company valuation report
TRANSCRIPT
1 | P a g e
2011
Company Valuation Report
2 | P a g e
Table of Contents
1. EXECUTIVE SUMMARY ........................................................................................................ 5
2. INTRODUCTION TO TRANSURBAN GROUP ................................................................... 9
2.1 Overview ................................................................................................................................ 9
2.2 History .................................................................................................................................. 10
2.3 Share Price Performance ...................................................................................................... 12
2.4 Products and Services ........................................................................................................... 14
2.5 Toll Roads ............................................................................................................................ 15
2.5.1 CityLink ......................................................................................................................... 15
2.5.2 M2 Hills ......................................................................................................................... 15
2.5.3 Lane Cove Tunnel .......................................................................................................... 15
2.5.4 M1 Eastern Distributor .................................................................................................. 15
2.5.5 M7 Westlink .................................................................................................................. 16
2.5.6 M5 Motorway ................................................................................................................ 16
2.5.7 Pocahontas 895 .............................................................................................................. 16
2.5.8 Capital Beltway HOT Lanes .......................................................................................... 16
2.6 Corporate Strategy and Objectives ....................................................................................... 16
2.7 Sources of Competitive Advantage ...................................................................................... 18
2.8 Ownership Structure ............................................................................................................. 19
2.9 Capital Structure ................................................................................................................... 20
2.10 Management Structure ....................................................................................................... 21
3. INDUSTRY ANALYSIS .......................................................................................................... 23
3.1 Overview .............................................................................................................................. 23
3.2 Industry External Drivers ..................................................................................................... 23
3.3 Market Segmentation: .......................................................................................................... 25
3.4 Products and Services Segmentation: ................................................................................... 25
3.5 Major Market Segmentation ................................................................................................. 26
3.6 Industry Participants/Competitors ........................................................................................ 27
3.7 Porter Analysis ..................................................................................................................... 29
3.8 SWOT Analysis .................................................................................................................... 31
3.9 Industry Outlook ................................................................................................................... 34
4. ECONOMIC ENVIRONMENT ............................................................................................. 36
3 | P a g e
4.1 Overview .............................................................................................................................. 36
4.2 Macroeconomic Indicators ................................................................................................... 36
4.2.1 Oil Prices........................................................................................................................ 36
4.2.2 Inflation .......................................................................................................................... 38
4.2.3 Interest Rates.................................................................................................................. 41
4.2.4 Exchange rates ............................................................................................................... 42
4.3 Economic outlook ................................................................................................................. 44
4.3.1 Estimated Market Return ............................................................................................... 44
5. CURRENT ISSUES ................................................................................................................. 46
5.1 Macroeconomic Factors ....................................................................................................... 46
5.1.1 Increase in Oil Price ....................................................................................................... 46
5.1.2 Increase Level of Debt to Disposable Income ............................................................... 46
5.1.3 Availability of Public Transport .................................................................................... 46
5.1.4 Government ................................................................................................................... 47
5.2 Microeconomic Factors ........................................................................................................ 47
5.2.1 Potential Investments ..................................................................................................... 47
5.2.2 Competitors .................................................................................................................... 47
6. FINANCIAL ANALYSIS ........................................................................................................ 49
6.1 Dupont Analysis ................................................................................................................... 51
6.1.1 EBIT/Sales ..................................................................................................................... 53
6.1.2 Sales/Total Assets .......................................................................................................... 53
6.1.3 EBIT/Total Assets.......................................................................................................... 54
6.1.4 Interest Expense/Total Assets ........................................................................................ 54
6.1.5 Net Before Tax/Total Assets.......................................................................................... 55
6.1.6 Total Assets/Common Equity ........................................................................................ 55
6.1.7 Net Before Tax/Common Equity ................................................................................... 55
6.1.8 Tax Retention Ratio ....................................................................................................... 56
6.1.9 Return on Equity ............................................................................................................ 56
7. VALUATION ASSUMPTIONS ............................................................................................. 58
7.1 Required Rate of Return (CAPM) ........................................................................................ 58
8. VALUATION ANALYSIS ...................................................................................................... 60
8.1 Dividend Discount Model (DDM) ....................................................................................... 60
8.1.1 Dividend Forecast .......................................................................................................... 61
4 | P a g e
8.1.2 Intrinsic Share Price ....................................................................................................... 63
8.1.3 Sensitivity Analysis ....................................................................................................... 63
8.2 Free Cash Flow to Equity Model (FCFE Model) ................................................................. 65
8.2.1 Cash Flow Forecast ........................................................................................................ 66
8.2.2 Intrinsic Share Price ....................................................................................................... 67
8.2.3 Sensitivity Analysis ....................................................................................................... 68
8.3 Pricing Earning Ratio ........................................................................................................... 69
8.3.1 Sensitivity Analysis ....................................................................................................... 72
8.4 Price/Book Value Ratio (P/B) .............................................................................................. 73
8.4.1 Sensitivity Analysis ....................................................................................................... 75
8.5 Net Tangible Asset Backing Model (NTA) ......................................................................... 75
9. VALUATION DISCUSSION .................................................................................................. 78
9.1 Dividend Discount Model (DDM) ....................................................................................... 78
9.2 Free Cash flow to Equtiy Model (FCFE Model) .................................................................. 78
9.3 Price / Earnings Ratio Model (P/E) .................................................................................. 79
9.4 Price/ Book Value Ratio (P/B) ............................................................................................. 80
9.5 Net Tangible Asset Backing Model (NTA) ......................................................................... 81
9.6 Preferred Valuation Method ................................................................................................. 82
10. CONCLUSION & RECOMMENDATIONS ...................................................................... 83
11. APPENDIX ............................................................................................................................. 84
11.1 Appendix 1: Excel Raw Beta and Adjusted Beta Calculations .......................................... 84
12. REFERENCES ....................................................................................................................... 85
5 | P a g e
1. EXECUTIVE SUMMARY
Transurban Group (TCL) is an Australian based company that and was first listed on the
Australian Stock Exchange (ASX) on the 14th
March 1996. The industry that it is in is industrials
and the sector is transportation on the ASX. It specialises in the operation and management of toll
roads. TCL main headquarters are in Australia however their operations extend to North America.
TCL also continues to search for other opportunities abroad to add to its portfolio of investments
in toll roads.
The share price movements of TCL have been extremely volatile in recent years the period from
March 2006 through to March 2011; TCL was trading at prices ranging from a monthly high of
$8.299 to a monthly low $3.996. In more recent times preceding August 2010 TCL share price
has been experiencing an upwards trend which can be seen as a positive sign. At the start date of
writing this report TCL share price was trading at $5.19 (as of 23/3/2011) and at the conclusion
of this report TCL share price is trading now at 5.44 (as of 13/5/2011).
Transurban operates and owns tolls, its operations provides specific products and services. Its
main product is the electronic tagging devices used for toll roads. The electronic tagging devices
that are known as e-TAG and e-PASS, the tagging device that is sold to commuters in Melbourne
for use on CityLink is known as the e-TAG. The CityLink is Transurban flagship toll road.
Transurban is also involved in the business of consulting and are experts in their industry. Their
consulting clients are from the public sector such as councils and governments domestic and
abroad. Their expertise is in the development and management of electronic toll roads, traffic
projection and modelling.
Transurban is a company that is highly leveraged and this is explored through examining their
capital structure. The five years history of the company demonstrated that the company had a
high net gearing ratio. This also indicated that Transurban Group had been heavily financed by
the outside parties. A company should have a well balance net gearing percentage as debt is
always a cheaper source of financing compared to equity financing but a highly geared company
would be risky to the company as the interest repayment would be very high. On the other hand,
the interest cover ratio of Transurban Group was relatively low for the past five years. Interest
cover ratio is vital as it measures the amount of profit available to cover the interest expenses of
the company. Therefore, the higher the ratio the less risks the company is bearing.
6 | P a g e
The Toll Road Operators industry has been growing steadily over the last decade as governments
seek to lower the cost of transport infrastructure through Public Private Partnerships (PPPs). And
as the main supporting partner, Transurban contributes most to the growth by the enhancement
projects of new toll roads and increased traffic on existing toll roads. The company holds the
greatest market share in Australian toll road industry at around 33.6%.
In the coming years, the industry revenue is expected to be pushed higher as the increasing
opening of new toll road and tunnel. The strong Australia economy as well as increasing
population density will see higher demand for toll road as a result of boosting road freight activity.
However, any increase in the fuel price as a result of Carbon Pollution Reductions Scheme
(CPRS) will infer users to switch from using toll road to using to public transportation.
The porter’s 5 forces tool is a powerful tool helps to better understand the strength of the
industry’s current competitive position as well as the strength of a position that the toll road
operators are considering moving into. There are five important forces that determine competitive
power in Australian toll road, but the most valuable force determining industry attractiveness is
competitive rivalry. The competition in this industry is increasing and operators will face
competition with price, customer service levels and product differentiation.
The company’s major strengths include its leading position, holding dominant assets enable to
maintain its market share in the industry. The enhancement of existing road assets not only
deliver more value to the community but will also boost profit to TCL. However, TCL also
suffers from outstanding debt problem which will affect shareholders’ dividends payments. Apart
from that, the proposition of CPRS along with traffic congestion adds to the threats to Transurban
with travel reduction.
Transurban Group’s future potential growth can be affected by the economic environment such as
macroeconomic and microeconomic factors. Examples of macroeconomic factors that will affect
Transurban Group are oil price, level of debt to disposable income, inflation and government
regulation. As the oil price increase, there will be less people using their cars as transportation
and thus fewer consumers using the toll road. When the level of debt increases, the level
consumer’s disposable income will decrease and consequently consumers have to reduce their
level of expenditure by avoiding high petrol costs and toll costs. Inflation will cost the level of
expenditure to rise, as the prices of the consumer goods increase. Thus, travelling with own
transport will incur a higher cost. Government regulation such as increase in taxes and upgrading
the public transports will also affect the company’s profitability level.
7 | P a g e
Microeconomic factors are factors that affect individual economy choices as well as individual
decision makers. Examples of the microeconomic factors that will affect the company are
potential investments and competitors. It is imperative for the company to be consistent in
discovering the potential investments which can bring in more revenue to the company. Potential
investments for Transurban Group can be the acquisition of potential growth assets and
upgrading the existing assets. Competitors play a vital role in affecting the decisions that will be
made by Transurban. When the rivals are performing well, the company will need to resolve with
alternative ways to boost up the company’s performance level as well as to outperform them.
EBIT is used to measure the amount of profit that the company can generate irrespective of other
external factors such as how the business if financed and government regulations. The five years
historical data demonstrated that average growth of Transurban Group was 187%. On the other
hand, EPS had been incurring negative figures from 2006 to 2009 and had a large increase in
2010 which overturned the figure into positive value. This also portrayed that the company’s
profits generating ability was very high. The ROE of Transurban Group had been relatively low
for the past five years. However, looking at the big increase in ROE in 2010 and upon the
completion of the future upgrading projects, it is very likely that the ROE will increase in future.
The preferred valuation method was the dividend discount model. This was the preferred model
over the other models because Transurban historically consistently paid dividends and we expect
would expect this to continue in the future. It was preferred over the discounted FCFE model
because the FCFE future growth rates would be more difficult to predict and it was also preferred
over the ratio relative valuation techniques since it was difficult to find companies that were
similar to Transurban and its structure.
The DDM and the FCFE models suggest that the share value of Transurban is underpriced and is
currently trading at a discount of 3.1%, FCFE model suggests that TCL share is trading at a
discount of 2.5688%. The relative valuation techniques used also suggests that the stock is worth
buying with exception to the P/E ratio which suggest we should avoid holding the stock or even
sell the stock. The five valuation methods used, four of our valuations conclude that Transurban
stock is worth buying or holding, while only one of the method used would lead to the conclusion
that investors should sell or avoid TCL stock.
