Transurban (ASX:TCL): Is it at risk of losing its valuable monopolies?

Transurban (ASX:TCL) is a unique stock on the ASX. No other stock has such long-term monopolies as Transurban does on its toll roads. Nor is any other stock arguably as hated as much as Transurban, given the constant toll increases. Of course, if you’re a monopolist it doesn’t matter if you’re liked as long as you’re making money.

 

 

However, there have been concerns toll road reform in NSW may actually be happen. Could this be a threat to the company’s results and cause a Corona Crash-like panic? Fears of a worst-case scenario have been abated by now, but even if there probably won’t be any existential threats – some changes could eat into the company’s profitability.

 

Who is Transurban?

Transurban is a toll road operator with interests in 22 roads. These include nearly every one of the 13 tolls roads in Sydney except the Harbour Bridge and Tunnel. It owns Melbourne’s CityLink and West Gate Tunnel, half a dozen roads in Brisbane including the AirportlinkM7, as well as half a dozen in the USA (most of which are in the Greater Washington area). In many instances, Transurban has monopoly concessions lasting several decades.

In FY24, it made $2.8bn in toll revenue and $4.16bn in total revenue. With $2.05bn operating expenses, it has a near 50% profit margin. However, its final margin is a lot lower with a profit of just $92m given over $1.1bn in depreciation and amortisation, $645m in net finance costs and $327m share in loss of equity accounted investments.

There are clear tailwinds showing the need for more roads, including population and employment growth in all of its markets. Even if no more concessions were granted, this means more cars on existing roads. Or so it will be in theory.

 

Will the future really be rosy?

There has been growing resentment over the high toll levels, especially in Sydney. For so long, little was done about it, but now it looks like action is being taken. The Minns Labor government commenced a $60 weekly cap on tolls from January 2024, with claims beginning from April 2024.

And a recently released independent review led by former ACCC chair Allan Fels and David Cousins revealed Sydney motorists would pay $195bn in tolls up to 2060 (a significant proportion of which would be for WestConnex that would be paid for ‘three times over’) and made recommendations to reduce the burden. In particular, the report recommended the government take control of tolls and set prices for itself.

At the end of last year, in response to this review, the Minns government established a new state-owned toll agency (NSW Motorways) to own and operate all the state’s toll roads that are not privately held. It will also come with an independent customer ombudsman to deal with disputes and complaints.

Transurban is not worried enough to publicly panic – and believe us, companies do publicly panic when there’s a legitimate threat to their business model.

‘Transurban remains committed to working collaboratively with the NSW government and its investment partners in Sydney’s motorways on reforms to improve outcomes for motorists while protecting the value of the significant investment made in the state’, the company said through its PR department.

“Transurban and its investment partners have invested $36 billion in the state’s motorways over two decades which have provided significant value to Sydney’s motorists, including faster travel times and safer, more sustainable trips’.

‘As part of the announcement the NSW government reiterated the legislation does not override the existing contracts in place. The government also continues to express its preference for a negotiated outcome with the industry for toll reform through the direct deal process.’

No doubt if the government takes action that does not ‘protect the value of the significant investments made [by Transurban], we’ll hear the company cry out.

 

What about other jurisdictions?

As important as Sydney is, it is not the only jurisdiction in which it holds roads. The company owns assets in North America and wants to buy more. It tried to buy Denver’s $1.3bn Northwest Parkway but ultimately pulled out. It may well spend this money on other assets. It had been rumoured that it would try and buy Melbourne’s EastLink completely (it only has 55% right now), although it appears to be dead in the water after the ACCC publicly said it didn’t want TCL owning it.

And although recent results weren’t that bad, investors appeared disappointed at the lack of an increase to its full year guidance and it failed to raise its dividend as expected.

Investors don’t seem to be too concerned. They have sent shares up 15% in the last year. In 1H25, it saw 2.5m Average Daily trips. TCL reiterated its distribution guidance of 65cps for the entire year. Its toll revenue increased from $1.48bn to $1.54bn, although total revenue fell from $2.13bn to $1.83bn due to the fall in construction revenue. It made a $15m statutory loss.

The company had been talked about as a takeover target due to the lull in its share price. The gain in 2025 has put these talks to bed for now. But its market cap still remains below the value of its $60bn portfolio.  Nonetheless, it is at over 100x P/E for FY25 and FY26 (accounting for consensus estimates) and its PEG is over 15x. And analysts’ mean target price of $13.72, below the $14.50 it currently trades at.

 

Conclusion

Transurban is a company all people, investors or not, will be watching with interest in the months ahead. It may appear an attractive investment due its monopolies and the fact that the NSW government appears content for now. Plus there is demand for roads and there will be a need for private financing.

But all this being said, there’s no guarantee that the road builder or operator will be Transurban, and you could argue it needs to diversify its revenue.

 

What are the Best ASX Stocks to invest in right now?

Check our buy/sell tips