,081 1,242 Associates Net interest exp. (728) (738) (742) (746) Other Profit before tax (47) Income tax Profit after tax Minorities Preferred dividends Associates & Other Normalised NPAT Unusal item after tax Net profit (Reported) Proportionate Statement Revenue 2,006 2,218 2,427 2,621 EBITDA 1,398 1,678 1,868 2,055 Depr & Amort (587) (611) (682) (713) EBIT 811 1,067 1,186 1,342 Net interest exp. (700) (691) (729) (788) PBT Income tax 37 (15) (17) (19) NPAT Net Debt 12,484 13,467 14,559 15,399 Balance Sheet 6/16A 6/17E 6/18E 6/19E Cash & equivalents 834 1,834 1,834 1,834 Receivables Other current assets Current assets 956 1,956 1,956 1,956 Property, plant & equip Intangibles 19,248 18,689 18,066 17,415 Other non-current assets 2,558 2,486 2,409 2,328 Non-current assets 22,074 21,935 21,194 20,392 Total assets 23,030 23,891 23,150 22,348 Payables Interest bearing debt 12,873 13,473 13,538 13,645 Other liabilities 3,289 3,289 3,289 3,289 Total liabilities 16,572 17,172 17,237 17,344 Net assets 6,458 6,718 5,913 5,003 Ordinary equity 5,035 5,325 4,567 3,756 Minority interests 1,423 1,393 1,345 1,247 Preferred capital Total shareholder funds 6,458 6,718 5,913 5,003 Net Debt 12,039 11,639 11,704 11,811 Cash Flow 6/16A 6/17E 6/18E 6/19E EBIT ,081 1,242 Net Interest (512) (552) (547) (550) Depr & Amort Tax Paid Change in Working capital Other cash and non-cash items (74) Operating cashflow 727 1,028 1,224 1,414 Capex (78) (553) (26) 0 Acquistions & Invest (1,869) Asset sale proceeds Other Investing cashflow (2,444) (379) Dividends paid (689) (1,052) (1,204) (1,396) Equity raised 1,362 1, Net borrowings 495 (586) (131) (89) Other financing cash in/(outflows) (55) (11) (46) (118) Financing cashflow 1,113 (650) (1,381) (1,603) Total cashflow (604) 0 0 (0) Adjustments Movement in cash/equivalents (604) 0 0 (0) Source: Company data, Credit Suisse estimates Earnings 6/16A 6/17E 6/18E 6/19E Equiv. FPO (period avg) 1,982 2,084 2,131 2,131 EPS (CS adj.) (c) EPS growth (%) DPS (c) Dividend Payout (%) Free CFPS (c) Valuation 6/16A 6/17E 6/18E 6/19E P/E (CS) (x) Dividend yield(%) PER EV/EBITDA ROE (%) FFO ratio Returns 6/16A 6/17E 6/18E 6/19E Return on Equity (%) Profit Margin (%) Asset Turnover (x) Equity Multiplier (x) Return on Assets (%) Return on Invested Cap. (1.7) Gearing 6/16A 6/17E 6/18E 6/19E ND/ND+E (%) Net Debt to EBITDA (x) Int Cover (EBITDA) (x) Int Cover (EBIT) (x) Capex to Sales (%) Capex to Depr (%) Environment Social Governance G L C S G L C Global Local Country Stock S MSCI IVA Rating AAA G L C S TP ESG Risk (%): 0.00 TP Risk Comment: We have not currently factored in any specific ESG risk into our target price. Key risks that would potentially lead to an adjustment to forecasts and valuation would include environmental (land use) and regulatory risks. MSCI IVA Risk: Neutral MSCI IVA Risk Comment: We see the current rating as appropriate given the policies in place relating to the environmental impacts of its operations. Share price performance May- 15 Sep- 15 Jan- 16 May- 16 Sep- 16 Jan- 17 TCL.AX S&P ASX 200 Index On 16-Jan-2017 the S&P ASX 200 Index closed at On 16-Jan-2017 the spot exchange rate was A$1.34/US$1 Transurban (TCL.AX / TCL AU) 2

3 We expect equity raising to fund growth Transurban has many opportunities in its development pipeline in 2017, and we expect it to use the announcement of a final agreement with the Victorian State on the Western Distributor investment (~$5.5bn) as a catalyst to raise equity. We now forecast a $1bn equity raising in 2H FY17. Transurban is in exclusive negotiations with the Victorian State on Western Distributor and expects to announce a final agreement in February or March. The intensive investment phase for Western Distributor is still far off (FY19-FY21), and Transurban could fund the project from operating cash flows and project debt. But it has many other investment opportunities and raising equity would allow it flexibility to pursue other opportunities. Two other large opportunities that we believe will tempt Transurban are: WestConnex $3-6bn capital cost. Potential sale process in Dulles Greenway $2.7bn capital cost. Potential sale in 1H Even after a $1bn raising for Western Distributor, Transurban may require further capital to support these potential deals. We believe it could create significant value from these deals and equity raisings to support the growth would be strongly supported. TCL shares have outperformed post equity raisings Transurban has come to the market for fresh equity three times since listing to acquire AirportLink, Queensland Motorways and the Lane Cove Tunnel. On average, 100 days after the equity raising the Transurban share price outperformed the ASX200 by 9%. On average, Transurban shares began to outperform the ASX days after a raising. However, part of this outperformance may have been supported by falling bond yields (Figure 1). It last raised equity ($1.025bn) to fund the AirportLink acquisition in November The renounceable offer at $9.60 per share (~5% discount to TERP) was well supported by shareholders. Assuming a similar discount (based on the current share price $10.40) suggests an offer price of $9.90 per share. Figure 1: Average TCL share price performance post equity raisings Share price (rebased) Days post equity raising TCL ASX200 Risk free rate Source: Company data, Credit Suisse estimates Transurban (TCL.AX / TCL AU) 3

