The Transurban Group (ASX: TCL) share price has gone through much volatility over the last two and a half years.
Despite inflation and interest rates roiling the market, Transurban shares are actually up in 2022. At the time of writing, since the beginning of 2022, the company's share price has risen by 3.55%.
There may be a couple of key reasons for the improvement in investor sentiment about the toll road operator.
Let's look at each of them briefly.
COVID-19 recovery
When COVID-19 hit, the amount of traffic on Transurban's toll roads took a huge hit. People were working and learning at home. During the first week of April 2020, the average daily traffic was down more than 50% year on year.
But since then, there has been a progressive traffic recovery, partly as government restrictions eased. In a recent Macquarie conference in May 2022, it was revealed traffic volumes in Sydney, Melbourne and Brisbane were up in the second week of Easter compared to the same period in 2019. By comparison, North American traffic was down, but only by a relatively small amount.
Transurban said that workday traffic trends across the Australian markets showed a return to CBDs. The business also said that private road transport usage has recovered closer to pre-COVID levels compared to public transport modes.
The toll road business believes that a permanent and total shift away from the workplace is "unlikely". It listed a few reasons such as a survey of employees showing 87% of respondents expected to do most of their work back in the workplace and increased collaboration in workplaces.
Finally, Transurban noted a continuing preference for private transport over public transport.
Transurban is expecting near and long-term traffic growth.
Inflation
Transurban says that the "inflation benefit" can provide "near-term interest rate protection".
The business has inflation-linked toll price increases. In other words, as inflation increases, so will the price of tolls. With inflation rising in the Australian economy, this can boost Transurban's revenue, as long as drivers continue to use Transurban roads.
Is the Transurban share price a buy?
It's an interesting investment question because of what's going on in the wider economy.
Transurban itself points out that freight is pivotal to the Australian economy, with four billion tonnes of goods carried across Australia each year. There was 3.2% growth in road freight movement across Australia in 2021. Large vehicle traffic is up 7.5% compared to pre-COVID levels. This could be helpful for the Transurban share price over time.
Another factor that Transurban prides itself on is delivering distribution growth. It thinks this can continue with the inflation-linked toll escalations, anticipated traffic growth, and balance sheet capacity to pursue growth opportunities.
It is currently working on seven projects. In the near term, the pipeline is focused on 'enhancement' opportunities.
One of the biggest projects is the West Gate Tunnel Project (WGTP) in Melbourne which aims to create a "vital alternative" to the West Gate Bridge. WGTP will deliver around 70km of new traffic lanes, as well as more than 14km of new and upgraded walking and cycling paths. This is set to open in 2025 and is specifically designed to move heavy vehicle traffic away from local roads.
Macquarie analysts think Transurban is a buy, with a price target of $14.97, implying a possible rise of around 5%. While recognising interest rate and bond changes would typically hurt asset investment plays, the broker noted that Transurban does benefit from inflation. One advantage is that the company's revenue can rise faster than interest rate rises. In fact, Transurban noted that a 1% increase in CPI is likely to increase revenue more than the impact of a 1% increase in interest rates in the near term.
Macquarie thinks the Transurban share price is valued at 23 times FY23's estimated earnings with a forecast FY23 distribution yield of 4.4%.
