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Friday, 15 December 2017
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Transurban Capital Raising

Transurban (TCL) – TCL has been raising $1.9 billion with a pro writer accelerated renounceable 3 for 37 entitlement offer. They have completed the institutional element which raised $1.35 billion. 94% of institutional entitlements were taken up. It was a bit of a no-brainer really with the offer price at 1140c compared to the share price which is now at 1274c up 4.4% today. The 6% that wasn’t taken up by institutions was sold on at 1250c which is noticeably above the offer price of 1240c. In other words it saw solid demand, which is hardly surprising, handing out stock at a discount in an easily valued company like this is like handing out cash. The more amazing thing is that with a theoretical ex-rights price of 1196c the share price has jumped to 1274c, which is a clear statement that institutions like the deal and despite having to raise $1.9 billion have not flipped it straight back out into the market. The reasons for that would include the fact that this is a highly illiquid stock so institutions new that they wouldn’t be able to flip large lines of new stock very easily. On top of that, if they did flip it they would effectively lower there waiting in the stock relative to the index which some may consider undesirable.

The money of course is being raised to deliver the West Gate Tunnel Project which will cost around $4 billion with much of that money going to CIMIC (CIM) who will build the project rather than own it. Retail investors will be able to take up their entitlement to the offer before 5 PM on 24th of January. The new shares will not be entitled to the interim dividend and will trade on a separate ticket called TCLNB until 28 December. You will also be able to sell your entitlements take up shares at 1140c (the rights) - the rights have started trading today and finish on the 17th of January. Here is the timetable.

The obvious question is whether you take up the shares at 1140c. The very obvious answer with the share price now at 1273c is YES. It is a no-brainer at this discount although any broker will tell you that you generally wait until the last minute (okay, the last few days) before accepting, just in case there is some sort of stock market crash. The retail offer closes at 5 PM on January 24 so you have time and can accept closer to the date rather than rushing it now. You never know what will happen to the market in the intervening month.

The other question is whether Transurban is a buy or a sell.

The deal has obviously been well received and as you can see from the chart below, for a dull infrastructure stock the company is making steady long-term share price progress, and this deal has been described as proving that management does have growth options outside of collecting toll fees.

Here is a short-term one-year chart – the stock had dropped 5.1% ahead of the well-flagged capital raising but as of this morning it is recovered almost all of that. So no bargain price available today.

It is not the most volatile stock and not a great trading stock but it is a quality stock and as such would make it into a “Moron portfolio” of the better large stocks. If it is growth you’re after then this is “low growth”. Its main drivers will be interest rates (has a lot of debt) and traffic numbers. But as you can see from the stock box it is low ROE, steady 7% revenue growth. You can ignore the earnings numbers because they are manipulated by depreciation which is why the stock appears to be on a PE of 65x and have earnings growth of 58%... It’s a tax thing, making sure they use depreciation of a large expensive asset to minimise profit and therefore tax. The yield is unremarkable and has only 9% franking. Dividend growth is around 10%. In the end it’s not an income stock and is not a growth stock, it’s a low-risk slow growth stock.

Shorting - There is only about 1.5% of the stock shorted, which is nothing. It’s not the sort of stock that shorters would bother with.

Brokers like it – Most are upbeat on the West Gate Tunnel contract with many pricing in a 12% return for the project. High toll growth combined with a low CPI and wage growth environment is looking very attractive for the brokers. It’s an easy stock to value so target prices don’t tend to vary far from the current share price.

Peers - here is a list of stocks in the same sort of space. TCL is the biggest.

This is the top 20. Not a lot of movement here. Noticeably it is held by a lot of international funds. International investors love big predictable stocks and there are a lot of international infrastructure funds that would have TCL at the top of the list of potential Australian investments.

Henry’s comment: The Conservative side of Victorian politics (do we have one?) is nitpicking over building another much-needed road connection under the Yarra. How much of this is a genuine concern and how much is revenge for what Labor did on the East-West freeway last election?? This road…and a few others… are desperately needed and TCL is best placed to run it. TCL has launched a rights issue and is raising more money than it needs for the Melbourne road. The story is that they are filling the coffers for a tilt at the upcoming Sydney tollway auctions. Victoria’s State election is in November next year, so there is no doubt this irresponsible Opposition of so-called Conservatives will try to make the road funding an issue. Very disappointing. I hope they see commonsense. But the key thing for us as investors is that TCL is targeting strong growth. This isn’t the yield play many call it. The company is a growth enterprise on a yield multiple, occupying centre stage in a vital piece of the East Coast’s infrastructure. With some foreign action thrown in. It’s a BUY.

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