RBA has cut interest rate to a record low. Decline in interest rates is positive for long duration income generating assets as it reduces the discount rate used in calculating the present value of future cash flow. Transurban (TCL ASX) share price performance over the last 3 years reflect the permeation of the lower for longer interest rate environment.
The consensus market view through low forward bond yield curve is that the low rates are here to stay. Our view is that investors today should question the consensus and be more cautious in chasing dividend yield stocks.
Transurban is a infrastructure play where it owns a portfolio of toll roads across Australia and single asset in US (Northern Virginia). Total equity market cap is around $26 billion. TCL total debt amounts to just over $12 billion result in $36 billion enterprise value.
Toll roads can be attractive given the stability on earnings and annual CPI linked increases. However there is a difference in risk profiles between developing new toll roads and owning stabilized assets. If new developments does not meet the traffic forecast in the feasibility study. The value of asset could be worth less than the amount of money spent.
41% of the portfolio revenue is derived from Sydney, 35% from Melbourne, 15% in Brisbane and remaining 9% from US.
The Australian assets are near stabilization which means that growth in year on year revenue are in single digits as function of toll increases and traffic growth while future increase in earnings will be primarily driven by the the Northern Virginia asset.
Debt plays an important role in the capital structure for TCL to deliver reasonable equity rate of return for investors. Group gearing is at 36% a decline of 4% from prior year.
The company’s Australian dollar debts are structured as $4 billion corporate debt and additional $4.5 billion non recourse debt against the assets.
Its US currency debt is structured as $1 billion corporate and $1.5 billion non recourse asset with interest capitalized as the assets ramp up.
Total debt maturity across the group is at 9.1 years with cost of debt at 5.5% in AUD and 4.3% in USD.
The group has benefited from decline in interest rates which it passes through directly to shareholders. Since 2009 it has increased distribution at more than 10% compounded rate. The management guides FY17 distribution at 45.5 cps.