Since listing in March 1996 the company's share price has steadily appreciated, with some hiccups.
Price movement
Since listing in March 1996 the company's share price has steadily appreciated, with some hiccups. The stock recently dropped back from its $4.90 record high in June. It came close to this in early 2001, but traded down several times to $3.65.
Profile
Transurban is a specialist company focusing on the development and management of toll roads. It has developed technological solutions to make electronic toll roads a reality, by electronically tagging vehicles and monitoring systems.
Transurban led the world in the development and operation of electronic tolling on CityLink, a 22-kilometre urban motorway in Melbourne. It will receive the revenue from CityLink for 34 years. It also owns 40 per cent of the Western Sydney Orbital road project, which is in a growth region in Sydney, but the road will not be operational until 2007. Transurban is also an equity partner in a consortium bidding for the $2 billion Mitcham Frankston Motorway in Victoria, due for completion in 2008.
Current details
Despite early tunnel flooding problems with the Melbourne CityLink, traffic (up 6.8 per cent for the 2002-03 financial year) and toll revenues (up 12.1 per cent) continue to improve. Huge capital investment is required to equip tollways before any income is received. Depreciation allowances help the economic viability of the project, especially in the start-up years. This tax allowance enables the company to pay dividends while net profits are low.
The anticipated dividend for this year is about 20 cents per share - a 4.5 per cent yield - rising to 24c per share next year - a 5.2 per cent yield. With just the one major asset the company is considered high-risk, but as new projects are completed this will diminish. It is also looking for opportunities overseas that have low-risk, low-capital requirements.
Sector
Investors typically value the potential income streams from infrastructure companies such as Transurban similarly to long-term bonds. As such, their share prices are sensitive to changes in interest rates. Transurban's share price will perform well in a low and stable interest rate climate.
Hills Motorway can be compared with Transurban, having one major asset in a major city. Hills Motorway runs the M2 in Sydney. It is currently trading on a 3.8 per cent yield.
Worth buying?
Transurban is a long-term growth asset. As its road projects are completed the cash-flow commences, providing stable inflation-adjusted returns to investors. However, its price could weaken if interest rates rise. Transurban is suited to long-term investors with a five-year investment horizon seeking portfolio diversification.
My recommendation: Buy.
Geoffrey Hill is the presenter of ABC NewsRadio's daily afternoon finance report and is an independent private client adviser. Visit him online at www.ghill.com.au
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