Based on this information we recommend a buy-hold recommendation on TCL stocks, since TCL
shares are trading at a discount. TCL shares is trading at a discount of 3.1%, based on the market
8 | P a g e
price of $5.31 as of the 15/4/2011 from the intrinsic value of $5.48 calculated from the dividend
discount model.
9 | P a g e
2. INTRODUCTION TO TRANSURBAN GROUP
Transurban Group Company Details:
ASX Listing Code TCL
Official Listing Date 14 March, 1996
GICS Sector Industrials
GICS Industry Group Transportation
GICS Industry Transportation Infrastructure
Internet Address http://www.transurban.com.au
Registered Office: Level 3, 505 Little Collins St, MELB, VIC, AUSTRALIA, 3000
Market Cap $7,478,000,000.00
Total Shares Quoted 1,443,500,000
Last Close $5.18 (as of 23/3/2011)
*Source: Australian stock exchange (2011) & Morningstar DatAnalysis (2011)
2.1 Overview
Transurban Group (TCL) is an Australian based company with its headquarters located in
Australia, TCL has offices in Melbourne and Sydney. They also have vested interests in North
America so they have offices in America; their American offices are located in New York,
Washington DC and Atlanta. The Group is currently in the top fifty companies listed on the
Australian Stock Exchange.
Transurban Group is in the industry of transportation and infrastructure. It’s a toll road owner,
operator and they are involved in the development and management of electronic toll roads. The
company started out as a single purpose business which was for the purpose of CityLink in
Melbourne (Transurban 2011). They currently have interests in eight toll roads and have
approximately 5 million customers around the globe. TCL interests can be seen in table 1.
Table 1: Transurban Group Interests in Toll Roads
ROAD INTEREST
AUSTRALIA
CityLink (Melb) 100%
Hills M2 (Syd) 100%
Lane Cove Tunnel (Syd) 100%
Eastern Distributor M1 (Syd) 75.1
Westlink M7 (Syd) 50%
Motorway M5 (Syd) 50%
Virgina, USA
Pocahontas 895 75%
Capital Beltway HOT lanes (under construction) 67.5%
*Source: Transurban (2011)
10 | P a g e
2.2 History
Transurban group was formed in 1992, it started out as a joint venture between two engineering
firms. The two firms in the joint venture at the time were Australian company Transfield
Construction Pty Ltd and a Japanese company Obayashi Corporation. The joint venture was for a
submission with the Government of Victoria to build, own, maintain and operate Melbourne City
Link (Morningstar DatAnalysis 2011). In 1995 the Victorian Government accepted their
submission and TCL was listed on the Australian Stock Exchange in 1996.
The CityLink project consisted of two major sections, the Westlink which connects the
Tullermarine and Westgate Freeways and the Southern Link which connects the Monash and
Westgate freeways (TCL Annual Report 2000). The project involved financing design,
construction, marketing, operation and maintenance of the toll roads. CityLink was first open to
traffic in August 1999, the development of the electronics tolling system on City Link which is a
cashless tolling system was a world first (InvestSMART 2011). The City Link project endured
numerous setbacks. There was the late delivery of the Central Toll Computer System; this
prevented the tolling of the Western Link until eight months after contracted completion date and
four and a half months after the section opened to traffic. The Western Link operated without
tolling on the 15th
August 1999 and commenced tolling on the 3rd
January 2000. Between the
financial period of 30th
June 1999 and 3rd
January 2000 TCL derived no net revenue from the
City Link project (TCL Annual report 2000).
On the 19th
February 2001, the Burnley Tunnel suffered a structural failure in an arch of its
structure. As a result of the structural failure the tunnel was closed for nine days. Transurban lost
approximately $1.9 million dollars in toll revenue and incurred $0.6 million dollars in consulting
fees (TCL Annual Report 2001). In 2001 in an out of court settlement the Transfield Obayashi
Joint Venture agreed to pay Transurban $157 million in damages (Millar R, & Moynihan, S
2007).
In 2001-02 it was a big year for Transurban, it was a year of transformation. In August 2001
Transurban negotiates its release as a single-purpose entity with the Victorian government. Being
a single-purpose entity the company was legally restricted to the business of operating and
developing Melbourne CityLink (TCL Annual Report 2002). In April of that year the group filed
an expression of interest for Lane Cove Tunnel in Sydney and in February 2002 and the
management team makes a major trip overseas to find new business opportunities. Towards the
end of the 2002 financial year Transurban group finalised a debt refinancing package worth $1.7
billion, this increased the company’s ability to raise capital and invest in other projects
11 | P a g e
domestically and internationally. During the period CityLink also launches a cost reduction
program to save $1 million per month on customer service and marketing costs, in July 2002
CityLink achieves that target and reduces cost down from $3.5 million to $2.5 million. Revenue
from tolls and fees for traffic in 2002 financial year was up 41.8% from the previous year.
TCL had another great year 2002-03; CityLink Revenue topped $230 million demonstrating
higher growth than what was initially forecast. In that period revenue was 10.7% higher than the
previous year. In the month of October Transurban’s consortium wins the $2.23 billion Westlink
M7 project in Sydney at the time it held a 40% share in the Westlink M7 project. It was the first
of many projects in Sydney; TCL financed the project by raising $430 million in equity (TCL
Annual Report 2003). Over this period the company was prospering, the future looked bright and
there was plenty of optimism about TCL.
In 2003-04 financial year traffic on Melbourne increased by 6% that saw revenue grow by 10.1%,
this was another positive year for TCL. Over the year they introduced other programs designed to
increase revenue and cut costs. In July they introduced a new video tolling product which
attracted more than 34,000 new accounts and generate over $1.5 million in revenue (TCL Annual
Report 2004). CityLink continued to develop further programs to cut operating costs and increase
revenue. In December 2003, Transurban and Macquarie Infrastructure Group agreed to set up a
tolling venture as New South Wales (NSW) six tolling roads would eventually move from
manual toll roads to electronic tolling, they already have a current joint venture in Westlink M7.
Transurban continued to increase its stake in NSW roads when it purchased 8.1% share in Hills
Motor way on 19th
April. TCL was entering in further bids for business opportunities. Transurban
was bidding to develop and operate the Mitcham-Frankston project and entered a tender in
Sweden. The tender in Sweden was TCL first tender outside of Australia and the tender was
unsuccessful (TCL Annual Report 2004). During this period it was one where TCL was actively
seeking new projects domestically and overseas to increase returns to its stakeholders.
The financial year for 2004-05 was an excellent year for investors, company securities grew from
the start of the 2004-05 financial year from $4.87 a year and trading at a high of $7.45 (TCL
Annual report 2005). That year Transurban was listed as one of the top fifty companies on the
ASX. Transurban were also successful in a takeover bid for Hills Motorway (M2) where it would
become 100% owner of the M2. The 100% ownership of the M2 and 40% ownership of the M7
made TCL a major stakeholder of around half of Sydney’s motorway. In early 2005 Transurban
reached an agreement on the upgrade of the Tullermarine/Calder interchange, however they were
unsuccessful in the bid for Mitcham-Frankston Freeway. TCL however continued its interest in
12 | P a g e
international opportunities. In the US they were targeting potential projects in the State of
Virginia, whilst also setting up an office in the United Kingdom building relationship with
potential partners and monitoring potential opportunities. Revenue on the CityLink was also up
during the period it was up 8% during the 2004-05 period (TCL Annual Report 2005).
Transurban had its first international toll road in June 2006, it was the Pocahontas Parkway in
Richmond, Virginia in the United States. The Company’s portfolio of toll roads now consisted of
four toll roads. TCL and its partners also opened Sydney’s Westlink M7 eight months early while
TCL had the full electronic tolling system working ten months early earning a performance bonus
of $8.3 million (TCL Annual Report 2006).
The company continued enhancing its portfolio of toll roads by adding more toll roads to its
portfolio. TCL takeover of Sydney Roads Group (SRG) increases TCL stake in five out of the
nine motorways in Sydney (TCL Security holder review 2007). The Security holder review of
Transurban (2007) states that on December 2007, TCL construction partner Fluor and the
Commonwealth of Virginia reached a financial close on the Capital Beltway Hot Lanes project in
Virginia. The joint agreement will allow TCL to operate the lanes for 75 years (TCL Security
holder review 2007).
On August 2008 TCL further increased its stake in its toll roads it already has interests in. It
further increase an addition 2.5% in Westlink M7 taking its interest to a total of 50%. While in
September 2007 TCL acquired an additional 3.8% in Airport Motorway Group, taking its
invested interest in Eastern Distributor to 75.1% (TCL Security holder review 2008).
During the 2009-10 financial year TCL posted an annual net profit turnaround. It posted a profit
turnaround of $59.605 million which was up from the $16.134 million loss from the previous
financial year (Herald Sun 2010). The profit turnaround for 2009-2010 financial year was the first
profit made in ten years. TCL continued to increase its portfolio in toll roads it announced on the
10th
of May 2010 that it had reached agreements to acquire the Lane Cove Tunnel, in August the
group assumed operational control (Morningstar 2011). The 2011 results will be released in the
near future.
2.3 Share Price Performance
The following chart (figure 1) compares the five year historical performance of TCL share price
against the All Ordinaries Index from the period of March 2006 through to March 2011. During
13 | P a g e
that period TCL was trading at prices ranging from a monthly high of $8.299 to a monthly low
$3.996. When TCL was trading at an all time high on May 2007 the share price rapidly declined
from then. The All Ordinaries Index also declined in close proximity. This would suggest the
share price of TCL is correlated to movements in market indices. It can be seen from figure 1
TCL share price has depreciated further than the market (relative to the All Ordinaries Index)
through periods prior to March 2009 where it was trading at all time low. The 20 month moving
average of TCL share price would suggest that there is a downwards trend however early 2010
the trend started to flatten out and the share price was improving, possibly even changing trends.
Figure 1: TCL Share Prices vs. All Ordinaries Index (5 Years Closing Monthly Prices)
*Source: ASX (2011)
The next chart (figure 2) compares the past six months of the daily share price of TCL with the
six month daily change of the All Ordinaries Index. The pricing movements seen in figure 2 show
that from periods preceding August 2010 TCL share price was experiencing an upwards trend
following the trend of the All Ordinaries Index. This would also further clarify that TCL and the
All Ordinaries are closely correlated. The upwards trend can also be seen from the twenty day
moving average of TCL share price. The upwards trend slowly steadied from early November to
present. During the six month period it can be said that the price of TCL stock price was
extremely volatile as during the period there was a fluctuation in share price of around 19%,
However TCL share price has improved which is a more positive sign.
14 | P a g e
Figure 2: Share Prices vs. All Ordinaries Index (6 month Closing Daily Prices)
*Source: ASX (2011)
Transurban’s stock price was last trading at $5.30 at the close of trade (25th
March 2011),
although it is still trading below its previous high it has recovered from trading at its five year low
in early to mid 2009.
2.4 Products and Services
Transurban operates and owns tolls in Australia and North America and through these operations
it provides specific products and services. Its main product for what it’s known for is the
electronic tagging devices used for toll roads. The electronic tagging devices that are used in
Australia are known as e-TAG and e-PASS.
The main tagging device that is sold to commuters in Melbourne for use on CityLink is known as
the e-TAG, with e-TAG account commuters can travel through toll roads in Melbourne and
Sydney. The e-PASS account is for commuters that only occasionally use toll roads and can only
be used for travel on Sydney’s Westlink M7 tolls. The two accounts allow up to four vehicles to
be registered on the one account. They also offer commercial e-TAG for businesses which
require account holders to have at least five vehicles registered on the one account. Visitors that
are in Sydney they can purchase the visitor’s e-PASS which allows visitors to travel on all
Sydney toll roads for up to 30 days (Roam 2011).
