AVOID Transurban (TCL)

The Intelligent Investor Graham Witcomb

Transurban's ex-boss, Scott Charlton, left a big legacy. During his 11-year term, the toll road operator's debt pile grew from $6.5 billion to more than $24 billion, yet a series of dilutive capital raisings to pay for overpriced acquisitions meant the share count doubled over that time, too.

The damage done by Charlton will take years to undo. The new chief executive, Michelle Jablko, who started in October, has her work cut out, but Transurban has announced a decent start to the financial year.

The company achieved good traffic growth on most of its roads, with an average of

2.5 million trips per day for the six months to December, up 2.1%.

Higher toll prices increased proportional revenue by 6.3%, while a modest 1.7% increase in operating costs led to a 7.5% lift in proportional operating profits to $1.3 billion.

The average interest rate on its debt sits at a reasonable 4.3% due to extensive hedging contracts placed during the pandemic. As these are renewed, borrowing costs will creep up. Between its cash and bank facility headroom, Transurban has about $3.4 billion of available funds, which Jablko says is plenty to cover ‘potential projects and opportunities'.

Talk of more acquisitions is worrying, but at least the market is favourable. Acquiring toll roads at lower prices should increase returns on capital over the long term.

While returns on capital are likely to rise, today's dividend – no higher than it was five years ago, staggering debt levels and slowing growth outlook mean the stock has little appeal. AVOID.