The Transurban Group (ASX: TCL) share price has been on a volatile ride since the start of COVID-19. But, after all the pain of 2020, difficulties during 2021 and the valuation plunge in 2022, things are looking up for the toll road operator.
As a reminder, Transurban owns, builds and operates toll roads in Australia and North America.
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Forecast of traffic growth and distribution growth
The toll road business itself said that the forecast trends for employment, migration and GDP support Transurban's traffic growth.
Transurban points out that Australian GDP is forecast to grow at 1.5% over 2023 and 2024. The business also notes that unemployment is at a historical low and the population is forecast to grow by 20% to 2041.
In terms of the distributions, higher payments can be supported by an improvement in the amount of 'free cash' that it generates. The company expects its FY23 distribution to be 53 cents per share, a rise of 30% compared to FY22. A higher distribution could help support the Transurban share price by attracting more investors.
It also notes that its portfolio of urban road assets provides "less exposure to discretionary travel," suggesting Transurban traffic could be more resilient than other roads.
Inflation to be a key boost
Talking at the Sohn investment conference, Wavestone Capital fund manager Catherine Allfrey chose Transurban as her preferred pick, according to reporting by the Australian Financial Review.
For her, inflation is a positive for the business. Allfrey said that Transurban is:
Suited to the times… inflation has become something that was going to be temporary, maybe is persistent, it could be peaking, who knows? But with this stock it doesn't actually matter.
She noted that Transurban's toll fees are linked to CPI [the consumer price index], noting that it will get a $400 million boost to revenue over the next three years from inflation. Higher revenue could be a boost for the Transurban share price.
One of the positive elements of the business for the fund manager was that Transurban continued investing during COVID-19. Allfrey said: "We now stand to reap the benefits."
Allfrey concluded:
You've got close to double-digit revenue growth at the top line, 73% earnings before interest tax, depreciation and amortisation (EBITDA) margins, we believe the market is underestimating the leverage on the bottom line of Transurban.
Transurban view on inflation
The toll road business said that the portfolio is "well positioned in rising inflation and interest rate environment".
Australian CPI is "currently expected to peak at 8% in the near-term" and then "decline to 3.25% by the end of 2024".
Transurban explained that the inflation link benefit resets the revenue base and "continues to compound over time".
The business also said that "balance sheet management provides near-term protection from interest rates".
Transurban share price snapshot
Over the last month, Transurban shares have gone up by more than 12%. Based on the expected distribution payout of 53 cents per security, the projected distribution yield is 3.8%.