Transurban is also involved in the business of consulting they are experts in their industry and
offer consulting services. Their consulting clients are from the public sector such as councils and
governments domestic and abroad. Their expertise is in the development and management of
electronic toll roads, traffic projection and modelling.
15 | P a g e
2.5 Toll Roads
Transurban has interests in eight toll roads, six of the eight toll roads are in Australia and two are
in America. The six toll roads in Australia are the CityLink, M2 Hills, Lane Cove Tunnel, M1
Eastern Distributor, M7 Westlink and M5 Motorway. The two toll roads in America are the
Pocahontas 895 and Capital Beltway HOT lanes.
2.5.1 CityLink
The company flagship asset is CityLink which is 100% owned and managed by TCL. It connects
to three major freeways, the West Gate, Tullermarine and Monash. The freeways link to
Melbourne manufacturing hubs, city, port and airport with around 22 kilometres of motorway.
Melbourne’s CityLink was one of the world’s first fully electronic toll roads with currently more
than 1.8 million vehicles registered to use the toll roads. CityLink was first opened to traffic in
August 1999 and the company has a concession to operate the road until 2034 (Transurban 2011).
2.5.2 M2 Hills
Sydney’s M2 motorway was first open to traffic in 1997 and was acquired by Transurban in June
2005. The M2 in Sydney has 21 kilometres of motorway, it links the lower north shore of the city
with the northwest regions and connects to the Westlink M7 and the Lane Cove Tunnel. The M2
is a combination of electronic toll and cash toll connections, there are certain lanes for each. The
company has 100% interest in the M2 and currently has a concession to operate the road until
2042 (Transurban 2011).
2.5.3 Lane Cove Tunnel
Lane Cove Tunnel has about 3.6 kilometre of motorway it connects to the M2 and has a fully
electronic tolling system. The tunnel is located in Sydney it was opened to traffic in 2007 and was
acquired by Transurban in August 2010. It is 100% owned by the company and they have a
concession to operate the road until 2037 (Transurban 2011).
2.5.4 M1 Eastern Distributor
The M1 is 6 kilometres of motorway that links Sydney’s City Centre, Harbour Bridge and Tunnel,
southern suburbs and Sydney’s airport. The road contains a combination of electronic and cash
tolling and includes a 1.7 kilometre tunnel. The road was first opened to traffic in 1999 and was
acquired by the company in 2007 with a concession to operate the road until 2048. TCL has a
75.15% interest in this asset (Transurban 2011).
16 | P a g e
2.5.5 M7 Westlink
The M7 Westlink consists of 40 kilometres of motorway in Sydney and links to M2, M4 and the
M5. The road is a full electronic toll operated road and improves access to Western Sydney by
helping motorist avoid traffic lights. The M7 was opened to motorist in 2005 and was acquired by
the company also in 2005. They currently have 50% interest and a concession to operate the M7
until 2037 (Transurban 2011).
2.5.6 M5 Motorway
Transurban’s sixth asset in Australia is the M5 in Sydney, the M5 is 22 kilometres of road and
connects the F5, M5 East and M7 Westlink motorway. The motorway contains a combination of
electronic and cash tolling system. It was first open to traffic in 1992 and was acquired by TCL in
2007. The company has a 50% interest and a concession to operate the toll road until 2023
(Transurban 2011).
2.5.7 Pocahontas 895
The Pocahontas 895 was the first international toll road added to Transurban toll road portfolio.
TCL acquired the asset in 2006 with a 75% stake and has a contract to operate the road until 2105.
The Pocahontas 895 is a 14 kilometres stretch of road in Richmond, Virginia, USA and is a
combination of cash and electronic tolls (Transurban 2011).
2.5.8 Capital Beltway HOT Lanes
The Capital Beltway HOT Lanes is a project that Transurban is currently completing, the
construction began in early 2008 and is expected to open in 2013. The construction consist of 22
kilometres of electronically tolled HOT lanes with an additional two lanes added to each direction
bring the total to twelve lanes. TCL has a 67.5% interest in this asset which is still currently under
construction (Transurban 2011).
2.6 Corporate Strategy and Objectives
According to the Transurban annual report (2010) the chairman of Transurban Group, Mr
Lindsay Maxsted, year 2010 was a great year in term of growth in revenue on all the Australian
assets and 13% of increment in EBITDA. These results had facilitated the generation of 31.8%
growth in underlying free cash to $347.5 million. Since year 2008, objective to reduce cost had
been delivered successfully this will save the corporation $45.3 million, twice as much as what
17 | P a g e
was expected from the original cost cutting target. The following highlights the projects that will
be carried out by Transurban Group as part of their development strategy and objectives to be
achieved in the coming future:
1. MI-Citylink upgrade in Melbourne
Extra lanes and freeway management system will be constructed to improve the traffic
flow and reduce congestion on M1 which includes CityLink’s southern section. The cost
is estimated to be $1.39 billion. The upgrading of M1 is forecasted to increase the traffic
level to additional 7% on CityLink within 5 years and improving the safety level when
travelling on the busy road corridors.
2. Hills M2 upgrade in Sydney
Additional lanes will be built in both directions along 14.5km of the motorway and
widening the tunnel as well as installing new tolled ramps to improve the access to the
motorway and alleviate congestion. The cost is approximately $550 million. Upon the
completion of the upgrade, it is expected to drive in more traffic by approximately 17,300
average daily trips by year 2016.
3. M5 widening in Sydney (Interlink Road Project)
Expanding the 21km motorway which is the main route for freight, passenger and
commercial between Port Botany and Sydney airport and South West Sydney to three
lanes in each direction to reduce traffic jams. The cost of the project is approximately
from $350-$450 million. The project is estimated to increase the traffic and boast up the
revenue. In terms of economy benefits, M5 widening will enhance the network connection
between the airports, industrial hubs and ports. The overall outcome is it will reduce the
travelling time for road users.
4. Building 58 new bridges and two electronic tolled Hot Lanes in Washington DC (US)
On a 22km section of the 1-495 ring road, two new electronically tolled Hot Lanes will be
built in each direction which increase the total number of lanes from 8 to 12.In term of
replacing the old infrastructure, 58 new bridges and overpasses will be constructed. The
project will cost approximately $US2 billion. In terms of economic benefits, over the year
of 2008 to 2013, the massive project opens up 11,800 jobs for the public and $2.7 billion
in the economic for the Washington metropolitan area.
5. 1-95/395 Hot Lanes Project
Collaborating with Fluor-Lane, both are working with the Virginia Department of
18 | P a g e
Transportation in reviewing and finalising the financial plan, scope and timeline for the 1-
95/395 Hot Lanes Project
Transurban Group is very optimistic about the future where the projects are to be carried out will
boost the corporation’s cashflows in long term, driving the returns and creating value for the
shareholders.
2.7 Sources of Competitive Advantage
Transurban Group has been actively carrying out massive multi millionaire dollars projects as
part of their development plan to expand their territory in Australia as well as in United States.
Several factors that make Transurban Group being competent in the market are:
1. Technology advancement enables the Transurban Group to appear as the world leader in
electronic tolling and providing excellent customer service with more than one million
fully interoperable e-Tag devices.
2. High barriers to entry into the market due to the government regulation and high cost of
establishment make Transurban Group one of the dominant players in the road tolling
market.
3. Transurban’s traffic forecasting is highly regarded which strengthen the asset acquisitions
and projects enhancement.
4. Efficiency of the operation and management teams in ensuring all the massive projects are
constructed effectively according to the timeline.
5. Diversification of capital funding options.
6. Good relationship with the lenders, stakeholders and governments which creates more
business and development opportunities in future. (TCL Annual Report 2006)
The definition of competitive advantage is an advantage that the company has over its
competitors which allow the company to perform better in the market. Examples of competitive
advantage are customer service, company’s cost structure, product and facilities offered, network
distribution and the company’s management (Investopedia 2011).
19 | P a g e
2.8 Ownership Structure
Table 2: Transurban Substantial Shareholders as at Last Notice 01/09/2010
Capital Partners Pty Ltd Canadian Pension Plan Investment Board
Shareholding 187,139,384 182,552,346
Share Held (%) 13.50 12.90
*Source: Transurban Group Annual Report (2010)
The two largest shareholders of the Transurban Group since 2009 were Capital Partners and
Canadian Pension Plan Investment Board. From year 2009 to 2010, there was a declination of
total shares held by Capital Partners which was 2.09% and CPPIB was 0.51%. Ontario Teachers’
Pension Plan Board was in the list of the substantial shareholders in year 2009 withholding 12.22%
of the securities and was dropped out in 2010. Other companies that were substantial sold over
the past 12 months were National Australia Bank, BlackRock Investment Management Limited,
Capital Partners and Ontario Teachers’ Pension Plan Board (MorningStar 2011).
Table 3: Distribution of Shareholders of Stapled Securities
Ordinary Shares Number of shareholders Number of Shares
1-1,000 24,717 9,743,880
1,001-5,000 31,107 78,306,126
5,001-10,000 7,109 50,916,469
10,001-100,000 3,845 81,493,545
100,001 > 225 1,220,830,613
Total 67,003 1,441,290,633
*Source: Transurban Group Annual Report (2010)
The total numbers of individual shareholders were 67,003 and the total numbers of shares held
were 1,441,290,633. Ordinary shareholders have voting rights and each share represents one vote.
Besides that, there were 5,687 holders of less than a marketable parcel of shares.
Table 4: List of the Top Twenty Shareholders as at 01/09/2010
Shareholder Shares Acquired Shares
(%)
AMP Life Ltd 11,785,190 0.82
ANZ Nominees Ltd 10,029,735 0.70
ANZ Nominees Ltd (i) 5,175,821 0.35
Argo Investments Ltd 3,405,099 0.24
Australian Foundation Investment Co. Ltd 14,825,726 1.03
Australian Reward Investment Alliance 8,776,444 0.61
Bond Street Custodians Ltd 3,266,846 0.23
Citicorp Nominees Pty Ltd 33,402,284 2.32
Cogent Nominees Pty Ltd 17,403,961 1.21
CS Third Nominees Pty Ltd 5,055,376 0.35
Djerriwarrh Investments Ltd 3,895,156 0.27
HSBC Custody Nominees (Australia) Ltd 479,852,426 33.29
20 | P a g e
J P Morgan Nominees Australia Ltd 145,496,316 10.09
National Nominees Ltd 349,974,664 24.28
Queensland Investment Corporation 7,156,613 0.5
RBC Dexia Investor Services Australia Nominees Pty Ltd 9,404,426 0.65
RBC Dexia Investor Services Australia Nominees Pty Ltd (i) 4,880,206 0.34
RBC Dexia Investor Services Australia Nominees Pty Ltd (ii) 2,867,732 0.20
UBS Nominees Pty Ltd 12,389,880 0.86
UBS Wealth Management Australia Nominees Pty Ltd 10,422,999 0.72
Total 1,139,466,900 79.06
*Source: Transurban Group Annual Report (2010)
The total shares held by these top twenty shareholders were 1,139,466,900 which was equivalent
to 79.06%.
2.9 Capital Structure
Table 5: TCL Net Gearing Ratios
Year 2006 2007 2008 2009 2010
Net Gearing (%) 150.51 87.97 83.62 100.04 80.43
*Source: Morningstar DatAnalysis (2010)
Net gearing ratio is measured by (total liabilities– cash) divided by shareholders equity. It gives
the measurement of the contribution of long term lenders to the long term capital structure of the
business taken into consideration of how much cash received by the company. The level of
gearing is vital in assessing the risks where it represents the extent where the company is financed
by outside parties (Atrill et al.2008). A high net gearing means that the company is heavily
financed by outside parties therefore it is vital for a company to have a well balance net gearing
percentage. From 2006 to 2008, the gearing ratio dropped significantly by 66.9% and remained at
80.43% in 2010. This is positive change as a decrease in gearing ratio means that the company
reducing its risk as debt represents a financial obligation. As compared to 2006, the net gearing
was very high, which indicated that the company went into negative gearing where the company
geared more than it should. However, the net gearing percentage was still very high in 2010.