4 Western Distributor expect announcement Feb/Mar The Western Distributor Project is a $5.5bn project made up of three interrelated projects: the Monash Freeway Upgrade, Webb Dock Access, and the Western Distributor. Transurban is currently in exclusive negotiations with the Government. The Victorian state government committed to providing $1.46bn of funding for the $5.5bn Western Distributor project in Melbourne. We expect an announcement in February-March 2017 of a final agreement on the project between Transurban and the state. This includes the final design and release of the draft EES (Environment Effects Statement). Construction bids were received last month based on the reference design. Financial close is likely to be at the end of Figure 2: Western Distributor timeline Short list of construction companies are asked to develop a Tender based on functional requirements Figure 3: Western Distributor project Current Feb-March 2017 Late Reference design released Tender Design Financial close Start of construction Source: Company data, Credit Suisse estimates Draft Environmental Effects Statement (EES) released Contract with successful tenderer Construction project complete We estimate the value of Western Distributor project at cents per share. The value range is based on assuming a return on capital of 10-11% and an 8.0% WACC. This is higher than the 7.2% WACC that we use for CityLink. The higher WACC compensates for the additional risk in reaching a final agreement with government, financing the investment and managing the construction, traffic ramp-up and operational risks. Source: Company data Dulles Greenway Macquarie Infrastructure Partners (MIP) is amidst a sale process of its 50% stake in the Dulles Greenway toll road (Greater Washington DC). MQA owns the other 50% of Dulles Greenway and has preemptive rights to MIP's 50%. Transurban is not interested in a 50% stake, but we believe there is an opportunity for MQA to exercise its pre-emptive rights and then sell 100% of the asset. Transurban could expand its asset base in the Greater Washington DC area. It already has express lane assets on the nearby I-95 and I495 and wants to have another network of assets there. Transurban (TCL.AX / TCL AU) 4

5 WestConnex NSW State looking to sell WestConnex is a $16.8bn government funded toll road project to link western and southwestern Sydney with the city, Sydney Airport and Port Botany. It extends the existing M4 and M5 roads and comprises ~14km of road above ground and 19km of tunnels. The project is to be delivered in three stages and be complete by Two months ago the state government appointed advisors for a potential sale of WestConnex or parts of it. Stage 1 (M4 widening and M4 East): M4 Widening and M4 East will widen the existing M4 Motorway to four lanes in each direction from Church Street, Parramatta to Homebush Bay Drive. The M4 Motorway will then be extended with twin tunnels, three lanes in each direction, from Homebush to Parramatta Road and the City West Link at Haberfield. Construction has commenced, M4 widening is expected to be complete in 1Q 2017 with the M4 East in Stage 2 (New M5): New M5 twin tunnels will run underground from Kingsgrove to St Peters and more than double the capacity of the M5 East corridor. The New M5 connects to an upgraded King Georges Road Interchange and the St Peters Interchange, providing a connection between Sydney Airport and Port Botany. The M5 upgrades are expected to be open to traffic in Stage 3 (M4-M5 Link): M4-M5 Link will join the M4 and M5 from Haberfield to St Peters with two new tunnels, four lanes in each direction (recently re-defined from three), and provide connections to Victoria Road and the ANZAC bridge, and the future Western Harbour Tunnel. The government has fast tracked Stage 3, with the twin tunnels to be built independently and potentially be open to motorists in Figure 4: WestConnex Source: WestConnex Transurban (TCL.AX / TCL AU) 5

6 Figure 5: WestConnex - asset details Length Tunnel/ Average toll CSe Construction Spare capacity in Reach 3% LT traffic Asset (km) Lanes Surface Construction Open ($ 2017 prices) cost ($mn) FY31 capacity growth M4 Widening 7.5 4x4 Surface Q FY % FY38 FY23 M4 East 6.5 3x3 Tunnel Q FY ,802 11% FY35 FY27 Stage 1 - M4 New M x2 Tunnel Q FY ,335 63% FY57 FY28 Existing M x2 Tunnel % FY43 FY28 South-west M5 (currently tolled) x3 Surface Sydney Gateway 2x2 Surface Q FY King Georges Rd Interchange 3x3 Surface Q FY Stage 2 - M5 M4 and M5 Link 9.2 3x3 Tunnel Q FY ,247 29% FY43 FY28 Stage 3 - M4 and M5 Link WestConnex 16,812 Source: WestConnex, Company data, Credit Suisse estimates A good fit for Transurban WestConnex lies within the middle of Transurban's Sydney network and is the last remaining major link to toll roads in Sydney. Stage 2 of WestConnex joins directly onto Transurban's M5 SouthWest Link and Stage 3 would capture commuters from the North or the East travelling West or South. It is likely Transurban could see an uplift of traffic on the M5 from the traffic on WestConnex with or without acquiring part of the WestConnex. The WestConnex has also been designed to create a future connection to a Western Harbour Tunnel and then onto the Northern Beaches Link. Transurban has already stated the potential for these future links to be part of Transurban's network. Figure 6: WestConnex fits in the center of Transurban's Sydney roads Source: Transurban Transurban (TCL.AX / TCL AU) 6

