Why the Transurban (ASX:TCL) share price just got upgraded by a leading broker

The Transurban Group (ASX: TCL) share price got upgraded to “buy” following the successful $11.1 billion acquisition of WestConnex. Transurban…

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The Transurban Group (ASX: TCL) share price got upgraded to “buy” following the successful $11.1 billion acquisition of WestConnex.

Transurban is part of the Sydney Transport Partners (STP) consortium to win the bid for the remaining 49% stake in the Sydney tollway that is doesn’t already own.

Transurban share price upgraded to buy

Credit Suisse reckons this is an attractive deal. Thus, it has lifted its recommendation on the Transurban share price to “outperform” from “neutral”.

“The deal gives TCL control of all of Sydney’s toll roads,” said the broker.

“While we are cautious of the exuberance on the potential for attractive unsolicited deals, due to TCL’s challenges in the West Gate Tunnel Project, we think TCL is in a strong position to deliver value from further investment adjacent to its roads, likely without a competitive process.”

Growth by acquisitions

These near-term opportunities include M7 widening and M7/M12 interchange, noted Credit Suisse. Other takeover deals could include the Western Harbour Tunnel and Beaches Link – among others.

“TCL’s disclosures imply ~A$1.8bn EBITDA contribution from WestConnex in FY28,” added the broker.

“We previously forecast A$1.2bn FY28 EBITDA and now raise this to A$1.66bn.”

Dividend dilution from $4.2bn capital raise

But Transurban’s dividend is likely to fall nearer term as it undertakes a big capital raise. The ASX company is selling $4.22 billion new shares. This includes $3.97 billion worth of shares via a 1-for-9 entitlement offer to existing shareholders that’s priced at $13 a new share.

The balance of the new share offer is sold to STP consortium member, Australian Super, at $13.07 a pop. This is in addition to Australian Super taking its full entitlement offer as a shareholder of Transurban.

However, the dilution impact on dividends may be offset by a recovery in traffic flow post COVID lockdowns in FY23.

What is the Transurban share price worth?

Credit Suisse increased its 12-month price target on the Transurban share price by $1.10 to $15.10 a share.

The broker’s bullish view doesn’t account for Transurban takeover appeal. Infrastructure owners are hot property as international bidders are hunting for quality monopolistic assets that can generate a dependable income stream.

The recent corporate interest in the Sydney Airport Holdings Pty Ltd (ASX: SYD) share price and Ausnet Services Ltd (ASX: AST) share price are recent examples.

The WestConnex transaction will only add to the Transurban share price appeal. The tollway connects Sydney’s west with the Sydney CBD, Sydney Airport and Port Botany. Transurban believes that 40% of Sydney’s population will live within 5 kilometres of WestConnex by 2031.

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