Gearing is often necessary to finance the business and it increases the return on equity provided it
is justified by the returns generated from the assets.
Table 6: TCL Interest Cover Ratio
Year 2006 2007 2008 2009 2010
Net Interest Cover Ratio 0.08 0.31 -0.11 0.68 1.14
*Source: Morningstar DatAnalysis (2010)
21 | P a g e
Interest cover ratio demonstrates the measurement of the amount profit available to cover the
interest expenses of the company. Interest Cover Ratio is profit before interest and tax divided by
interest expenses (Atrill et al.2008). For 2006, the interest cover ratio was relatively low, 0.08
which mean that the level of profit to cover the interest payments was low and therefore higher
risk. For 2008, the ratio was -0.11 indicating that the business performance was bad because the
level of profit was insufficient to cover the interest payments and as a result the corporation
needed to come out with a solution to maximise the level of profit. There was an improvement in
ratio from 2009 to 2010 which was partly due to the cost reduction plan successfully being
carried out in 2008 which save the company $45.3million. Hence, the higher the interest cover
ratio, the lower the risk and vice versa.
2.10 Management Structure
Figure 3: TCL Management Structure
The board of directors of Transurban Group comprises of eight non executive directors, one
chairman and a chief executive director. The board is being structured where each of the
members of the board has different experience, qualifications and skills to ensure effective
discussion as well as efficient decision making. The main role of the board is to provide strategic
guidance and effective management for the company. Non executive directors do not get
22 | P a g e
involved in running the day to day business, therefore they are considered as independent from
the management. They only monitor the executive activities and play an important role when
there is conflict of interest. On the other hand, executive director get involved in the day to day
business management and is normally a full time employee. There are three committees being
established to assist the board in discharging the responsibilities which are Remuneration
Committee, Nomination Committee and Audit and Risk Committee. These committees comprise
of only non executive directors. Remuneration Committee is accountable of integrates financial
report, audit functions of external and internal and deal with risk management systems whereas
Nomination Committee is to deal with appointing new board members and performance of the
committee and board. Audit and Risk Committee focuses on directors’ remuneration as well as
incentives and remuneration packages for CEO and other senior executives.
23 | P a g e
3. INDUSTRY ANALYSIS
3.1 Overview
The industry which the Transurban group primarily operates within is Australia’s Toll Road
Operators industry. The primary activities of this industry include the terminal facilities provision
as well as the operation of toll bridge, toll road, weighbridge, and vehicular ferry or punt. For
TCL Ltd, it mainly involved in the development and management of toll roads in Australia and
the USA.
According to IBISWORLD (2010), The Toll Road Operators industry has been growing steadily
over the last decade as governments seek to lower the cost of transport infrastructure through
Public Private Partnerships (PPPs). As a result, industry revenue has grown by an average of 3.8%
per annum to be worth an estimated $2.6 billion in 2010-11. Growth has been supported by new
toll roads and increased traffic on existing toll roads. And the increasing opening of new toll
roads is bound to have a large effect on the industry, providing a large source of growth.
Despite the internal factor of the high demand for toll bridge and road operations, the key success
of the industry also results from the external factors, such as: Optimum capacity utilization,
Long-term site tenure and location to provide stability, provision of a related range of
goods/services ("one stop shop") and advanced technology to reduce costs and increase
efficiencies (IBISWORLD 2010).
3.2 Industry External Drivers
The Key External Drivers section mainly looks at the key factors outside the control of an
individual business that determine the industry's performance. For Australian’s toll road
operator, there would be four dominant factors boosting the development of the industry in
accordance with 2010 industry report.
The first factor of the demand for passenger travel is caused by the rapid growth of vehicle
ownership. The industry is sensitive to motor vehicle usage in the cities, both private and
commercial vehicles. Our research report predicts the number of motor vehicles will tend to
increase significantly in the following years, and by 2014 the number of vehicle owners will
reach to around 17million (Figure 4). These rising amount will to a large extent support the stable
income of the industry.
24 | P a g e
Figure 4: Expected Number of Motor Vehicles in Recent Years
*Source: IBISWORLD (2010)
Apart from the rising number of vehicle, real household disposable income contributes
proportionally towards the operation of the industry. The greater the disposable income of
households the greater the expected demand for use of toll roads. Toll roads provide convenient
travel routes but toll fees can be costly especially when a free alternative route available
(IBISWORLD, 2010). Figure5 shows that the disposable income fluctuates dramatically from
2007 to 2012.
Figure 5: Expected Household Disposable Income In Recent Years
*Source: IBISWORLD (2010)
Moreover, legislative compliance requirements for services to road transport and the demand for
road freight transportation will provide sustained momentum for the steady growth for the
industry as well.
25 | P a g e
3.3 Market Segmentation:
Market segmentation is the process of splitting customers, or potential customers, in a market into
different groups, or segments.
3.4 Products and Services Segmentation:
Toll road operators are the most profitable segment of the products and services in the industry
(figure 6), contributing 79% of industry value in 2011 (IBISWORLD 2011). Beyond the
operations of toll roads, the market also includes the provision of support and maintenance
services. Industry revenue is expected to boost over the next five year with the opening of the
Clem Jones tunnel and Hale Street Link in Brisbane. The Brisbane Airport link is due to be
completed in 2012.
Container parking, handling, equipment and refurbishment facilities make up the second main
resource of income for toll road provider. The industry report states that this segment is closely
linked to the port and international trade activity. And it will be hit by the looming Australian
recession as trade activity freezes.
Besides, the segment of weigh bridges it is closely related to the transportation industry and plays
a considerable role in the industry (8%). However, as economic activity grow slowly in Australia;
the amount of freight being transported falls significantly which to some extent drives down the
revenue from this segment.
Vehicle ferries which provide ferry and punt services for vehicles only takes up 1% according to
the figure 6. This segment provides services to locals and tourists, as the economic condition
improves; demand is expected to recover in the following years.
26 | P a g e
Figure 6: Products and Services Segmentation
*Source: IBISWORLD (2011)
3.5 Major Market Segmentation
The major market of this industry is primarily made up of three segments: private motoring
(44%), commercial motoring (36%) and trade activity (20%) (IBISWORLD 2010). Private
motoring the main resource of revenue, demand from private motorists is negatively related to the
price of oil. Due to the soaring price of oil, many motorists simply choose to use public transport
than pay the high price for fuel in addition to tolls, parking fees and a congestion levy on inner
city car parks. However statistics from IBISWORLD shows the lower price of fuel, and public
transport systems that are stretched to capacity will cause some motorists to shift back to the use
of toll roads in 2009-10. On the other hand, the use of commercial vehicles is influenced by the
economic condition. For example, demand from commercial uses fell in 2008-09 as slower
economic conditions decreased freight volumes in Australia. However it rebounded in 2010-11 as
Australian consumers increase spending, and retailers and manufacturers rebuild inventory levels.
The trade activity segment involves import/export and wharf-related logistics operations, which
are subject to movements in trade volumes (IBISWORLD 2010).Since imports and exports in this
industry are low and steady, domestic demand will equal to revenue in the absence of imports and
exports.
27 | P a g e
Figure 7: Major Market Segmentation
*Source: IBISWORLD (2011)
3.6 Industry Participants/Competitors
The dominant competitors in the Australian toll group are Transurban Group, ConnectEast Group
and Queensland Motorways Limited and other companies. The followings are the snapshot of
major participants in the industry.
28 | P a g e
29 | P a g e
3.7 Porter Analysis
Porter's 5 Forces analysis deals with factors outside the toll road operator industry that influence
the nature of competition within it, the forces inside the industry (microenvironment) that
influence the way in which firms compete, and so the industry’s likely profitability is conducted
in Porter’s five forces model. Porter defined the forces which drive competition, contending that
the competitive environment is created by the interaction of five different forces acting on a
business. In addition to rivalry among existing firms and the threat of new entrants into the
market, there are also the forces of supplier power, the power of the buyers, and the threat of
substitute products or services. Porter suggested that the intensity of competition is determined by
the relative strengths of these forces.
These five forces can be neatly brought together in a diagram like the one below:
Figure 8: Porter’s Five Forces
*Source: Mind Tools (2011)
1. Supplier Power: The analysis of supplier power typically focuses first on the relative size and
concentration of suppliers relative to industry participants and second on the degree of
30 | P a g e
differentiation in the inputs supplied. The ability to charge customers different prices in line
with differences in the value created for each of those buyers usually indicates that the market
is characterized by high supplier power and at the same time by low buyer power. The key
selling industries to the toll road operator make up of metal container manufacturing, lifting
and material handling equipment manufacturing and road and bridge construction. Supplier
power is high in this case. The technology applies to those specialized manufacture as well as
construction is unique and patent. This means there are mere substitutes to replace suppliers in
this industry.
2. Buyer Power: The most important determinants of buyer power are the size and the
concentration of customers. Other factors are the extent to which the buyers are informed and
the concentration or differentiation of the competitors. This force is relatively high where there
are few large players in the market. However, as the toll road operator industry is marketed
directly to private vehicle users and different commercial transportation industries in various
areas, therefore the relative buying power is relatively low.
3. Competitive Rivalry: The intensity of rivalry, which is the most obvious of the five forces in
an industry, helps determine the extent to which the value created by an industry will be
dissipated through head-to-head competition. The most valuable contribution of Porter's ―five
forces‖ framework in this issue may be its suggestion that rivalry, while important, is only one
of several forces that determine industry attractiveness. Competition in this industry
is medium and the trend is increasing and competition for toll roads are public roads that act as
substitutes (IBISWORLD, 2010). While with a large number of operators, competition in the
container services industry is fierce. Operators compete on price, customer service levels and
product differentiation.
4. Threat of Substitution: A threat from substitutes exists if there are alternative products with
lower prices of better performance parameters for the same purpose. They could potentially
attract a significant proportion of market volume and hence reduce the potential sales volume
for existing players. Threat of substitution is considerable high, public road and transportation
acts as substitutes for commercial traffic along with transport of freight. The high price of fuel
will result in a significant number of commuters abandon their cars in favour of public
transport. Beyond the high price of fuel, the tough economic conditions will keep pressure on
toll roads as many Australians cut spending and use public transport.
31 | P a g e
5. Threat of New Entry: The threat of new entrants is usually based on the market entry barriers.
They can take diverse forms and are used to prevent an influx of firms into an industry
whenever profits, adjusted for the cost of capital, rise above zero. In contrast, entry barriers
exist whenever it is difficult or not economically feasible for an outsider to replicate the
incumbents’ position. Barriers to entry in this industry are high and are steady; the ability to
demonstrate to governments the benefits associated with Build-Own-Operate-Transfer (BOOT)
and Public Private Partnerships (PPP) schemes is the main barrier by entering in this industry.
Besides, the incredibly high cost of building transport infrastructure prevents new firms who
intending to get involved in.
3.8 SWOT Analysis
SWOT Analysis is a useful technique for understanding a company’s external and internal
environment which is an important part of strategic planning process. Internal factors to the firm
usually can be classified as strengths(S) or weaknesses (W), while external factors are defined as
opportunities (O) or threats (T) (QuickMBA 2010).
