Those looking for an excuse to buy the underperforming Transurban Group (ASX: TCL) share price may get their wish.
Morgans believes now is a good time to be buying the toll road operator and has upgraded its shares to "add" from "hold".
The upgrade couldn't come at a better time as the Transurban share price has barely budged this calendar year.
Transurban share price stuck in the slow lane
In contrast, the S&P/ASX 200 Index (Index:^AXJO) has gained more than 10% while other ASX infrastructure shares have zoomed ahead.
For instance, the Sydney Airport (ASX: SYD) share price and Spark Infrastructure Group (ASX: SKI) have surged over 30% each in 2021. It helps that both ASX shares received takeover interest.
Changing gears triggers upgrade
But coming back to the Transurban share price, Morgans believes value can be unlocked by changing the way the market looks at the company's debt.
The broker previously applied a constant 0.7 equity beta to its cost of equity estimate. This was only applied to the DCF valuation of Transurban's assets.
The equity beta reflects the sensitivity of geared cashflows to broader macroeconomic and market conditions. A value greater than 1 implying a higher risk than the market and below 1 as less risky than the market.
Since toll roads are defensive assets, Morgans estimates Transurban's risk is 30% below the broader market.
Valuation increase for the Transurban share price
But when the broker adjusted the beta to account for the differences in NPV gearing across assets or time, Transurban's share price valuation jumped.
"Our change is to adjust the equity beta for an asset's NPV gearing, by assuming a constant asset beta (0.47 based on delevering our estimate of TCL's historical statistical beta) and relevering this based on the NPV gearing of each road concession," explained Morgans.
"Hence, this captures differences in the cost of equity due to gearing.
"For instance, we estimate debt vs NPV for Transurban Qld at 38% and thus 7.6% pa cost of equity (assuming 3% pa risk free rate and 6% pa market risk premium). The Hills M2 has 13% NPV gearing and we apply a 6.3% pa cost of equity."
What is the Transurban share price worth?
Previously, the broker applied a consistent 7.2% per annum cost of equity to both assets.
The adjustments led Morgan's to increase its price target on the Transurban share price to $14.82. This compares to its previous target of $13.99 a share.
