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Is Transurban’s (ASX:TCL) share price 18% undervalued?

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The Transurban Group (ASX: TCL) share price was down 0.5% at close of trade today.

That’s broadly in line with the wider market moves, which saw the S&P/ASX 200 Index (ASX: XJO) fall 0.3% by the closing bell.

Still, October’s been a good month for Transurban shareholders, with the share price up 6.2% so far this month. Following the massive COVID-19 driven sell-off in March, year-to-date the share price remains down 6.5%. 

So why do I think the Transurban share price is undervalued by at least 18%? We’ll get to that in a tick. But first…

What does Transurban do?

Transurban is one of the world’s largest toll road operators. Atop collecting toll payments from road users, the company also designs and constructs new road projects. Transurban is Australian-owned and operates in Melbourne, Sydney and Brisbane. It also runs toll roads in Montreal, Canada and the wider Washington DC area in the United States.

Transurban first listed on the ASX in 1996.

Why the Transurban share price could go up

Less than 8 months ago, on 20 February, the Transurban share price hit an all-time closing high of $16.26 per share.

That’s just over 14% above today’s price of $13.93 per share. This means if things were simply to ‘return to normal’ the share price could gain 18%.

And traffic counts on the company’s toll roads indicate that the return to normal is already well under way.

At last week’s annual general meeting (AGM), the company revealed that while average daily traffic (ADT) was still down 58.6% on its Melbourne tollways for the September quarter, traffic numbers in Sydney were up 1.5%.

That’s not huge. But it does indicate that once restrictions are lifted, people are prone to return to their cars. And with angst over potential infections on public transport likely to linger in Australia and North America, car travel should see a boost from people turning away from buses and trains.

Then there’s the multi billions of dollars in the recovery budgets that the Australian, US, and Canadian governments have pledged for infrastructure (including roads) projects. This should also offer long term gains for Transurban’s road design and construction branches.

Connecting the dots, I believe Transurban’s share price could be at least 18% higher by this time next year.

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Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of 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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