7 Project Timeline Stage 1: All approvals for Stage 1 are complete. M4 Widening is due to open in 1Q The M4 East is due to open in Stage 2: Approvals for M5 East have been issued. Construction on both King Georges Rd Interchange Upgrade and New M5 has begun. The new M5 is due to open in Planning is underway for Sydney Gateway; no documents have been issued to the Government for approval. Stage 3: Secretary's Environmental Assessment Requirements (SEARs) were issued to the Roads and Maritime Service to construct and operate the M4-M5 Link in March The SMC is planning to release the proposed design for the third stage for public consultation in January followed by an EIS to the Department of Planning by mid SMC is currently calling for bids to construct phase 3. Figure 7: WestConnex timeline Stage M4 Widening Pre-construction Construction 1 M4 East Pre-construction Construction King Georges Rd Interchange Upgrade Preconstruction Construction 2 New M5 Pre-construction Construction Sydney Gateway Pre-construction Indicative Construction 3 M4-M5 Link Pre-construction Indicative Construction Source: WestConnex WestConnex - $16.8bn investment in 3 stages The cost of the project is $16.8bn, with Stage 1, 2 and 3 budgeted to cost $4.3bn, $5.3bn a $7.2bn respectively. The NSW Government is using a limited-recourse financing model for the project. The Federal Government is contributing $1.5bn, and has provided a concessional loan of $2.0bn. The State Government is contributing $1.8bn, largely raised through the sale of electricity assets. Figure 8: Cost of the project Funding $mn Stage 1 - M4 Widening 497 Stage 1 - M4 East 3,802 Stage 1 4,299 Stage 2 - New M5 4,335 Stage 2 - King Georges Road Upgrade 131 Stage 2 - Sydney Gateway 800 Stage 2 5,266 Stage 3 - M4 and M5 Link 7,247 Stage 3 total 7,247 Total 16,812 Figure 9: Proposed tolling regime Tolling Jan-15 Jan-16 Jan-17 Flagfall $1.12 $1.16 $1.21 Toll per km $0.42 $0.44 $0.45 Toll cap $7.95 $8.27 $8.60 Truck multiplier 3x 3x 3x Escalation Max of 4% or CPI until 2038, CPI after 2038 Concession term 2060 Source: WestConnex Source: WestConnex, Credit Suisse estimates WestConnex toll growth at 4% p.a. for 1 st 20 years The proposed tolling will be distance-based, with a journey along the full length capped at $8.60 (in 2017 terms). This is more expensive than the M7 (39cents/km vs. 45cents/km), the only other Sydney road toll that is distance-based, but is consistent in the Transurban (TCL.AX / TCL AU) 7

8 government's overall principles for tolling. WestConnex's toll escalation of the greater of 4% or CPI is in-line with the tolling for the M2 and NorthConnex. Figure 10: Comparison of current motorway tolls on Sydney Roads Source: Company data, Credit Suisse estimates Road Toll/km Toll Escalation M7 $0.39 Quarterly CPI Hills M2 $0.35-$1.27 Max of quarterly CPI or 1% (4% p.a.) Eastern Distributor $0.85 Max of weighted sum of quarterly AWE and quarterly CPI or 1% (4% p.a.) M5 South West $0.34 Quarterly CPI M4 $0.00 NA WestConnex $0.45 Max of 4% p.a. or CPI Government cautious on "new" M5 traffic We assume traffic on the roads (except M5 corridor) will reach the Government Business Case forecast levels in 2031, with a strong ramp-up period in the first 3 years of traffic. We assume sustainable traffic growth in the medium-long term of 3%, before the roads reach our estimate of capacity. Figure 11: Traffic growth forecasts 15.0% Figure 52: Utilisation of capacity in FY31 100% Traffic growth (% YoY) 10.0% 5.0% 0.0% FY18 FY22 FY26 FY30 FY34 FY38 FY42 FY46 FY50 FY54 FY58-5.0% -10.0% % capacity used in FY31 90% 80% 70% 60% 50% 40% 30% 20% -15.0% M4 Widening M4 East New M5 M4 and M5 Link Existing M5 East 10% 0% M4 East M4 Widening M4 and M5 Link Existing M5 New M5 Source: Company data, Credit Suisse estimates * New M5 and Existing M5 are CS traffic forecasts Source: Company data, Credit Suisse estimates The WestConnex is doubling capacity in the M5 East corridor with the new and existing M5 tunnels in operation. Applying the 2031 Government traffic forecasts, we estimate traffic would utilize only 38% of total capacity in the corridor. The government's traffic forecasts for the combined M5 East corridor are conservative, in our view. On the existing M5, the government forecasts a 60,000 daily vehicle reduction on the existing M5 East tunnel as cars are diverted to the New M5 and alternative roads (M4 and King Georges Rd). However, the traffic forecast for the M5 corridor in FY31 is ~10% below current traffic levels. In our base case valuation, we assume traffic on the M5 corridor in FY31 is 10% from current traffic levels by FY31 or utilising 50% of the corridor's total capacity. In this base case scenario, we assume the new M5 reaches capacity by Transurban (TCL.AX / TCL AU) 8

