Toll road stocks are continuing to recover from COVID, so why are they still below pre-pandemic peaks?

Nick Sundich Nick Sundich, April 19, 2023

Toll road stocks, at least on the ASX, still aren’t back to their pre-COVID levels – albeit very close.

The only two ASX toll road stocks – Transurban (ASX:TCL) and Atlas Arteria (ASX:ALX) both updated their shareholders this week and both are close to pre-COVID levels. But is a smooth completion of the recovery a fait accompli?

 

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Toll road stocks are monopolies – but not smooth-sailing ones

In theory, toll road stocks should be a great investment. After all toll roads are long-dated monopoly assets and drivers have little choice but to stomach toll increases or undertake a longer journey. However, is no guarantee of success. After all, the owners of the Cross City and Lane Cove Tunnels in Sydney went into receivership.

Also keep in mind that toll road stocks only own the right to collect tolls for a finite period. And finally, the pandemic sent traffic levels (and with it toll revenues) plunging.

 

Are we almost back to normal?

Turning our attention to the ASX’s toll road stocks – Transurban is 9% below its pre-COVID peak and Atlas Arteria is 17% below. Both companies have released updates to their shareholders this week.

Atlas Arteria – which owns toll roads in North America and Europe – saw traffic up 4.1% in 12 months and revenues up 7.6%. And all its roads saw higher revenues against pre-COVID levels even though one road saw traffic numbers just below pre-COVID levels.

Turning to TransUrban – which has toll roads in Sydney,  Melbourne, Brisbane and the Greater Washington Area in the USA – and it too saw traffic numbers continuing to grow. Traffic levels across the group were up 12% from 12 months ago and were up from pre-COVID levels, including the new M4-M8 Link that opened on January 20. So why aren’t the share price of toll road stocks above pre-COVID levels?

 

Shares have still not fully recovered

In respect of Transurban, we suspect there are concerns that its solid position in NSW might be under threat. With a new state government, there is no guarantee that it’ll get concessions to operate new roads in the future, with Chris Minns promising not to sell off future motorways, looking to refund certain high-spenders on tolls and launching a review of Sydney’s road network. Granted it may be able to find road contracts in other states, but it’ll take time for other markets to make up for what Sydney does now.

As for Atlas, it warned that construction works on some of its roads might impact traffic numbers, which explains some of the relative share price weakness.

 

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