The Transurban Group (ASX: TCL) share price has experienced a rapid recovery since March. At the time of writing, Transurban shares trade just 13% lower than their February highs. Is now a good time to buy?
TCL share price chart
What does Transurban do?
Transurban is a road operator that develops, manages and maintains toll road networks. It operates 21 toll roads across Sydney, Melbourne, Brisbane and North America.
Investors panicked and hit the sell button on Transurban shares in March as lockdowns threatened to significantly reduce motorist volumes across its road networks.
Although this did actually happen, traffic volumes more or less returned to normal from May onwards as restrictions were gradually removed (with the exception of Melbourne). Transurban’s roads that service airports have been some of the hardest hit as flight volumes have virtually come to a standstill.
Are Transurban shares a COVID-19 recovery play?
The company conducted some independent research into how people will behave when the risk of COVID-19 has diminished. It seems confident that behaviour towards working from home won’t be significant enough to permanently reduce traffic volumes in the long-term.
The company has a great track record of growing its earnings while investing in new infrastructure projects. Management has indicated it has a large pipeline of construction projects, including the West Gate Tunnel project in Melbourne, so it seems logical enough that Transurban should be able to grow its earnings further from here.
Unfortunately, its networks that service airports are at the mercy of COVID-19 and travel restrictions, so you’d have to expect that these will continue to underperform, at least in the short-term.
Transurban’s pricing method
Although no one is forced to use a toll road, motorists who do use tolls don’t have much choice with which toll operator they use. As a result, Transurban could be said to have monopolies across multiple road networks.
The fee structure differs across states, but many toll roads in NSW and Victoria can be increased by either the annual inflation rate or 4% per year (whichever is higher). Fees cannot be reduced by deflation, so there’s a large amount of pricing power compared to other companies, such as energy retailers, that are price takers.
I’m a little bit surprised that there isn’t more regulation into toll prices in Australia. While this is a good thing for Transurban now, it might be something that could be introduced in the future, so it’s definitely something to think about.
Buy/hold/sell?
I’d be a buyer of Transurban shares at these levels. At the expense of the motorist, its pricing model is a money-making machine that is allowed to increase higher than the overall cost of goods and services.
Additionally, there’s probably some more potential upside when international travel comes back in to service those particular road networks.