Transurban (ASX:TCL): Its Sydney monopolies are safe (for now), but its branching out into other markets too

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 reform be a threat to the company’s results and cause a Corona Crash-like panic? Fears of a worst-case scenario happening any time soon. But it does remain to be seen what impact the deal done with the NSW government will have.

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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. For those wondering, the tolls were in place there to pay off the debt the government borrowed to built it, but once it was paid off, it was kept in place just as a revenue-raising exercise.

Transurban 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.

Beyond operating the roads and collecting revenues, it does other things too including operating an app that not only helps people manage their account but it also has a travel time savings feature, and the company has partnered with breakfast radio networks to give peak-hour motorists real time traffic reports.

In FY25, it made $3bn in toll revenue and $3.7bn in total revenue. With $1.7bn operating expenses, it has a near 50% profit margin. However, its final margin is a lot lower with a profit of just $178m given it records over $bn in depreciation and amortisation annually along with hundreds of millions in net finance costs ($735m in FY25).

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 temporarily $60 weekly cap on tolls from January 2024, with claims beginning from April 2024.

Depending on how you look at it, it is either a lot of money or not much money – in our view, that would depend on whether or not you were an investor in the company or a road user.

A few days ago, the headlines read that NSW Toll Reform had been struck. The weekly cap is permanent, and Transurban has agreed to remove administration fees as part of an overhaul of the enforcement process and pay the government for induced demand resulting from the extension of the cap.

Transurban went out of its way to highlight that it put a lot of money in the road network it wanted to protect – pointing out its total investment was $36n.

CEO Michelle Jablko declared,’ This outcome is a step towards delivery of a fairer and simpler system for NSW, that benefits motorists across Sydney, while continuing to protect the value of the investment Transurban and its Partners have made in the city’s roads over nearly two decades.

An ideal scenario?

But things could have ended up worse. The NSW government commissioned a report from former ACCC chair Allan Fels and David Cousins which was released in 2024. It anticipated 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.

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 did not give the impression of panicking but if you read between the lines, it was clear it would not accept anything that would see it with less money.

‘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.’

Ultimately, it seems that the company is happy with the current arrangements. But will the road users who vote? Only time will tell there.

What about other jurisdictions?

As important as Sydney is, it is not the only jurisdiction in which Transurban holds roads, and the company is seeing faster traffic growth in other jurisdictions. In Sydney, Average Daily Traffic in Q1 of FY26 only rose 1.7%, but there was a 3.2% rise in Melbourne, 2.6% in Brisbane and 6.8% in North America. Melbourne was strong due to an uplift in Western Link traffic, and the soon-to-be-opened West Gate Tunnel will also help its cause. Growth in Brisbane will be helped by upgrades to the roads it has at Logan West and on the Gatewa Motorway.

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. Indeed, the company told investors at its AGM it was part of a consortium exploring new projects in Atlanta and Nashville.

It had been rumoured that it would try and buy Melbourne’s EastLink completely (it only has 55% right now), although any rumours were killed off after the ACCC publicly said it didn’t want TCL owning it.

Prospects for growth?

Transurban 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.

The only guidance given is that the FY26 distribution/dividend would be 69cps, which would be Free Cash coverage of 95-105%. Analysts covering the company call for $4.06bn revenue and $2.6bn EBITDA (compared to $3.77bn revenue and $2.03bn EBITDA in FY25). For FY27, they call for $4.11bn revenue and $2.65bn EBITDA.

Yet the mean target price ($14.30) is below the current price ($14.74) and its P/E is 69x whilst its EV/EBITDA is 25x.

For the sake of ESG investors, we observe the company cut its Scope 1 and 2 emissions by 24% and purports to be working to reduce Scope 3 emissions. It has the all important goal of Net Zero…by 2050.

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. The challenges will be to stand out from other providers and ensure drivers get value for money.