The SWOT analysis provides information that is helpful in matching the firm’s resources and
capabilities to the competitive environment in which it operates. The company Transurban will be
analyzed by this four aspects as follows:
Strengths:
Leading player in the market
Holding dominant toll road assets in Australia
Asset enhancements
Good road performance and safety
Innovative transport solutions
Transurban, a major player in the marketplace holds approximately 33.6% market share in
Australian toll roads industry. Its assets include CityLink (Melbourne), Westlink M7 and Hills
M2 (both in Sydney). Apart from that, Transurban also acquired Sydney Roads Group (SRG),
which had interests in three major toll roads – Eastern Distributor M1 (75.15%), M4 (50.61%)
and M5 (50%) (IBISWORLD,2010). These advanced electronic toll road assets play dominate
roles in Australian toll road market and it also represent the main income for TCL. According to
IBSIWORLD 2010, there were approximately 3.2 million customers using all Transurban roads
32 | P a g e
in 2006, and the number of toll road users as well as revenue increase due to the increasing
activity of Australia’s economy.
On the other hand, Transurban always devotes to upgrade their existing road assets - projects
such as enhancing CityLink's corridor in Melbourne and the Hills M2 motorway in Sydney –
which will deliver more value to the community. The enhancement improves congestion, safety,
driver experience, and travel times. The benefits are moving towards a substantial growth profile.
TCL considers ―Safety‖ as the first priority and insists that safe workplace for their employees
and safe roads for the customers. The company undertakes a number of routine safety initiatives
on roads where they have management control including routine road safety inspections, incident
inspections, and independent road safety audit etc. In some extent, these series of conducts will
minimize the probability of road accident as well as establish a reputation for its safety.
TCL is a provider of Innovative solutions; Transurban always looks at new pieces of
infrastructure and develops new ways to improve their transport networks. Transurban has the
expertise and experience to play a strategic role in addressing different challenges which make
their existing infrastructure work better and create a more sustainable future.
Weaknesses:
Outstanding High Debt Levels
Given the massive investment and enhancement required, without doubt, Transurban need a large
amount of fund to finance its projects. However, statistics from Crude Oil Peak shows the
company has accumulated a debt mountain of around $4billion. Up to now, most of the previous
debt has not been paid back, but refinanced. The refinancing is done for longer periods to avoid
early capital repayments and the repayment problem is pushed into the future. This rolling over of
debt has continued recently, when Transurban obtained a bank loan of $740 million for the M2
widening in Sydney.
Shareholders might also suffer from the debt problem in that interest payments reduce the
dividends they receive, not to mention that the share value drops with higher debts. There does
not appear to be any intention to pay back debt in the foreseeable future. The next debt for the M5
widening is already around the corner.
Opportunities:
Potential Future Transactions
33 | P a g e
Transurban continue to look for further opportunities in the US and Australia that fit their strict
investment criteria. In the US, they are actively monitoring significant long-term opportunities,
with a focus on Virginia and Georgia (Transurban 2011). For example, the company is
developing HOT lanes on the Capital Beltway (I-495)–one of the most congested roadways in
Washington,DC. The project will maximize capacity and adding value to existing infrastructure
corridors.
On-going Population Growth
The On-going population growth in Australia indicates the generation of higher traffic Volumes.
Transurban knows their current toll way assets can’t satisfy the increasing needs and that is the
reason why TCL undertakes project upgrades. The recent CityLink upgrade is starting to deliver
higher traffic flows and enhancements to the M2 & M5 in Sydney should be completed in 2012.
As a result, TCL revenues are expected to continue to grow steadily as toll road users increase.
The Purchase of Lane Cove Tunnel
In May 2010 Transurban brokered a deal to purchase the Lane Cove Tunnel for an estimated
$630.5 million (IBISWORLD, 2010). Transurban said that the acquisition of the Lane Cove
Tunnel, a 3.6 kilometre roadway in Sydney's north, would increase Transurban's exposure to
Sydney's north-west corridor, one of the city's fastest growing business and residential areas. And
the Lane Cove Tunnel toll-road concession arrangement will incrementally benefit Transurban's
strong business profile by providing some further cash flow diversity to the group.
Threats:
The Proposition of Carbon Pollution Reductions Scheme (CPRS):
Toll roads generate revenue through motor vehicle use and that travel produces greenhouse gas
(GHG) emissions. Public policies and community action designed to cut emissions. The
Australian Federal Government’s proposed emissions trading scheme-the Carbon Pollution
Reduction Scheme (CPRS) is one of the action aimed for GHC, which is scheduled to commence
in July 2011. Transurban may be exposed to indirect impacts from the introduction of the CPRS
in the form of higher energy prices (like fuel price), higher construction materials costs and a
potential impact on traffic numbers (Transurban, 2009). In the case of transport fuels, that is the
oil refineries. The increased costs will be passed to consumers of fuel. The carrying out of the
scheme will have the potential to reduce travel and revenue on toll roads.
Urban Congestion and Traffic Management
34 | P a g e
In Australia, the Bureau of Infrastructure, Transport and Regional Economics estimate that,
without reform, urban road congestion could cost the national economy $20 billion by 2020 –
nearly double today’s estimates. High traffic volumes have resulted in low speeds, slow travel,
and significant delays in peak periods. Given the challenges posed by climate change, simply
building more roads and allowing cities to continue to sprawl is not the answer. How to develop
new ways in addressing the challenges posted by urban congestion is another problem that
Transurban faces.
3.9 Industry Outlook
According to IBISWORLD’s prediction, the next five years Australian toll road operator will be
dominated by the opening of the Clem Jones Tunnel and Hale Street Link in 2010 and the
Brisbane Airport Link in 2012. Increased capacity will push industry revenue higher, up by an
average of 3.4% per year over the five years through 2015-16 to be worth $3.1 billion.
The strong development of Australia’s economy, the numbers of trucks as well as commercial
vehicles will increases. This will combine with the opening of opening new toll roads in Brisbane
and the completion of upgrades to CityLink in Melbourne to boost industry revenue. Besides, as
the economy recovers, real household disposable income are expected to increase and Australian
customers are deemed to spend their higher disposable income. Therefore, the demand for toll
road will be boosted which is supported by higher road freight activity. In 2010-11, road freight
revenue is forecast to grow by an average of 4.4% per year over the next five years after growing
by a strong 6.6 % (IBISWORLD 2010).
The proposition of the Carbon Pollution Reductions Scheme (CPRS) will impose a carbon cost
on the upstream producers of carbon emissions. In the case of transport fuels, the increased costs
will be passed on to consumers of the fuel. Any increase in the price of fuel as a result of a carbon
price will see a small percentage of private motorists move from the use of cars to public
transport while others will seek to reduce their transport costs by using public roads and avoiding
toll roads. However, this scheme has been delayed until 2013 and the delay in implementation
and possible changes and amendments means it is unclear what, if any effect a carbon price will
have on the industry.
Secondly, in the past couple of years, the fuel prices have been experienced extraordinary
fluctuation and are not expected to return. As global economies begin to recover from 2010-2011,
the price of oil is expected to cool down and demand will increase. For many Australian, vehicles
35 | P a g e
become an essential transport tool and the stable fuel price encourages the extensive use of
vehicles (IBISWORLD 2010). This will support an increase in the number of vehicle journeys on
toll roads over the period through 2015-16.
Road congestion Australia is expected to increase significantly over the next 20 years with the
Bureau of Infrastructure, Transport and Regional Economic forecasting that road congestion will
cost the Australian economy $20.4 billion per year by 2020. Apart from that, due to an increasing
population density in cities across the country it is likely that any new major road projects will
include significant land acquisitions costs or require the building of tunnels (IBISWORLD 2010).
It is impossible that governments alone can fund the required investment in new roads, bridges
and tunnels. Therefore, government is likely to seek assistance from private operators to fund
such projects, creating new toll roads and this would boost industry revenue.
New traffic projections of North-South tunnel (a new toll road) in Brisbane indicate that the
potential number of vehicles using the tunnel could be higher. The 6.8 kilometre tunnel running
from Woolloongabba in Brisbane's south underneath the Brisbane River and Story Bridge to
Bowens Hills in the city's inner-north opened in 2010 and the project of the airport link is
expected to be completed and opened to traffic in 2012 (IBISWORLD 2010). The new road and
tunnel will boost the industry revenue.
36 | P a g e
4. ECONOMIC ENVIRONMENT
4.1 Overview
After a sharp, broad and synchronized global downturn in late 2008 and early 2009, an increasing
number of countries have registered positive quarterly growth of gross domestic production
(GDP), along with a notable recovery in international trade in 2010 and 2011 ( World Economic
Outlook 2011). The world economy is expected to grow at about 4.5 percent a year in both 2011
and 2012, with advanced economies growing at only 2.5 percent and emerging developing
economies growing at a higher 6.5 percent (World Economic Outlook, 2011). Emerging Asian
economics are leading the world recovery; particularly China while advanced economies Europe
and United States lag behind International Monetary Fund 2011). The world economic is on the
mend. However, the recovery is expected to remain sluggish and uneven. The conditions for
sustained growth remain fragile (IMF 2011).
Transurban Group is a toll road owner and operator with interests in Australia and North America.
Its business comes from the Australian market and American markets, thus future earnings are
leveraged primarily from the outlook of these economies. Thus we will focus on Australian and
American economies for the macroeconomics analysis.
4.2 Macroeconomic Indicators
It is important to look at a range of macroeconomic indicators to evaluate the state of the current
economy and forecast the future outlook. In this report, oil prices, inflation, interest rates and
exchange rates will be discussed.
4.2.1 Oil Prices
Crude oil prices behave much as any other commodity with volatile price swings in times of
shortage or excess supply. The crude oil price cycle may extend over several years responding to
changes in demand as well as OPEC and non-OPEC supply (WTRG Economics 2009). Oil prices
have surged to about $110 a barrel April 2011, as precautionary demand and risk premiums have
increased in response to the oil supply shock triggered by events in the MENA (Middle East and
North Africa) region. The key cyclical factor was stronger-than- expected growth in demand for
commodities during the second half of 2010, which drove up oil prices for 2011 to about $90 a
barrel by early January2011, up from the $83 a barrel expected in April 2010.
37 | P a g e
Figure 9: Global Oil Demand and Production by Region (Millions)
*Source: International Monetary Fund (2011)
The run-up in oil prices preceding the onset of the oil supply shock reflected a number of factors.
Annual growth in oil demand in 2010 was 3.4 percent, the highest rate since 2004.Oil supply
responded to the unexpected increase in oil demand, but not to the full extent possible. Global oil
production is estimated to have increased by 3.2 percent in 2010 (World Economic Outlook
2011).
38 | P a g e
Figure 10: OPEC and Non-OPEC production
*Sources: IMF Primary Commodity Price System (2011)
OPEC crude oil production, which is subject to production quotas, rose by 1.8 percent,
contributing one-quarter to the increase in global supply (Left panel and figure 10).
Global oil production is estimated to have increased by 3.2 percent in 2010. Higher-than-
expected non-OPEC production contributed about half of the surprise increase in supply.
Declines in the North Sea were more than offset by higher production elsewhere, notably in
Brazil, China, Russia, and the United States, reflecting incentives for investment and field decline
management embodied in rising oil prices and, in the case of Russia, changes to the tax regime to
cover high production and development costs (Right panel and figure 10).
Owing to the raising crude oil price, consumer may choose other transportation instead of
Transurban Group’s toll roads, it would be expected that families will be cutting back on
expenses for family budgets. Consequently, Transurban Group’s trading in South America and
Australia will be influenced.
4.2.2 Inflation
In mainstream economics, the word ―inflation‖ refers to a general rise in prices measured against
a standard level of purchasing power. Previously the term was used to refer to an increase in the
money supply, which is referred to as expansionary monetary policy or monetary inflation
(Trading Economic 2011).
