A top 20 publicly listed company in Australia by market capitalisation. This is where Transurban Group (ASX: TCL) stands today. The Melbourne-based company that was founded just two decades ago is now positioned as a key player of Australia’s equity market. The incorporation of Transurban into the ASX20 is a remarkable milestone for the toll and infrastructure company given that no infrastructure company has been a constituent of the index before. Transurban stands next to the most coveted companies in Australia while many of its smaller rivals have either been acquired (by Transurban itself or by other major players) or liquidated. Such success warrants our attention and has prompted us to launch an investigation on factors behind Transurban’s stellar performance.Transurban’s financial performance is nothing short of incredible. The company has recorded a capital gain of 100% over the past 5 years and has beaten the market index by 160% over the same period (Figure 1). The company dominates in the industry with 67% of market share and is actively expanding to further cement its foothold in the industry (Figure 2). It has just recently acquired Queensland Motorways in 2014 and is widening its international reach by venturing to the highly lucrative American freeway industry. Domestically, Transurban has numerous projects in its pipeline and notable among them are the construction of Western Distributor in Melbourne and NorthConnex in Sydney.
Figure 1
Data source: http://www.asx.com.au/
Figure 2
Data source: http://www.ibisworld.com.au/
Transurban has reaped billions from Australian motorists and is constantly posting record-breaking profits. Such profit, apparently is not worthy of the Australian Taxation Office’s (ATO) attention given that TCL paid only a meagre amount of tax on its billion dollars of profit. Compounding that ability to evade tax with its monopoly on the industry and you will get a highly successful toll-operating company such as Transurban. Ultimately, all growth in earnings can be traced to two fundamentals – how much the firm is investing in new projects, and what returns these projects are expected to generate for the firm. The key drivers behind Transurban’s success as the largest player in the Australian toll industry can be attributed to its full proof business model and lucrative operating and economic environment. The company generates the majority of its earnings through toll revenues. With the constant rise in the number of road users in Australia and the strategic locations of Transurban toll stations on many major highways, the company’s vast span of operations continue to grow making consumer demand for its toll services to be relatively inelastic. This suggests that Transurban have significant pricing power, inflation protected revenues, and are largely immune from the economic fluctuations of the business cycle. According to the Australian department of infrastructure, they expect to see significant growth in total investment on transport infrastructure in Australia. The high expected future growth in the Australian property market is an important conduit that would increase linkages and road traffic within Australia, pathing the way for positive growth in future earnings.
Transurban’s rise to monopolistic power began a mere two decades ago. In 1996, the company was formed after the Victorian CityLink contract was awarded to Australia’s Transfield Services and Japan’s Obayashi Corporation. It was an innovative and massive project – about eight times larger than the previous largest road project in Melbourne. Construction was completed in 2000 and tolling commenced the same year.
Fast-forward seven years, and Transurban has been given the all-clear by the Australian Competition and Consumer Commission (ACCC) to take over main rival Sydney Roads Group (SRG). The friendly takeover was supported by SRG, who cited as advantages an improved balance of concessions by remaining life and by level of risk, and savings through pooling of expertise, administrative overheads and joint management.
Graeme Samuel, the chairman of ACCC in 2007, advised that an extensive review and inquiries of interested parties had supported the conclusion that the $1.26 billion acquisition was ‘unlikely to substantially lessen competition’ under terms of Australian monopoly law. Samuel explains that ‘Transurban’s increased control over roaming fees will be in NSW where the materiality of roaming fees is mitigated by the presence of competing tags issuers with a significant tag issuing base’. This means that motorists have the ability to choose another tag provider if Transurban administration fees were to rise.
Transurban has since acquired several more interests in motorways and associated companies in Sydney and Brisbane. Its portfolio now boasts of 13 Australian roads, with significant shares in two express lanes in Virginia, U.S.A. In addition to the benefits mentioned earlier, a larger company has the opportunity to modernize and integrate toll systems, the possibility of coordinated variable toll strategies in consultation with the Australian government and access to lower cost capital for improvements and to participate in new projects.
References:
Tollroadsnews.com. (2007). Monopoly regulators clear big Australia tollroad takeover by Transurban. Retrieved 14 April, 2016, from http://tollroadsnews.com/news/monopoly-regulators-clear-big-australia-tollroad-takeover-by-transurban
News.com.au. (2007). $13bn Transurban bid gets nod. Retrieved 14 April, 2016, from http://www.news.com.au/national/bn-transurban-bid-gets-nod/story-e6frfkp9-1111113121430
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