9 Figure 13: Government traffic forecasts on WestConnex in 2031 ADT 163,800 East of James Ruse Drive ADT 132,400 East of Concord Rd ADT 105,000 Haberfield to Rozelle ADT 99,800 Camperdown to Rozelle ADT 111,200 Camperdown to St Peters ADT 37,200 New M5 Tunnel ADT 89,400 Airport Gateway Source: WestConnex Transurban (TCL.AX / TCL AU) 9

10 WestConnex valued at $3.0bn after remaining capex We value the entire WestConnex project at $3.0bn, with Stage 1 at $3.5bn and Stage 2 at $2.9bn. Stage 3 (M4-M5 Link) has negative value of $3.4bn due to the high capital cost of the tunnel construction and toll prices at the same level of the rest of WestConnex. If Stage 3 is sold separately it would require a very large capital subsidy or higher toll levels. Figure 6: WestConnex valuation FY17 NPV (ex. capex) $mn FY17 NPV (capex) $mn FY17 NPV $mn WACC EV IRR Asset M4 Widening 3,872 0* 3, % M4 East 1,737-2, % Stage 1 - M4 5,609-2,075 3, % New M5 1,077-2,885-1, % Existing M5 2, , % South-west M5 ( )** 2, , % Sydney Gateway % King Georges Rd Interchange % Stage 2 - M5 6,370-3,482 2, % M4 and M5 Link 1,705-5,091-3, % Stage 3 - M4 and M5 Link 1,705-5,091-3, % WestConnex 13,684-10,647 3,036 * $497mn will be completed in 2017 **South-west M5: $390mn EBITDA in last 12 months of concession ending Dec Estimate 5% capacity headroom Source: WestConnex, Company data, Credit Suisse estimates We use a WACC of 7.25% for brownfield roads and 8.0% for greenfield roads. Add M5 South-West concession into Stage 2 package The government may package up the South West M5 toll road as part of the M5 package. Transurban's concession on the road expires in Dec It currently holds a 50% stake along with Retail Employees Superannuation, Sunsuper, Hastings Funds Management, IFM Investors and AMP Infrastructure Equity Fund holding the remaining interests. Including this asset with Stage 2 sale of the WestConnex could give Transurban and its partners an advantage. Transurban has a better knowledge of traffic patterns and along with its partners has control of the asset until Other bidders would only get the cashflow from the asset starting in This may limit financing options and introduce additional risk at the change of control. Sensitivity Analysis Given the Stage 3 project has not been approved by the State planning departments, the capex required to build the roads may increase. A 10% increase to the construction cost could diminish the value of the WestConnex by $1bn (~34%). The valuation is slightly less sensitive to changes in traffic with a 10% change from the Government forecasts causing a $700mn (~22%) change in valuation. Transurban (TCL.AX / TCL AU) 10

11 Figure 15: Traffic sensitivity to valuation Change to FY31 traffic forecasts -10% Base case NPV ($mn) 10% M4 Widening M4 East Stage 1 - M % change -10.3% 8.9% New M Existing M South-west M5 (currently tolled) Sydney Gateway King Georges Rd Interchange Stage 2 - M % change -9.6% 8.8% M4 and M5 Link Stage 3 - M4 and M5 Link % change 3.4% -3.0% WestConnex % change -24.9% 22.1% Figure 16: Capex sensitivity Change to capex required 10% Base case NPV ($mn) -10% M4 Widening M4 East Stage 1 - M % change -5.6% 5.6% New M Existing M South-west M5 (currently tolled) Sydney Gateway King Georges Rd Interchange Stage 2 - M % change -11.7% 11.7% M4 and M5 Link Stage 3 - M4 and M5 Link % change 14.7% -14.7% WestConnex % change -34.0% 34.0% Source: Credit Suisse estimates Source: Credit Suisse estimates Downside if Stage 3 (M4-M5 Link) is not built The M4-M5 Link has not been approved by State Government. Environmental Impact Statements are yet to be submitted and this environmental approval process could take up to 6-12 months. There is the risk the M4-M5 Link is not built. Without the M4-M5 link, the upgraded M4 and M5 would have lower capacity due to bottlenecks at the eastern ends of the toll roads. We estimate that having no M4-M5 Link could reduce the value of Stage 1 by 13% and Stage 2 by 32% due to lower traffic. The lower traffic is partly offset by a higher proportion of the toll flag falls charged on M5. Figure 77: Sensitivity Analysis if there was no M4-M5 Link M4-M5 Link not approved Base case NPV ($mn) No M4-M5 Link M4 Widening 3,872 3,778 M4 East Stage 1 - M4 3,534 3,082 % change -12.8% New M5-1,807-2,445 Existing M5 2,407 2,118 South-west M5 (currently tolled) 2,869 2,869 Sydney Gateway King Georges Rd Interchange Stage 2 - M5 2,888 1,962 % change -32.1% Source: Credit Suisse estimates Government looking to sell early, but not forced to Press reports NSW Treasury has appointed advisors to explore sell down plans for the WestConnex project. The Government aims to have potential mandates by the Transurban (TCL.AX / TCL AU) 11

