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Should you offload Transurban?

It will be a long way down the road before investors know whether Transurban (ASX: TCL) will fulfill its expectations of a bright future. Recent news has been mixed and it looks to be getting expensive.

Whichever way you look at it, the toll road owner and operator’s decision to consider bankruptcy for its first United States toll road investment, the Pocahontas Parkway in Virginia, is not good news. The company acquired it from the state government there in 2006 for $638 million, which included $202 million equity. But the failure of a new housing estate to go ahead and generate traffic sealed its fate.

Last June the company wrote down to zero value its 75% in the asset, ownership of which will most likley be transferred to the parties that financed it. Consequently, there is no impact on the current balance sheet and it averted drawn-out finance restructuring talks and the prospect of putting up more cash for a failing business.

Transurban said the issue was “asset specific”, but one of its other two USA assets, the express lanes project near Washington DC that opened last November, is now reporting less traffic than expected.

At home the business is performing well. Transurban owns Melbourne’s CityLink and Sydney’s Hills M2 and Lane Cove Tunnel, the latter for which it announced on Tuesday the refinancing of $260 million in debt due to expire in August. The company reported a 5.6% revenue increase to $196.4 million for the March quarter.

However, despite a respectable dividend yield of 4.4% and an attractive forecast earnings increase from a current 4 cents per share to 37.7 in 2015, the stock has a staggering price to earnings ratio of 174 and a worrying debt to equity ratio of 129%.

But the real difficulty for shareholders and would-be investors is not assessing the current business but understanding Transurban’s future prospects, most notably whether it can pull off its unsolicited joint proposal for a $3 billion tunnel linking Sydney’s M2 Motorway and the F3 freeway, using a new patronage risk-sharing approach said to be “innovative” for infrastructure projects. Less than a third of the project’s finance would come from future toll revenue.

Because Transurban owns all the Lane Cove Tunnel that connects to the M2 and half the Westlink M7 that connects to it, as well as all of the M2 itself, it would expect to do well out of the construction of the city’s so-called “missing link”. After a year the proposal is now in its third and final stages of assessment, but it’s not a dead certainty yet.

If the stock price goes through $7 towards its 52-week high of $7.18 on May 22, you’d have to think most of the upside at this stage is priced in. Pre-GFC Transurban once hit $8.60. If you’d managed to pick it up around its March 2009 low of $3.49, that would be a pretty handsome profit in four years.

Foolish takeaway

Transurban could be heading back into overvalued territory. Investors believing its story of long-term income could look to buy on sizeable market dips, but those sitting on good gains could understandably be taking some profits soon.

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Motley Fool contributor Andrew Ballard owns shares in Transurban. 

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