The full year results from Transurban Group (ASX: TCL) can best be described as a peace offering to wary investors eyeing the rising headwinds against our only listed toll-road operator even as it delivered double-digit earnings increases for the year.
The share price of Transurban barely budged this morning while the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index dipped 0.1% into the red.
The company reported a 10.2% jump in proportional earnings before interest, tax, depreciation and amortisation (EBITDA) to $1.8 billion on the back of an 8.7% uplift in revenue to $2.3 billion for the year ended June 30, 2018.
There aren’t many companies that can produce an EBITDA margin that’s closing in on 80% but the good news may be marred by the rise in bond yields and worries of new regulatory restrictions on the business.
It’s a fine balancing act for management who has to deliver good results to shareholders but not such good results that it reinforces perceptions that it’s grown too big for its boots.
Transurban is dealing with the worry about bond yields by announcing that its FY19 distribution would be lifted by 5.4% to 59 cents a share and this increase will happen regardless of the outcome of its WestConnex bid.
Rising bond yields reduces the attractiveness of infrastructure stocks, including Sydney Airport Holdings Pty Ltd (ASX: SYD) and Spark Infrastructure Group (ASX: SKI), unless they can show investors that they are keeping ahead of the curve by growing earnings and distributions.
Meanwhile, the competition watchdog has yet to give its blessing on the deal amid debate that Transurban has been ripping off customers with unfair fees.
To address this criticism, Transurban has developed an app called “Linkt” to fix its image. There’s really an app for everything! Linkt promises to lower fees and provide more convenience to toll road users in Sydney, Melbourne and Brisbane.
The decision by the competition regulator will only be made next month and this is probably why investors are sitting on their hands even with today’s respectable profit results.
I wonder if Transurban will face a lawsuit if the allegations of overcharging were proven to be true and what the potential cost of remediation would be.
Toll roads are a lucrative business. Its tollways in Sydney saw an 8.3% increase in revenue to $944 million while Melbourne jumped 13.4% to $780 million. These cities account for around 75% of group revenue and Melbourne is set to become a bigger contributor thanks to the development of the West Gate Tunnel project.
It’s a good thing for shareholders that Transurban is looking offshore too as that will help alleviate some of the regulatory risks. The company has reached financial close on the A25 motorway in Montreal, Canada.
The A25 is the second North American asset for Transurban and its US tollway is also delivering good growth with a 7.1% increase in revenue to $233 million.
Brisbane delivered the weakest growth at 2.1% to $393 million. Transurban is facing a government enquiry in that state.
“In Brisbane, we have made significant improvements for our customers. For instance, we have introduced two new apps, launched a new website and have made it simpler for customers to avoid fees,” said Transurban’s chief executive Scott Charlton.
“We have also worked with our government partners to change legislation which now bundles customer Notices of Demand and reduces administration fees.”
I wouldn’t be rushing to buy the stock on the back of the profit announcement and dividend increase. I think there are better opportunities out there.
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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Sydney Airport Holdings Limited and Transurban Group. 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 Scott Phillips.
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