The inflation rate in Australia was last reported at 2.7 percent in the fourth quarter of 2010. The
most well known measures of Inflation are the CPI which measures consumer prices, and the
39 | P a g e
GDP deflator, which measures inflation in the whole of the domestic economy (Trading
economic 2010).
Figure 11: Australia Inflation Rates (2008 -2010)
*Source: Trading economics of Australia (2011)
Figure 12: Australia Long Run Inflation (1960-2010)
*Source: Reserve Bank of Australia (2011)
The Governor and the Treasurer have agreed that the appropriate target for monetary policy in
Australia is to achieve an inflation rate of 2–3 per cent, on average, over the cycle. Seeking to
achieve this rate, on average, provides discipline for monetary policy decision-making, and
serves as an anchor for private-sector inflation expectations. Inflation in Australia is moderate
due to slow wage growth, exchange rate appreciation and easing demand (Inflating Target RBA
2011).
40 | P a g e
Treasurer Wayne Swan believes inflation is expected to rise a quarter of a percentage point in the
March quarter of 2011, as a result of Australia's devastating floods (Herald Sun 2011). As
inflation rises, the price of oil and the price of consumer goods are expected to rise, this will
result in a decrease of the demand which in result an expected fall in consumption. Consumers
will take the cheaper alternatives of transportation, Transurban Group will possible face a
decrease in revenue in Australia.
Figure 13: US Inflation Rates (2005-2010)
*Source: Trading Economic (2011)
As we can see from the chart, the inflation starts to increase at the beginning of 2010. The
inflation rate in United States was last reported at 1.6 and 2.1percent in January and February of
2011 and at 2.7 % in March of 2011. US Consumer Price Index for All Urban Consumers (CPI-U)
increased 2.1 percent before seasonal adjustment over the last 12 months, the Bureau of Labour
Statistics reported on March 17. For the month, the index increased 0.5 percent prior to seasonal
adjustment in 2010 (Trading Economic 2011). However, in the US oil prices played a lead role in
the rise of inflation during 2010 — the current level of inflation (Dec 2009- Nov 2010) is 1.1%,
and energy prices increased in the U.S. by 3.9%. (Bureau of Labour Statistics (BLS) 2011)
Because of increasing inflation, the price of oil and consumer goods will rise; this will lead to
decrease in demand and consumption. Consumer may choose the cheapest way to travel (e.g:
public transaction) instead of toll road.
41 | P a g e
4.2.3 Interest Rates
Figure 14: Australia Interest Rates (2004-2010)
*Source: Trading Economic (2011)
From 2004 to 2010, Australia's average interest rate was 5.81 percent reaching a record high of
7.50 percent in 2008 and a record low of 3.00 percent in April of 2009. Interest rates are
controlled by the central bank (Reserve Bank of Australia). The official interest rate is the cash
rate. The cash rate is the rate charged on overnight loans between financial intermediaries, this is
determined in the money market as a result of the interaction of demand and supply of overnight
funds (Trading Economic 2011).
Since the global financial crisis, the RBA has reduced the cash rate to record lows in order to help
stimulate the economic. The cash rate in Australia was last reported at 4.75 percent. Reserve
Bank of Australia decided on the 1st March 2011, to keep interest rate unchanged at 4.75% (RBA
2011). Westpac Economist Bill Evans predicts that the next interest rate rise will come in April
2011, and this will be the first of three for that year (Tom Reid 2011).
42 | P a g e
Figure 15: US Interest Rates (2002-2010)
*Source: Trading economic (2011)
US Interest rate (2002-2010) shows that the interest rate in US has increased by 4.28% from 1.02%
in May 2006 to 5.3% in October 2007 and has decreases to 0.25% in January 2009, this can be
seen in figure 15.
In the United States, interest rate decisions are divided between the Board of Governors of the
Federal Reserve (Board) and the Federal Open Market Committee (FOMC). The Board decides
on changes in interest rates after recommendations submitted by one or more of the regional
Federal Reserve Banks. The FOMC decides on open market operations, including the desired
levels of central bank money or the desired federal funds market rate.
According to Trading Economics 2010, the Federal Reserve has kept interest rates unchanged at
0.25% from January 2009 to August 2010 (Trading economic 2011). The low interest rates would
make it attractive for business spending as it would be cheaper for Transurban to fund new
projects and also reduce current debt. Less interest expenses will result in increase in net profit.
4.2.4 Exchange rates
The behaviour of currencies in the foreign exchange market is hard to forecast because there are
many factors to consider across many countries.
43 | P a g e
Figure 16: Australian Dollars vs US Dollars (2010-2011)
*Source: RBA (2011)
Australia’s real exchange rate has appreciated over the last years, driven largely by an increase in
the term of trade and bringing with it benefits and challenges for the broader economy. Many
variables have been identified as correlating with the real exchange rate, including productivity,
inflation and investor perceptions (RBA Economic Competition 2010).
The rise of interest rate has had positive effect on the AUD in the last month. Inflation has
increased as a result of a decrease in money supply (i.e. currency), this means an increase in
inflation rates will cause increase in the price of Australian products. This will create less demand
for Australian product (decrease Australian export) which leads to a depreciation in AUD
(appreciation in USD).
The stronger currency is likely to negate higher earnings from the growing commodity exports
and may result is cautious business sentiment for sometimes. For example, Australia dollar
appreciation will affect business in America and the profit in America will decline. Thus, there
will be a higher risk of exchange between the countries.
44 | P a g e
4.3 Economic outlook
Figure 17: World Economic Growth Rate (2004-2010)
*Source: World Economic Situation and Prospect (2010)
Overall, the world’s GDP is expected to climb in the future since economic recovery is on the
mend. In 2010 it was a year of recovery, it was sputtering and many questioned whether the
recovery was real and if it could be sustained. In 2011 things are looking brighter following a
booming stock market up 13%, a new 2011 Tax Stimulus package, and housing markets
stabilizing around the country. But the one major area of concern is unemployment, which is
high around 10% despite improving corporate and small business profits (Today’s Economic
2011). As a result of the positive economic outlook consumer and business confidents is expected
to be strong as the world economy is experiencing the expansionary phase of the business cycle.
4.3.1 Estimated Market Return
Since Gross Domestic Product (GDP) growth serves as an indication of the level of economic
activity, we assume expected market returns are driven by the changes in GDP growth. If GDP
growth is high, then it indicates that the level of economic activity in the economy is high and
consequently investors are optimistic and confident about the current economic condition as they
are expecting a higher return for their investments. As seen in the table below, if change GDP is
over 5%, then estimated market return will be 25% and the assumed probability that it will occur
is 15%, there will be a weighted expect market return of 3.75%. Inversely, if GDP declines, then
it indicates that the economic activity is slowing down and investors may not expect as high of a
market return. The table below shows that if the change in GDP declines is in the range of 3% -
4%, then estimated market return will be 15% and the probability of that occurring is 40% there
will be a weighted 6% expect market return. We expected that there will be a strong to weak
45 | P a g e
growth in RGDP hence we have weighted the probability heavily in those periods (75%). The
table below shows the inputs that have been used to calculate the expected market return for the
current period. The expected market return for the period is expected to be 11%.
Table 7: Estimated Market Return
Macroeconomic
Performance
Estimated Market Return Probability Expected Market Return
(% Change in Real GDP
Very Strong (>5%) 25% 15% 3.75%
Strong (3% - 4%) 15% 40% 6.00%
Weak (1% - 3%) 5% 35% 1.75%
Very Weak (<-1%) -5% 10% -0.50%
E(Rm) 11%
46 | P a g e
5. CURRENT ISSUES
Transurban Group like many of peers also faces external factors that affect its future and potential
growth. Macroeconomic and microeconomic factors will now be discussed to examine the
current issues that the company may face during a time of rising prices and in a recovering world
economy.
5.1 Macroeconomic Factors
5.1.1 Increase in Oil Price
The increase in world oil price since 2009 has reflected the combination of expectations of the
recovery of world economy which lead to a higher consumption in oil. Investment and
speculative demand are also among the factors that contributed to the rise in world oil prices.
From 2009 to 2010, Australia’s crude oil and condensate production is forecasted to drop by 2.3%
from 2008. Thus, due to the lower production in year 2009, Australia’s crude oil and condensate
exports are forecasted to drop by 2.4% and consequently causes the prices of oil to increase by
3.5% to 9.1billion. As a result, the increase in oil prices has a major impact of declination in
consumption of petrol. Consumers decrease their petrol consumption level by travelling with
public transport instead of driving their own vehicles. This will cause the total revenue of
Transurban Group to decrease due to the diminishing level of traffics (ABARE, 2011).
5.1.2 Increase Level of Debt to Disposable Income
Among the other countries in the world, Australia has the highest household debt to disposable
income ratio. This has a negative indication as in average Australia household has bigger debts
(Denning D 2010). According to RBA, debt to disposable income ratio had increased from 92.4
in 2009 to 97.4 in 2010. The latest RBA report showed that interest rates had increased which
overall increases the interest payments as a share of disposable income have increased from 10.6%
in 2009 to 12.1% for 2010 due to the monetary policy taken by RBA to control the inflation rate
(RBA 2011). As Australians are engaging in the higher level of debts, therefore they need to cut
down on their daily expenditure in order to sustain the debt repayments. It is a bad sign for the
growth of revenue for Transurban Group as people cut down on their travel cost by consuming
less petrol or avoid paying toll by using public transports.
5.1.3 Availability of Public Transport
Depending on the location of the areas, public transports can be a threat to Transurban Group.
Due to technology advancement, public transports such as buses, trains and trams are built
47 | P a g e
connected to most of the areas especially in big cities like Melbourne and Sydney. Statistics
showed that yarra trams and metro trains have been delivering average of 80% in their
performance achieved (Yarra Trams 2011). The efficiency of public transports had been
consistently increased which boost the confidence of passengers in taking public transports.
Hence, more people will start to take public transports as it is more convenient and save costs.
5.1.4 Government
Few massive projects carried out by the Transport Victoria Government such as regional railway
stations upgrade and Westlink will have negative impact on the traffic growth of Transurban
Group. The upgrade of regional railway stations enhances the connectivity with bus and coach
services and better access to rail services. Improvement of passenger amenities promotes the
numbers of people taking public transports (Victoria Department of Transport 2011). NSW
government’s strategy to speed up the plan and construction of the 23 km North West rail link
will have negative impact on Transurban’s profit level. The North West rail link will connect the
passengers from areas including Castle Hill and Rouse Hill to the city making the travelling to
and from city a cheaper and easier way (NSW Department of Transport 2011). Upon the
completion of all these projects, the number of passengers using the tollway will decline as more
passengers are using public transports.
5.2 Microeconomic Factors
5.2.1 Potential Investments
Transurban Group’s growth was attributed a lot to acquisitions on strong assets and investments
into new information technology systems. According to the latest half yearly report, Westlink M7
had great potential of maximising the revenue return as southern section of the road in Sydney
had high industrial development which would continue to deliver more traffic. Western Sydney
continued to deliver high population growth and high employment which would drive in more
traffic along M7. Besides that, according to the half yearly report of Transurban Group, there was
10.3% in the growth of revenue which indicated that the growth rate had been strong (Transurban
Half Yearly Report 2011). Therefore, Transurban Group should invest in upgrading the Westlink
M7 as one of the project in future to sustain more traffic along M7.
5.2.2 Competitors
Due to high cost of establishment and extensive government regulations, the entry of new
competitors to the markets is tough. Nevertheless competitions within the industry still exist.
48 | P a g e
Connect East and Queensland Motorways are the two largest competitors to Transurban Group.
