Transurban still remains one of the best corporate credits in the market with a suite of high-performing toll roads and excellent management team. In essence, this outcome removes financial uncertainty over the cost of the project and removes a distraction for Transurban’s management.
We believe there is good value in the TQLAU 3.25 31s (see chart below), which are yielding in the mid 3%. This news may create an opportunity to access the bonds which are generally hard to find in the market. Transurban’s traffic continues to improve with levels on Sydney and Brisbane roads back to pre-COVID levels, while Melbourne is about 15% below pre-COVID levels.
Transurban will need to inject AUD2bn to finish the West Gate Tunnel. This reflects an additional contract contribution of AUD1.7bn and AUD300m in relation to site and insurance costs. Equity consensus had estimated an additional AUD1bn would need to be invested. The tunnel was initially due for completion by end of 2022 but will now be finished in late 2025.
Transurban will use the existing cash, bank debt, and income from its roads to pay for the completion of the West Gate Tunnel between FY2023 and FY2026. Transurban has AUD1.1bn in cash and AUD2.7bn in available debt facilities.
Importantly, the Victorian Government’s contribution (around AUD2bn as well) must be made in full before Transurban’s contribution commences. If the contracts awarded to construction group CIMIC/John Holland were terminated and new contractors were hired to build the tunnel, it would be a more severe outcome.
Most of the additional cost to build the toll road is in relation to removing and disposing contaminated soil post Victoria’s EPA introducing new policies.
Chart 1. Transurban Traffic Update
Source: Transurban Investor Presentation
S&P and Moody’s do not include any revenue from West Gate Tunnel so there is no impact on operating cash flow. However, Transurban’s traffic continues to improve with levels on Sydney and Brisbane roads back to pre-COVID levels, while Melbourne is about 15% below pre-COVID levels.
Chart 2. Relative Value