12 announcement of budget in June Currently, we estimate WestConnex represents ~10% of the government's total capital investment by all departments. However, the Government is not a forced seller due to its debt constraints. It closed FY16 with net debt of $663mn (Figure Error: Reference source not found!), and it has since completed the sale of Ausgrid for $16bn. Figure 18: NSW Government net debt 14 Figure 19: NSW Government capital investment NSW Government net debt ($bn) Capital investment ($bn) FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 0 FY17 FY18 FY19 FY20 Other Govt investment WestConnex Source: ABS Source: NSW Government, Credit Suisse Lack of traffic data could limit number of bidders Government originally planned to complete each section of WestConnex and then operate it until there was a sufficient history of traffic data to enable selling it to the private sector at an attractive price. The government now appears to be contemplating a sale or partial sale of WestConnex before there is a useful history of traffic data. History suggests traffic forecasts on greenfield investments are often overestimated (Cross City Tunnel, Lane Cove Tunnel, AirportLink and Clem7). The government might be hoping that some bidders overestimate the traffic growth potential and pay a high price. The other issue is that the traffic on stages 1 and 2 will not reach potential until stage 3 is complete, and this is planned for Even if there are no delays in the project and stage 3 opens on time, it could take another couple years to get a history of traffic data that is useful for valuation. That could be 8-10 years away, too long for the typical political time horizon. If the government sells WestConnex or parts of it early (before there is useful traffic data), then there are likely to be less bidders. This improves the potential for Transurban to get the asset at an attractive price. Other possible bidders The nature of interested bidders depends on what parts of WestConnex the government seeks to sell. Stages 1 and 2 would be of interest to consortia of infrastructure funds and pension funds. If stage 3 is sold with a build, finance and operate model, then construction firms would also be interested (Ferrovial, ACS/CIMIC, etc). CIMIC is the major contractor on 3 of the 4 tenders already awarded and would likely be interested in any opportunity with stage 3. Fulton Hogan, a NZ based construction company who is the sole contractor on the King Georges Interchange Upgrade, may also be interested. Transurban (TCL.AX / TCL AU) 12

13 Figure 20: WestConnex partners CP2, the owner of stakes in ConnectEast in Melbourne and Sydney's AirportLink train line could also be interested. Source: WestConnex Transurban (TCL.AX / TCL AU) 13

14 Figure 81: WestConnex estimates WestConnex financial estimates WestConnex - $ mn FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY26 FY27 FY28 FY29 FY30 FY31 Traffic (ADT 000s) M4 Widening M4 East New M Existing M5 East M4 and M5 Link Traffic growth M4 Widening 4.0% 10.0% 10.0% 10.0% 5.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% M4 East 10.0% 10.0% 10.0% 5.0% 10.0% 10.0% 5.0% 3.0% 3.0% 3.0% 3.0% 3.0% New M5 10.0% 5.0% 5.0% 7.5% 10.0% 10.0% 10.0% 4.0% 4.0% 4.0% 4.0% Existing M5 East -10.0% -10.0% -5.0% -5.0% -5.0% 0.0% 0.0% 3.0% 3.0% 3.0% 3.0% M4 and M5 Link 10.0% 10.0% 10.0% 3.0% 3.0% 3.0% 3.0% Revenue M4 Widening M4 East New M Existing M5 East M4 and M5 Link EBITDA M4 Widening M4 East New M Existing M5 East M4 and M5 Link EBITDA margin M4 Widening 85% 86% 86% 87% 87% 88% 88% 89% 89% 90% 90% 90% 90% 90% 90% M4 East 55% 56% 57% 58% 59% 60% 60% 61% 61% 62% 62% 63% 63% New M5 15% 16% 17% 18% 30% 35% 40% 45% 50% 51% 51% 52% Existing M5 East 70% 71% 71% 72% 72% 73% 73% 74% 74% 75% 75% 76% M4 and M5 Link 50% 52% 54% 56% 58% 60% 62% 63% EBIT M4 Widening M4 East New M Existing M5 East M4 and M5 Link Free cash flow M4 Widening M4 East Stage 1 - M New M Existing M5 East South-west M5 (currently tolled) Sydney Gateway King Georges Rd Interchange Stage 2 - M M4 and M5 Link Stage 3 - M4 and M5 Link Source: Credit Suisse estimates Transurban (TCL.AX / TCL AU) 14