There are few major projects such as Eastern recreation precinct, Eastlink service centre,
Somerfield, The key industrial park and Peninsula Link along the Eastlink tollway will be
completed in 2011 and 2013 are forecasted to generate more traffics towards the eastern surburbs
(CEU Annual Report 2010). As for Queensland Motorways, there are two major projects being
commenced by them which are Gateway upgrade project and free flow tolling on Gateway and
Logan motorways. The completion of these two projects will bring positive outcomes to the
public as it provides better connections for business, tourism and industry and reduces traffic
congestion (Queensland Motorways 2009). It can be seen that the eastern freeway is dominated
by Connect East and upon the completion of the projects along the Eastlink, traffics will be
diverted from the North suburbs towards the Eastern suburbs. On the other hand, Queensland
Motorway is on the move to dominate the toll roads in Queensland which restrict the expansion
of Transurban to that particular state. The impact is estimated will decrease traffic growth of
Transurban Group.
49 | P a g e
6. FINANCIAL ANALYSIS
Transurban Group’s financial statements are complied consistent with the Australian accounting
standards and has been audited by the PriceWaterHouseCoopers accounting firm.
Figure 18: Historical Income Summary (5 years)
*Source: Morningstar DatAnalysis (2011)
Transurban Group had been experiencing strong increase in operating revenue. There was a total
increase of 344 million which equivalent to 84.52% from year 2006 to year 2010. There was a
50 | P a g e
big increase which was 136 million in operating revenue from year 2007 to 2008. The large
increase in the operating revenue was due to the successful acquisition asset of Eastern
Distributor (ownership of 75.15%) and M5 Motorway (ownership of 50%). Eastern Distributor
generated total revenue of 73.7 million while M5 Motorway managed to generate total revenue of
163.6 million which contribute to the increase in the Transurban’s operating revenue (Security
review 2008). Overall the strong level of growth in Transurban Group had indicated that
acquisition and upgrading of assets managed to drive in more traffic and capture a larger
consumer group.
Table 8: EPS Growth Compared to EBIT Growth
Year EPS (Cents) Growth (%) Growth EBIT (%)
2006 -7.6 - -
2007 -17.2 -126.31 370
2008 -13.1 23.83 -144.68
2009 -1.9 85.49 633.33
2010 4.6 342.11 80.36
*Source: FinAnalysis (2011)
EBIT (Earnings before interest and tax) is used to measure the profitability level of the firm
which capture the businesses’ ability to generate profit on its sales irrespective of other factors
such as government taxation policy of incorporation or how the business is financed.
Transurban’s EBIT margin had increase of 370% from 2006 to 2007 and had decreased of 144%
in 2008. The decrease in EBIT margin for 2008 was due to the acquisition of new assets, Eastern
Distributor and M5 Motorway where the depreciation charged on new assets employed were
larger. There was a massive increase in EBIT from 2008 to 2010 which was 1061.9%. Other
factors such as increase in toll fees on heavily populated urban areas had contributed to the
increase in operating revenue hence higher EBIT and massive cost reduction since 2008 which
save the company of total $45.3 million reduced the operating expenses eventually contributed to
the increase in EBIT (TCL annual report 2009).
EPS (Earnings per share) had been showing negative figures since 2006 to 2009 which indicate
that Transurban Group had been heavily financed by debt due to the company been actively
acquiring new assets in year 2007 to generate more revenue. It showed improvement in EPS after
2007 but still remained negative figures because the new assets had not been generating sufficient
revenue to cover the financing costs of the company. However, the dividends were still being
paid out to meet the investors’ expectations and also the company was very optimistic to turn
around the negative EPS into positive EPS once the assets started to generate sufficient revenue
51 | P a g e
in future. There was strong growth in EPS in 2010 which was 342.11% which turn around the
negative EPS into positive value which had proven the company’s ability to generate profits for
the investors.
6.1 Dupont Analysis
Dupont Analysis provides a detailed analysis in evaluating the return on equity for the company.
The extended Dupont system captures the evaluation of the company’s profit margin, total asset
turnover, the effect of financial leverage on the company as well as the effect of income taxes on
ROE.
Figure 19: Dupont ROE Analysis Framework
*Source: Merck & Company, A comprehensive Equity Valuation Analysis
To conduct the analysis of Dupont ROE, Transurban Group’s financial performance have been
compared relative to its peers which are CTI Logistics Limited (CLX) and Toll Holdings Limited
(TOL).
52 | P a g e
Table 9: Summary of Extended Dupont Analysis
*Source: FinAnalysis (2011)
6.1.1 EBIT/Sales
EBIT or can be considered as reported earnings before interest and tax and it attempts to measure
the profitability of the firm. Through this ratio, the investors can compare the efficiency of the
company in generating profit with the peers and gain a broader view in making investment
decision.
The EBIT margin for Transurban Group had increased from year 2006 to 2007 but had
deteriorated in 2008 and experienced an increase again from 2009 to 2010. Comparing to
all the peers, Transurban Group had not been performing well in 2006 and 2008 but
managed to outperform all the peers in 2010.
Toll Holdings had been experiencing decrease in EBIT ratio and CTI Logistics on the
other hand had been consistently maintaining the EBIT ratio on the average of 0.12.
Transurban Group had the highest EBIT ratio in 2010 as the previous assets acquisition
managed to bring in higher revenue to the company.
Therefore, it is very optimistic that Transurban Group will continue to experience positive
marginal growth as the company begin to benefit from the assets acquisition as well as massive
upgrading projects that will drive in more revenue.
6.1.2 Sales/Total Assets
Total asset turnover ratio is to measure the effectiveness of a firm’s use of its total asset base.
Therefore the higher is the ratio; the higher is the volume of sales thus higher the profitability of
the firm.
Transurban Group had the lowest total asset turnover ratio comparing to the other peers.
According to the ratio, Transurban Group had not been able to maximise the usage of the
asset in generating more income. The latter is due to Transurban Group had been carry
major fix assets that caused the ratio to be low.
However, Transurban Group had been showing consistent increase in the ratio until 2009
and remained unchanged in 2010. This showed that the company was trying to improve
the management of the assets and became more efficient in handling the assets.
It is most likely that Transurban Group total asset turnover ratio will remain low due to the
company carry a higher fix asset base comparing to the rest of the companies.
54 | P a g e
6.1.3 EBIT/Total Assets
The return on asset ratio (ROA) measures the efficiency of the firm in delivering profits from the
assets regardless the size of the firm. A high ROA indicates that the company has a good
financial and operational performance and vice versa.
Transurban Group had the lowest ROA ratio comparing to the competitors. Transurban
Group had been massively expanding and acquiring new assets which caused the
company went into heavy financing.
In year 2008, Transurban Group had a negative ROA ratio as the new acquired assets
were not ready to generate more revenue as well as massive upgrading projects been
carried out had caused the ratio to decline. However, there was an improvement in the
ratio after 2008.
CTI Logistics had the highest ROA ratio comparing to the rest which indicated that the
company had the best financial and operational performance comparing to Toll Holdings
and Transurban Group.
It is expected that the ROA for Transurban Group will increase in future upon the completion of
the massive upgrading projects such as MI-Citylink, Hills M2 and M5 in Sydney.
6.1.4 Interest Expense/Total Assets
The interest expense to total debt ratio reflects the interest rate that the company has to pay on its
total debt. A high interest expense ratio is not a good indication for the company because the
company is paying a high interest rate on the debt and thus will increase the total expenditure of
the company.
Transurban Group’s interest expense ratio had been consistently remaining on the average
of 1.6% which was low. This was due to the offset of interest revenue. It also came to
show that although the company incurred a high interest expense but the company had
been managing the repayment of interest effectively.
It is very optimistic that the company will continue to maintain the low interest expense ratio in
the future.
55 | P a g e
6.1.5 Net Before Tax/Total Assets
This ratio attempts to measure the level of return on the company’s asset base before tax. The
ratio is quite similar to EBIT/Total asset except it takes into consideration of the effects of
interest payments.
The ratio had been showing negative figures from 2006 to 2009 which clearly indicated
that the level of return on the company’s asset before tax was bad and came to prove that
the company was not making enough profit to cover the expenditures.
However, there was a big increase about 150% in the ratio from 2009 to 2010, which
showed significance improvement in the profitability level and where the company had
access to more funds before tax.
It is very likely that Transurban Group will continue to have increase in the ratio as the expansion
of the operations will bring in more profits in future.
6.1.6 Total Assets/Common Equity
This ratio is to examine how a company uses debt to finance its assets. It is also known as
financial leverage multiplier. The higher the ratio, the higher the financial leverage and this
indicates that the company is relying heavily on debt to finance its assets.
Transurban Group had the highest financial leverage ratio comparing to the competitors
and this came to prove that the company had been heavily financed by debts because of
the company’s expansion strategy.
The ratio overall decreased from 312% in 2006 to 260% in 2010 which demonstrated that
the company had reduced amount of debts as more revenue were generated to cover the
expenditures.
Transurban Group’s ratio is likely to remain relatively high depending on the company’s future
strategies in expanding the business as it might need extra funds to finance the massive projects.
6.1.7 Net Before Tax/Common Equity
This ratio indicates the return to equity holders before payment of tax.
Transurban Group had been showing negative ratio from 2006 to 2009 which
demonstrated that the return to the equity holders were poor. Comparing to the other peers,
CTI Logistics had the highest return to the equity holders.
56 | P a g e
As Transurban Group had weak performance for the past 4 years, it showed a huge
improvement in 2010 where the ratio had increased about 144% from -1.49% to 0.65%.
Looking at the improvement in the ratio, it is very likely that the ratio will continue to increase in
future as the company is very optimistic in bringing in more profits to the shareholders with their
current strategy plans.
6.1.8 Tax Retention Ratio
This ratio measures the proportion of net income before tax that is not paid in the form of taxes.
The higher the ratio, the lower the rate of the tax paid.
The tax retention ratio for the Transurban Group had been inconsistent as it experience
low rate in 2006, 2008 and 2009 and relatively high in 2007 and had the highest in 2010
which was 233%.
Transurban Group had been paying the lowest rate of tax in 2010 comparing to the other
competitors.
6.1.9 Return on Equity
ROE measures the company’s profitability by demonstrating how much profit the company is
generating using the money that is invested by the shareholders.
Figure 20: Five Year Average Return (2006-2010)
*Source: FinAnalysis (2011)
57 | P a g e
Transurban Group was the weakest performer comparing to its peers as it had the lowest
average ROE for the past 5 years.
CTI Logistics was the strongest performer as it had the highest average ROE which was
above the average benchmark. Toll Holdings on the other hands had been performing well
and managed to achieve ROE slightly higher than the average benchmark.
However, comparing to the ROE of Transurban Group from 2006 to 2010, there was a big
increase from -2.5% to 1.5%.
Transurban Group is very heavily relying on the consumers using the service of the toll road;
therefore the profits as well rely heavily on the traffics. Taken into considerations of the few
massive upgrading projects, upon the completion of the projects, there will be higher level of
traffics and the company is very likely to boost up the ROE in the coming future.
58 | P a g e
7. VALUATION ASSUMPTIONS
The valuation that will be conducted on Transurban will be on its intrinsic share price value,
certain valuations models and techniques are used. The data that will be used for the purpose of
this analysis will be based on the firm’s and the S&P 200 historical data, as well the analysis on
the economic outlook.
7.1 Required Rate of Return (CAPM)
The required rate of return for Transurban must be derived in order to use the valuation models,
as it will give the discount factor relevant for use in valuation models throughout this report. To
calculate the required rate of return the capital asset pricing model (CAPM) is utilised. The
CAPM is made up of three components the risk-free rate ( ), market risk premium ( )
and Beta ( ). The CAPM is based on the idea that investors must be compensated for taking on
an investment. The two forms of compensation is the time value of money which is represented
by the risk-free rate and the second form of compensation is for taking on additional risks which
is represented by the product of the asset’s beta and market risk premium (Investopedia 2011).
