Transurban Group (ASX: TCL) shares have been one of my core holdings since I can remember, and why wouldn’t it? It has gotten so bad that I smile every time my E-tag beeps going to the airport or when I’m driving on the various toll roads this behemoth owns.
However, it’s important to note that Transurban is not a cheap stock, its share price has reached levels that are not particularly attractive to savvy investors.
On the other hand, if you’re like me and have read every Warren Buffett book in existence you know that Transurban has one of the key factors of a great business – an unbelievable moat. And this company not only owns the majority of key roads across the eastern seaboard but is starting to ramp up its American operations. If you dig a bit deeper you would probably find your usual freeway is part of the Transurban family.
This dominance offers the company the opportunity to take on new projects and invest for future growth. When tendering for a new project Transurban can rest assured that whoever wins would have to enter into some sort of an agreement with them to access key parts of their roads. It’s a bit like Telstra Corporation (ASX: TLS) and the early NBN days — but on steroids.
Company Background
As stated above Transurban has a dominant position across the eastern seaboard. It owns and operates 15 toll roads in Melbourne, Sydney, and the greater Washington area. Revenue growth is derived from traffic growth and their very own rivers of gold – inflation protected toll escalation. CityLink in Melbourne is Transurban’s biggest asset, this accounts for approximately 32% of their total toll revenue – working out to be about twice the size of the roads in Brisbane.
Note the development pipeline Transurban currently have includes projects such as widening their Tullamarine freeway (the main avenue to Melbourne’s airport) and the commencement of the North Connex in Sydney.
Another important note is the expected growth in traffic numbers. The immigration bonanza that Australia is currently facing has resulted in more cars on the road and a greater need for unification of our motorways.
Transurban benefit as the cash register clicks (beeps) every time an extra driver comes onto their freeway, this is also added at virtually no cost to the company. Given the popularity of Australia, the projected population growth outlook and the dominance of Transurban’s network the future cashflow (beeps) look very promising.
Tell me the Bad Stuff!
To ensure I’m providing a balanced article and not turning into a Transurban groupie I want to point out that they have over $15 Billion (with a ‘B’) in net debt.
Now that you’ve picked yourself up off the floor you can see that the obvious risk here in interest rates rising in the near future. With the American Federal Reserve seemingly putting an end to low-interest rates (globally) it’s safe to say Transurban will not be basking in their low-interest rate glory for much longer.
Summary
Transurban is one of my favourite stocks on the Australian share market. The fact that I can explain its revenue model in 10 seconds flat goes to show the simplicity of the business and, I believe, the dominant position it will have for many generations to come.
Consider this…
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Disclosure: At the time of publishing, Anthony Villella owns shares of Transurban.
