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The Transurban share price jumped 11% last Thursday. Is it a buy?

Transurban shares

The Transurban Group (ASX: TCL) share price soared 11% on Thursday on no market sensitive news. It has retained these gains in today’s trade and is currently up another 2.77% to $12.62 per share.

Does the strong surge in the Transurban share price suggest a buying opportunity? 

COVID-19 trading update 

Transurban’s most recent coronavirus trading update on 1 April highlighted its average daily traffic compared to the prior corresponding period. 

January experienced a 3% increase, February was flat and there was a 14% decrease in March. The average daily traffic progressively worsened in March, with the first week of March increasing 1% while the fourth week declined by 36%. 

The company also noted that Chinese highway congestion levels point towards a progressive recovery. China’s overall level of traffic in major Chinese cities remains below normal, however traffic has increased week-on-week since 10 February. It found that highway traffic has rebounded faster than public transport, implying that social distancing is encouraging more people to commute using their cars. 

Australia has yet to relax its lockdown with Health Minister Greg Hunt warning that it is too early to relax social distancing rules. The continued lockdown in Australia and deteriorating situation in the United States means that the theme of uncertainty will continue in April and beyond. 

Dividend outlook

Transurban withdrew its previous distribution guidance for 2H20 (previously 31 cents per share) due to the uncertainty in trading outlook. Its 2H20 distribution will be dependent on its free cash position. However, looking back at its 1H20 result, cash flows from operating activities totalled $678 million, while its free cash positioned totalled $927 million. It is difficult to gauge how severely current conditions will impact its free cash position moving forward.

The company has traditionally paid its dividend with debt. Its 1H20 result highlighted a total group debt of $20.66 billion that had a weighted average maturity of 8.4 years and an average weighted cost of around 4.3–4.9%. Transurban recently announced that it had successfully reached a financial close on its issuance of 600 million euros of senior secured 10 year notes. 

Foolish takeaway 

It is likely that Transurban’s debt position will continue to balloon. This is a challenging period for the toll road operator, especially when ratings agencies have placed certain regional transport sectors and/or assets on negative watch or negative outlooks since the outbreak of COVID-19.

With less individuals and businesses using toll roads at the moment, Transurban’s earnings outlook faces significant headwinds and uncertainty. Investors should wait for more traffic data and/or confirmation of whether the government will provide any support for the industry. 

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Motley Fool contributor Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended 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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