15 1H FY17 result preview Transurban reports its 1H FY17 results on Tuesday 7 th February. This is the first time where the 2Q traffic and revenue results have not been pre-released. We forecast proportional toll revenue growth of 11.4% and proportional EBITDA growth of 13.1%. We expect the focus could be on cost performance, given the slight weakness in the FY16 results. We expect an update on the revenue improvement from the rollout of GLIDe and other cost rationalization initiatives. Management is likely to focus on the development pipeline and its partnerships with the Government. Figure 92: TCL 1H FY17 revenue and EBITDA forecasts 1H FY17 100% by asset CSe 1H FY16 YoY % CSe 1H FY16 YoY % CSe 1H FY16 YoY % CSe 1H FY16 YoY ppt Hills M % % % 83.1% 83.1% 0.0 Lane Cov e Tunnel % % % 62.7% 62.2% 0.5 Cross City Tunnel % % % 67.2% 66.7% 0.5 M1 Eastern Distributor % % % 71.3% 70.8% 0.5 Roam & Tollaust % 25.0% -1.0 M % % % 85.1% 84.6% 0.5 M % % % 85.5% 85.5% 0.0 Sydney % % 79.2% 79.2% 0.0 City Link % % % 83.6% 83.6% 0.0 Melbourne % % 83.6% 83.6% 0.0 Gatew ay Motorw ay % % % 75.4% 75.4% 0.0 Logan Motorw ay % % % 76.1% 74.1% 2.0 Clem % % % 53.0% 50.0% 3.0 Go Betw een Bridge % % % 77.0% 75.0% 2.0 Legacy w ay % % % 50.2% 42.9% 7.3 AirportLinkM % 56 0 nm 43 0 nm 76.5% 0.0% nm Brisbane % % 71.4% 67.8% Ex press Lanes % % % 50.5% 40.5% Ex press Lanes % % % 64.6% 51.1% 13.5 USA % % 47.3% 46.4% 0.8 Corp/other Proportional % % 75.5% 74.1% 1.3 Source: Company data, Credit Suisse estimates Average daily trips ('000s) Toll Revenue ($mn) EBITDA ($mn) EBITDA margin % Management unlikely to raise FY17 dividend guidance Transurban has guided to a 50.5 cent per share dividend for FY17. Management has announced a 25 cent dividend per share for 1H FY17, representing 11% growth on 1H FY16. This represents a higher payout of free cash, which we forecast to grow 9% YoY in 1H FY17. We do not expect management to raise its FY17 dividend guidance given we are expecting a capital raising to support growth. Transurban (TCL.AX / TCL AU) 15

16 Figure 103: TCL 1H FY17 Free cash and DPS forecasts 1H FY17 ($mn) CSe 1HFY16 YoY% Cash from operations % Add back transaction & integration costs from acquisitions of non-100% ow ned assets % Add back pay ments for maintenance of intangible assets % Less CF from operating activ ities from consolidated but non 100% entities % Less allow ance for maintenance of intangible assets for 100% ow ned assets % Add distibutions from non 100% own entities: M1 Eastern Distributor % M5 distribution and TLN interest % TQ distribution and SLN interest % NWRG distribution and M7 TLN interest % Free cash % Free cash per share (cents) % DPS (cents) % % pay out of free cash 99.6% 94.2% Source: Company data, Credit Suisse estimates Estimate changes We now include a $1bn equity raising in our estimates for 2H FY17. We raise our DPS estimates 1% and 5% in FY18 and FY19 due to a higher free cash calculation. We have changed our approach to estimating free cash to better reflect Transurban's calculation of free cash. Transurban (TCL.AX / TCL AU) 16

17 Figure 114: TCL estimate changes Year end June ($mn) New Old Change FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E Hills M % 0.0% 0.0% Lane Cov e Tunnel % 0.0% 0.0% Cross City Tunnel % 0.0% 0.0% M1 Eastern Distributor % -0.5% -0.5% M % 0.0% 0.0% NWRG (M7 + NCX) % 0.0% 0.0% Sydney 1,230 1,308 1,381 1,231 1,308 1, % -0.1% -0.1% CityLink % 0.0% 0.0% Gatew ay Motorw ay % 0.0% -0.5% Logan Motorw ay % 0.0% -0.5% Clem % 0.0% -0.5% Go Betw een Bridge % 0.0% -0.5% Legacy w ay % 0.0% 0.0% AirportLinkM % 0.0% 0.0% Brisbane % 0.0% -0.4% 495 Ex press Lanes % 0.0% 0.0% 95 Ex press Lanes % 0.0% 0.0% USA % 0.0% 0.0% Proportional toll revenue 2,158 2,365 2,558 2,158 2,365 2, % 0.0% -0.1% Total proportional revenue 2,218 2,427 2,621 2,219 2,427 2, % 0.0% -0.1% Statuatory toll revenue 2,087 2,292 2,488 2,088 2,293 2, % 0.0% -0.1% Sy dney 1,009 1,079 1,146 1,010 1,080 1, % -0.1% -0.1% City Link % 0.0% 0.0% Brisbane % -0.5% -0.8% USA % 0.1% 0.1% Proportional EBITDA 1,678 1,868 2,055 1,680 1,870 2, % -0.1% -0.2% Statutory EBITDA 1,580 1,771 1,964 1,583 1,774 1, % -0.2% -0.2% Proportional EBITDA margin 69.1% 71.3% 71.0% 69.2% 71.3% 71.1% -0.1% 0.0% 0.0% Statutory EBITDA margin 68.7% 70.9% 72.1% 69.0% 71.2% 72.4% -0.3% -0.2% -0.2% EBITDA 1,580 1,771 1,964 1,583 1,774 1, % -0.2% -0.2% Net interest paid % -2.9% -8.6% Other % % % Cash flow from operating activities 1,028 1,224 1,414 1,075 1,208 1, % 1.4% 4.1% Transaction & integration costs from acquisitions n.m. n.m. n.m. Pay ments for maintenance of intangible assets % % % CF from consol but non 100% entities % -44.1% -40.7% Maintenance of intangible assets % -82.2% % Distibutions from non 100% own entities: M1 Eastern Distributor % -0.2% -0.2% M5 distribution and TLN interest % -1.1% -1.0% TQ distribution and SLN interest % -61.0% -43.2% NWRG distribution and M7 TLN interest % 10.7% 12.2% Free cash (TCL definition) 1,049 1,236 1,465 1,020 1,138 1, % 8.6% 15.3% Free cash per share % 3.8% 10.2% Growth 7.6% 15.2% 18.5% 107.0% 11.5% 11.6% DPS ($) % 0.9% 4.8% Growth 11.0% 11.9% 15.9% 11.0% 10.9% 11.6% Source: Credit Suisse estimates Transurban (TCL.AX / TCL AU) 17

