Is the Transurban share price too expensive?

Transurban boasts some attractive investment characteristics including sky high profit margins. But are the shares too expensive?

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Transurban Group (ASX: TCL) shares are up close to 30% over the past year alone as the yield hunt intensifies on the back of falling Australian cash rates. Based on today's $14.64 share price and guidance for 62 cents per share in distributions over FY 2020 the stock offers an estimated 4.23% yield. This is low compared to historical standards, but still attractive compared to the pathetic returns available on cash savings rates. 

Today it announced it has refinanced $1,650 million worth of syndicated bank debt into two separate tranches of $825 million with terms to maturity of 3 to 5 years respectively.

Transurban reported the refinancing completed on "favourable" terms, although no specific financials or benefits were reported.

The debt is to help finance the group's major Melbourne West Gate Tunnel project, among other expensive construction projects it's undertaking in Victoria, Sydney and the US. 

Should you buy?

Given debt is so cheap today it makes sense to invest for Transurban, although the key risks for investors remain too much leverage or a change in the interest rate cycle. The latter could prove a double whammy for Transurban as the interest on its gross debt rises, while its free cash flows used to pay dividends become less attractive to investors. These scenarios would likely equal a lower valuation and share price. 

Overall though it's a quality business model with the sky high group EBITDA margins of 75.4% usually at levels reserved for sexy software businesses.

The margins are so strong because once a toll road is built it requires little ongoing maintenance or staff support, as it's just a question of sitting back and collecting the toll revenue. 

In fact building toll roads by issuing debt is one of the oldest business models in the world first employed by the Romans who built straight toll roads and tolled bridges to get travellers around.

Some Roman roads are still toll roads today. This is a business model likely to last the test of time then as is reflected by the impressive long-terms for Transurban returns. 

Overall, Transurban has a solid business model on paper, but it's not immune from risks around leverage or equity investors demanding a greater yield in compensation for the balance sheet and operational risks around the business.

I'd probably sit on the fence with a 'hold' rating today. 

Another monopoly-style business unsurprisingly popular with investors is Sydney Airport Ltd (ASX: SYD). It could also be worth some more research. 

Motley Fool contributor Tom Richardson owns shares of Dicker Data Limited.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of and has recommended Dicker Data Limited. 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.

More on Share Market News

Fancy font saying top ten surrounded by gold leaf set against a dark background of glittering stars.
Share Gainers

Here are the top 10 ASX 200 shares today

It was another shaky day for ASX shares this Tuesday.

Read more »

forklift holding boxes next to upward trending arrow signifying share price lift

If you don't own this ASX stalwart stock, you're missing some serious stability

This stock is riding strong tailwinds, I really like its outlook.

Read more »

ETF spelt out on cube blocks with rising arrows.

Are these record-breaking ASX ETFs now too expensive to buy?

Should you ever buy an ETF at an all-time high?

Read more »

Two parents and two children happily eat pizza in their kitchen as a top broker predicts a 46% upside for the Domino's share price
Consumer Staples & Discretionary Shares

Buy Domino's shares for a 50% return and attractive dividend yield

Morgan Stanley believes investors should be grabbing a slice of this stock.

Read more »

Three guys in shirts and ties give the thumbs down.
Share Fallers

Why Coles, Liontown, Lovisa, and Wildcat shares are dropping today

These ASX shares are having a difficult session. But why?

Read more »

A businessman looking at his digital tablet or strategy planning in hotel conference lobby. He is happy at achieving financial goals.
Share Gainers

Why DroneShield, Healius, Newmont, and Paragon Care shares are pushing higher

These ASX shares are having a strong session on Tuesday. But why?

Read more »

a mine worker holds his phone in one hand and a tablet in the other as he stands in front of heavy machinery at a mine site.
Materials Shares

Why are ASX lithium shares like Pilbara Minerals crashing on Tuesday?

Lithium stocks are getting another whack today.

Read more »

two colleagues high five each other as they sit side by side at a long desk in front of their laptop computers in an office environment.
Mergers & Acquisitions

Guess which ASX small cap stock is rocketing 27% on 'transformative' merger

Investors are liking the look of this merger plan.

Read more »