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Why Warren Buffett would love Transurban Group shares

Toll road operator Transurban Group (ASX: TCL) has hit “a massive six” as they say in cricket by acquiring a new toll road in Brisbane.

The acquisition of Brisbane’s AirportlinkM7, a tunnel road connecting Brisbane airport with the CBD and northern, western and southern suburbs is a quality asset that will likely provide additional growth for the future. The 6.7 kilometre road was opened for traffic in 2012 and is being acquired for a total price of $2 billion.

Transurban has twelve roads in the Australian portfolio. Five of those roads are in Brisbane, and AirportlinkM7 will be the sixth road in Brisbane that is now owned and managed by Transurban. The sixth road will greatly benefit from an already existing network of roads, under Transurban ownership and will help drive efficiencies of scale.

Some of the other benefits that AirportlinkM7 otherwise known as Brisconnections will bring with it include an annual toll escalation based on Brisbane’s consumer price index, a significantly increased earnings profile due to recent upgrades to the roads network and toll price increases.

As Transurban’s Chief executive officer Scott Charlton said:

“We expect to achieve EBITDA margin enhancement through integration with Transurban following this acquisition.

AirportlinkM7 is a quality urban asset with observed traffic history and substantial additional capacity.

The asset is performing well. We have seen the earnings base lift following key developments in recent months including the opening of Legacy Way and the removal of the majority of the toll price discount.’

Owning quality toll road assets is like running a business with not much competition, and is inflation proof as toll prices are adjusted based on the current inflation rate. The toll roads assets are long-term and the revenue stream is highly predictable.

So for the recent quarter ending September 2015, Transurban reported an 18.9% increase in toll revenue compared to the previous comparable period. For the same quarter Brisbane’s toll revenue increased by 9.3%.

Foolish takeaway

Toll roads businesses generate predictable growing streams of revenue for years and years. And moreover roads will likely see more traffic in the future. This is the kind of business that legendary investor Warren Buffett would love to acquire. I would recommend this stock for all Foolish investors’ watch list.

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Motley Fool contributor Qaiser Malik has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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