18 Figure 125: TCL Sum-of-the-parts Valuation Valuation maintain $12.50 TP For Transurban, our target price and fair value estimate of $12.50 per share is based on a SOTP approach with a DCF for each major asset (WACC %). We estimate Transurban's cost of capital at 7.25%. Our 8.3% cost of equity is based on a risk free rate of 5%, a 5% market risk premium and an equity beta of For the US toll road assets we assume a higher WACC at 8% to reflect the higher risk profile for less mature assets that are in a revenue ramp up phase. EV/EBITDA Remaining concession Spare LT pop growth in $mn FY17 EV FY18 EV % of EV FY17 FY27 FY37 Ownership life (years) capacity road corridor Annual toll indexation Hills M2 5,436 5,607 15% % 31 39% 1.4% Max of CPI or 4% Lane Cove Tunnel 1,056 1,074 3% % 31 41% 1.4% Max of CPI or 0% Cross City Tunnel % % 19 56% 2.0% 3% until Dec-17, then CPI M1 Eastern Distributor 1,460 1,487 4% % 31 11% 2.0% Max of CPI or 4% Roam & Tollaust % % M % % 10 32% 2.1% Max of CPI or 0% NWRG (M7 & NCX) 4,821 5,252 13% % 31 56% 2.0% M7 CPI, NCX Max CPI or 4% Sydney 14,156 14,752 38% CityLink 8,739 8,717 23% % 29 44% * 2.0% 4.5% until Dec-17, then CPI Western Distributor 1,345 2,453 4% 100% 100% * 2.0% Melbourne 10,084 11,171 27% Gateway Motorway 2,319 2,376 6% % 35 41% 2.3% Bribane CPI Logan Motorway 1,889 2,021 5% % 35 47% 2.6% Bribane CPI Clem % % 35 72% 2.3% Bribane CPI Go Between Bridge % % 47 75% 2.3% Bribane CPI Legacy way % 48.1* % 48 80% 2.3% Bribane CPI AirportLinkM7 1,409 1,449 4% 26.2* % 36 68% 2.3% Bribane CPI Brisbane 6,847 7,121 18% 495 Express Lanes 2,947 3,107 8% % 71 45% 4.1% Dynamic, uncapped 95 Express Lanes 3,733 4,137 10% % 71 55% 4.1% Dynamic, uncapped USA (Northern Virginia) 6,681 7,244 18% Corp/other % % Proportional EV 37,379 39, % Proportional net debt 11,633 12,725 31% Equity value 25,746 27,172 69% Equity value per share Source: Company data, Credit Suisse estimates Transurban (TCL.AX / TCL AU) 18

19 Figure 136: TCL Income Statement Financial statements Year end June ($mn) FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 Hills M Lane Cove Tunnel Cross City Tunnel M1 Eastern Distributor M M NSW ,102 1,241 1,321 1,403 1,490 1,569 CityLink ,057 1,132 1,216 1,274 Gateway Motorway Logan Motorway Clem Go Between Bridge Legacy Way AirportLink M Brisbane Express Lanes Express Lanes US Assets Proportional toll revenue 1,117 1,656 1,946 2,158 2,365 2,558 2,830 3,060 3,400 3,636 3,896 4,120 growth 48% 18% 11% 10% 8% 11% 8% 11% 7% 7% 6% Toll, fee and other road revenue 985 1,611 1,870 2,095 2,301 2,498 2,722 2,898 3,224 3,439 3,679 3,888 Construction revenue Other Revenue Statutory Revenue 1,150 1,860 2,210 2,155 2,361 2,558 2,782 2,958 3,284 3,499 3,739 3,948 NSW ,027 1,100 1,173 1,251 1,322 CityLink ,067 1,124 Brisbane US Assets Proportional EBITDA 934 1,017 1,398 1,678 1,868 2,055 2,308 2,520 2,769 2,975 3,201 3,396 EBITDA 768 1,211 1,248 1,580 1,771 1,964 2,179 2,346 2,575 2,759 2,964 3,141 Margin 67% 65% 56% 73% 75% 77% 78% 79% 78% 79% 79% 80% Depreciation & Amortisation Finance income Finance costs Net finance costs Proportional PBT PBT Tax Reported NPAT Minorities Attributable NPAT ,163 1,371 1,597 1,674 Source: Company data, Credit Suisse estimates (for 2017E-2025E) Transurban (TCL.AX / TCL AU) 19

