After a stellar 2014, Transurban Group (ASX: TCL) is set to continue outperforming the market with its toll revenue growth (proportional toll revenue growth in September was reported at 36.7%) and heavy free cash flow increases (up 29% in the last financial year).
Add to this its ability to secure attractive debt refinancing and U.S. revenues set to ramp up with the opening of the I95 express lane in Northern Virginia, and Transurban could be just what investors are looking for — a safe haven asset with income and capital growth. Now that could be a turn worth taking!
With forecast lower returns on term deposits, subdued economic conditions, falling consumer confidence and murmurs about the future performance of the big banks, investors are struggling to know where to put their hard-earned dollars. Transurban could well be the investment that steers investors through this period of uncertainty. Not only will it benefit from lower rates on its debt and a lower Aussie dollar favouring its U.S. earnings, Transurban is likely to benefit from cheaper petrol prices encouraging the increased usage of motor vehicles.
Transurban is already this country's 'monopoly' toll road operator and has a proven track record as the road infrastructure partner of choice. Governments at the federal and state level and around the world know they need to invest in infrastructure projects to support increases in population and stimulate economic growth.
In this climate of caution, though, investors may not be as easily convinced. Transurban may not pass some of the more traditional fundamental filters given its high price-to-earnings ratio (P/E) of 46 and debt-to-equity ratio of 117%.
However, if we drill down further and look at the price-to-earnings-to-growth ratio (PEG) of 2.22 and interest coverage ratio of 1.58, there's a ray of light at the end of the tunnel. It is common for infrastructure stocks to traditionally trade on high P/E and debt/equity multiples. Take Sydney Airports (ASX: SYD), for example, which trades at a P/E ratio of 50 times and debt/equity ratio of 184%!
What Transurban has that makes it a compelling proposition, aside from its burgeoning cash flows, is its healthy earnings per share growth supporting its equally healthy dividend per share growth. In fact, since the 2009 financial year, its distributions growth has compounded at a rate of 10%, taking the FY2015 distribution to 39 cents a share partially franked. Throw in the ability to opt in to the dividend reinvestment plan and your investment growth can be compounded even further.
The beauty of Transurban is its ability to keep clipping the ticket on a growing portfolio of roads with increasing traffic numbers, which is why even the legendary Warren Buffett likes to own 'toll bridges'. So jump in and come along for a comfortable ride with Transurban in 2015.