20 Figure 147: TCL Balance Sheet Year end June ($mn) FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 Cash 2,879 1, ,834 1,834 1,834 1,834 1,834 1,834 1,834 1,834 1,834 Trade and other receivables Other Total Current Assets 2,963 1, ,956 1,956 1,956 1,956 1,956 1,956 1,956 1,956 1,956 Investments 1,229 1,339 1,461 1,389 1,312 1,231 1, Property, plant and equipment Deferred tax assets ,097 1,097 1,097 1,097 1,097 1,097 1,097 1,097 1,097 1,097 Intangible assets 10,386 17,320 19,248 18,689 18,066 17,415 16,739 16,052 15,346 14,640 13,935 13,229 Total Non Current Assets 11,905 19,869 22,074 21,935 21,194 20,392 19,487 18,571 17,666 16,798 15,969 15,173 Trade and other payables Borrowings Derivative financial instruments Current tax liabilities Provisions Other liabilities Total Current Liabilities 1,493 1,635 1,605 1,605 1,605 1,605 1,605 1,605 1,605 1,605 1,605 1,605 Non-current Borrowings 6,077 11,471 12,468 13,068 13,133 13,240 13,330 13,408 13,402 13,422 13,470 13,549 Deferred Tax Liabilities Provisions Derivative financial instruments Other liabilities Total Non Current Liabilities 7,413 13,608 14,967 15,567 15,632 15,739 15,829 15,907 15,901 15,921 15,969 16,048 Contributed equity Reserves Retained earnings Non-controlling interest - THT & TIL Non-controlling interests Total Equity Net debt 3,919 10,850 12,039 11,639 11,704 11,811 11,901 11,979 11,973 11,993 12,041 12,120 Net debt/ebitda 5.1x 8.96x 9.6x 7.4x 6.6x 6.x 5.5x 5.1x 4.7x 4.3x 4.1x 3.9x Net Interest cover 2.2x 2.0x 1.7x 2.1x 2.4x 2.6x 2.9x 3.1x 3.4x 3.6x 3.9x 4.1x Average shares (mn) 1, , , , , , , , , , , ,130.7 Source: Company data, Credit Suisse estimates (for 2017E-2025E) Transurban (TCL.AX / TCL AU) 20

21 Figure 158: TCL Cash flow statement Year end June ($mn) FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 EBITDA 768 1,211 1,248 1,580 1,771 1,964 2,179 2,346 2,575 2,759 2,964 3,141 Working Capital / Other Non-Cash Items Payments for Maintenance of Intangible Assets Interest Received/(Paid) Other revenue Tax Paid Transaction and integration costs related to acquisitions Operating cashflows ,028 1,224 1,414 1,624 1,787 2,012 2,197 2,401 2,457 Payments for Investments Payments for Intangible Assets Payments for Property, Plant and Equipment Distributions received from equity accounted investments Acquisition of subsidiaries, net of cash 0-6,397-1, Other Investing cashflows ,692-2, Equity issued 2,696 1,342 1,362 1, Net borrowings 735 4, Distributions (gross) ,063-1,250-1,514-1,784-1,995-2,135-2,347-2,577-2,665 Other financing cashflows (inc Debt / equity raising costs) Financing cashflows 3,004 4,727 1, ,381-1,603-1,893-2,116-2,342-2,527-2,730-2,787 Net decrease/increase in cash held 2,622-1, EBITDA 768 1,211 1,248 1,580 1,771 1,964 2,179 2,346 2,575 2,759 2,964 3,141 Net interest Other Cash flow from operating activities ,028 1,224 1,414 1,624 1,787 2,012 2,197 2,401 2,457 2,571 Transaction & integration costs from acquisitions Payments for maintenance of intangible assets CF from consol but non 100% entities Maintenance of intangible assets Distibutions from non 100% own entities: M1 Eastern Distributor M5 distribution and TLN interest TQ distribution and SLN interest NWRG distribution and M7 TLN interest Free cash flow ,049 1,236 1,465 1,734 1,939 2,098 2,308 2,535 2,614 2,843 FCFps Source: Company data, Credit Suisse estimates (for 2017E-2025E) Transurban (TCL.AX / TCL AU) 21

22 Figure 169: TCL key stock drivers Transurban (TCL.AX / TCL AU) 22

23 Reference Appendix Our new Total return forecast in perspective chart helps visualize Credit Suisse and consensus views of a company s 12-month return within the context of forecasting risks and its historical trading pattern: 12mth Volatility is calculated as the annualised standard deviation of weekly total return series over the past 12 months. It illustrates variability of stock returns; in other words, risk. The way to think about it is that one would rather take 10% forecast return from a stock that has 20% volatility, than from the stock that has 40% volatility. The shaded area shows the one standard deviation range based on past 12 months volatility. In statistical terms, once you make a number of brave assumptions, there is a 68% probability that the share price will end up inside that range in 12 months time. 52wk Hi-Lo is maximum and minimum daily closing price over the past 52 weeks. It is often handy to know the price momentum especially when the stock is trading close to its highs and lows: Is the stock trading close to its peak? Is the momentum against the stock? *Consensus is IBES consensus supplied by Thomson Reuters. IBES is a survey of sell side research analysts, collecting a few dozen data points such as EPS, DPS, Sales, Target Price, ROE and so on. *Mean is the average of target returns, while the shaded area around the mean represents the range of estimates from the lowest to the highest estimate. This aids visualisation of a number of important factors such as: the range of analyst estimates; where Credit Suisse s estimates on this stock sit relative to consensus; and where the share price is relative to consensus mean and consensus range target. Target return is calculated as capital gain plus forecast dividend yield (net) over the next 12 months. For "CS tgt" we have used Credit Suisse s target price and Credit Suisse forecast for 12-month forward dividend, grossed up for franking. For the consensus mean and range, we have used consensus target price and consensus dividend forecasts for 12 month forward. Transurban (TCL.AX / TCL AU) 23