The CAPM equation required to calculate the relevant discount factor used in the valuation
models is presented below:
Risk-free rate ( )
The risk-free rate is the return that the investors can expect with no risk associated to it. The risk-
free rate that will be used for the purpose of the valuation models will be the current 10 year
Australian Treasury bond yield. The yield for the 10 year government bond is currently 5.575
percent as of the 15th
April 2011 (Reserve Bank of Australia 2011).
Market return ( )
The market return is based on the analysis that was performed on the economic outlook. It was
calculated that based on the current economic environment the expected market return would be
11 percent. (The full calculation for the expected market return can be seen in section 4.3.1, table
7).
Market risk premium ( )
The market risk premium is the difference between the expected return of a risky asset that
exceeds the risk less asset. The market risk premium is derived from the difference between the
59 | P a g e
expected market return (11%) and the risk-free rate (5.575%). The market risk premium that was
calculated is 5.425 percent.
Beta ( )
The beta coefficient is a measure of systematic risk, also known as non-diversifiable or market
risk. It measures the systematic risk of a particular risky asset relative to that of a fully diversified
market portfolio. The market portfolio for valuation purposes will be based on the S&P200.
To calculate the beta the five year monthly total returns indices between 1/1/2006 – 1/3/2011 for
S&P200 were used as the market return and the total return indices for Transurban Group were
used for the same period.
The equation for the raw beta is as follows:
The equation for adjusted beta is as follows:
The raw beta calculated is 0.6132 and from converting it to an adjusted beta figure it was
calculated to be 0.7408. Since the Beta is less than one this indicates that Transurban group
inherits less systematic risk than the market. The adjusted beta will be used in the calculation of
required rate of return since the beta of individual assets tends to move towards the mean market
beta in the long-run. (Refer to appendix 1 for excel beta calculations).
Required Rate of Return (CAPM) Calculation
By inputting the variables in the CAPM formula investors required rate of return can be derived.
The required rate of return for Transurban stock is calculated to be 9.5939%. This is the investor
required rate of return that will be used in the valuations models.
60 | P a g e
8. VALUATION ANALYSIS
8.1 Dividend Discount Model (DDM)
The dividend discount model is used to evaluate the intrinsic value of a company’s share price.
This model is useful for valuation purposes where it can be seen that a company pays dividends.
The theory of the model is to determine all the present values of a company’s expected future
dividends payables to shareholders (Reilly & Brown 2009). To forecast a company’s future
dividends the appropriate assumptions for dividend growth rates must be used.
There are two evaluations models for the DDM that need to be taken into consideration. One of
the models that need to be taken into consideration is the stable growth rate model also known as
the constant growth rate model. This model is used for when the dividend growth is constant
generally in where dividend growth is stable. The requirement in order to use this model is that
the required return ( ) must be greater than the dividend growth rate (g). If it is not this violates
the assumptions of this model.
The equation for the stable growth DDM model is shown below:
The second model is the multi-stage dividend growth rate model. In this model the dividend
growth rate can be greater than the required rate of return in the short-run. In this model it takes
into account different stages of dividend growth which depend primarily on the attributes of the
company, the stages of the business cycle and on the economy’s future economic outlook.
The equation for the multi-stage growth DDM is shown below:
Where:
Since our future expectation of Transurban is for it to experience several growth phases before
the company enters into the mature growth phase, both models will be utilised to calculate the
intrinsic value of Transurban Group’s share price. In calculating the intrinsic value the company’s
future dividend growth rates must be forecasted.
61 | P a g e
8.1.1 Dividend Forecast
The dividend for 2010 that was used was $0.24 per share. This is the sum of the interim dividend
for 2010 and the final dividend for 2010 (TCL Annual Report 2010). The full dividend for 2011
was not able to be used since the final dividend for 2011 has not been paid.
Firstly we will examine the historical dividend growth rates which can be seen in the table below.
Table 10: Transurban Historical Growth Rates
*Source: company data (Fin Analysis) (2011)
Over the past four years from 2007 to 2010, Transurban’s ordinary dividend payment has
experienced significantly fluctuation during this period especially the dramatically drop of DPS
from 57c to 22c between 2008 and 2009. In addition to the decrease freight volumes from the
slower economic conditions, the level of dividends was under further pressure.
According to Theage (2009), in 2008 Transurban captured headlines as it raised almost $1 billion
capital and shifted from its debt-funded model towards paying distributions out of cash flow. As a
result, Transurban's dividend for the half-year has been cut from 28c to 11c (57c to 22c for whole
year) and Transurban's net profit follows a $16.1 million loss in 2008/09.
After the sharp fall, TCL gained a gradually increase in its dividend payment. For the full year
2009/2010, it was reported that the company’s net profit had reached $59.418 million which is up
342% on the prior year (Theweat 2010). Transurban declared a final distribution of 12 cents per
security unfranked, bringing total distributions for 2009/10 to 24 cents unfranked. Besides that,
Transurban said it expected to pay a higher total distribution in 2010/11 of at least 26 cents, based
on the positive outlook for Transurban in the year.
Also, despite of the economic cycle, a cost reduction program conducted by Transurban had
delivered total savings of $45.3 million since June 2008. This is more than double the original
cost reduction target announced at that time. Transurban chief executive officer defined the
results and growth in EBITDA was the outcome of continued efforts in pursuing value for the
security holders. And the continuing rising distributions of dividends for shareholders
demonstrates confidence in the firm’s capacity to continue to add value.
62 | P a g e
Currently, the interim dividend is declared to be 13c per share in the first half year of 2011, but
TCL group affirms the expectation to pay distribution in the whole financial year of at least 26c
per security. This is supported a strong pipeline of growth projects that would deliver a
significant increase to group cash flows and drive returns for security holders over the long term.
Although Transurban has provided no guidance to dividend price in the following several years,
however we maintain an optimistic attitude towards the steadily revenue growth as well as DPS
growth for the firm with the following reason:
On-going population growth which should generate higher traffic volumes;
The recent CityLink upgrade starting to deliver higher traffic flows
The tolls that Transurban charges road users are usually indexed to inflation which
suggests toll growth of around 3% per annum given the current inflation rate.
We expect to see a stable to mid strength dividend growth rate of 8% in the following three years
(2011- 2013) as the enhancements to the M2 & M5 in Sydney will be completed in late 2012.
The Hills M2 upgrade is a clear demonstration of attractive enhancement projects that can be
undertaken on Transurban’s mature toll roads (BusinessSpectator, 2009). These projects unlock
capacity for the benefit of Transurban security holders and road users alike.
Transurban is forecasted to enter a high dividend growth stage with the growth rates of 14% for
about three years. Chris Lynch, the chief executive of TCL, said "We are forecasting 7% uplift in
traffic across CityLink by 2015 - over and above regular growth - as a result of the upgrade
project." Increasing the dividend signals that directors are confident in the future ability of the
company to maintain cash flow. However, we consider the firm will get into a stable stage in the
long run with low dividend growth rate which is estimated to be 3% from 2017 onwards.
We develop the following timeline according to the assumption we’ve made:
Table 11: Forecasted Dividend Growth Rates
PHASE 1: Slow - Moderate
Growth Stage
PHASE 2: High Growth Stage PHASE 3: Stable Growth Stage
2011 - 2013 2014 - 2016 2017 - Onwards
-Dividend growth rate of 8% -Dividend growth rate of 14% -Dividend growth rate of 3%
-The accomplishment of M2 & M5
enhancement
-The commencing use of the
upgrade projects
-Stable economy
-Construction on the Capital
Beltway (I-495) High Occupancy
Toll (HOT) lane project with its
first tolls expected in early 2013
-Traffic volume is expected to be
17,300 average daily trips by 2016
-Dividend growth rate close to the
level of macro-eco long term
growth
63 | P a g e
8.1.2 Intrinsic Share Price
Transurban Group’s intrinsic share price was calculated to be $5.48, the calculations for the
intrinsic values can be seen below in table 12. The calculations were based on the three growth
phase that we have made in our assumptions and also based on our required rate of return that we
have calculated using the capital asset pricing model. To calculate the intrinsic value of
Transurban share price we have used the multi-stage dividend growth model and the stable stage
growth model. Comparing our intrinsic value of $5.48 and the market price of $5.31 as of the
15/4/2011, it would suggest that Transurban shares are trading at a discount of 3.1%.
Table 12: Transurban Group Intrinsic Share Price (DDM Excel Calculation)
8.1.3 Sensitivity Analysis
The outcome and accuracy of the intrinsic value in DDM valuation is dependent on variables that
have been forecasted in the model, therefore it is necessary to test the significance of these
variables. The variables that need to be considered are the growth phases and the required rate of
return.
Transurban required rate of return is dependent on its market risk premium and the beta. In table
12 we compare the sensitivity of the required rate of return based on different market risk
premiums and beta values to measure the outcome of Transurban intrinsic share price.
64 | P a g e
Table 13: DDM Beta and Risk Premium Sensitivity (Discount Sensitivity)
It can be seen from the above table that as the company’s beta and risk premium increase the
intrinsic share price of TCL decreases and vice-versa. It can be seen from the CAPM equation in
section 7.1 that as market risk premium or if beta increases the required rate of return required by
investors would increase; since the investors are taking on more risk. Based on the current
dividend growth rates, for investors to take on more risk reflected by the increase in the required
rate of return, investors would want to pay a lower price for the share. Hence increasing betas and
market risk premiums would cause the intrinsic share price to decrease and vice-versa.
Dividend growth rate sensitivity and its influence on the intrinsic value using the dividend
discount model should also be considered. Table 14 below shows the intrinsic price based on the
sensitivities of the different growth phases.
Table 14: Dividend Growth Rate Sensitivity
The table above shows that as growth rates increase the intrinsic share price will increase and
vice-versa, holding the required rate of return constant. This is also logical, if investors required
rate of return remains the same and as dividend growth rates increase investors will be paid a
greater return. If investors’ returns are increasing relative to their required rate of return they will
be willing to pay more for the stock.
65 | P a g e
The sensitivity analysis completed for the DDM model shows that the variables forecasted and
calculated are sensitive to the calculation of the intrinsic value of its share value. This suggests
that the accuracy of the intrinsic value derived is highly dependent on the accuracy of the
forecasted growth rates and required rate of return calculated.
8.2 Free Cash Flow to Equity Model (FCFE Model)
The discounted free cash flow to equity model like the dividend discount model is used to
calculate the intrinsic value of a company’s share price. This model is useful for evaluation
purposes where a company does not pay a continuous dividend or any dividends at all. The
theory of the model is to determine all the present values of a company’s expected future free
cash flow to equity available to shareholders (Reilly & Brown 2009). There are also two discount
models that need to be considered for valuation of the company’s intrinsic value, the stable
growth FCFE model and the multi-stage FCFE growth model.
The first model to be considered is the FCFE stable growth model; in this model the growth rate
is constant as the company’s free cash flow to equity is increasing at a constant rate. The
requirement is that the required rate of return ( ) must be greater than the FCFE growth rate
( ). If it is not this violates the assumptions of this model.
The equation for the FCFE stable growth model can be seen below:
The second model that needs to be considered is the FCFE multi-growth rate model in this model
the FCFE growth rate can be greater than the required rate of return in the short-run. This model
takes into account different stages of dividend growth which depend primarily on the attributes of
the company, stages of business cycle and on the economy’s future economic outlook.
The equation for the FCFE multi-stage growth model can be seen below:
Where:
66 | P a g e
Both of the models will be used in conjunction to one another for our valuation of Transurban’s
intrinsic share value. Both models will be used as we have forecasted for several different growth
phases before the company enters into its mature growth phase. The growth rates for the FCFE
must be forecasted in order to use these models.
8.2.1 Cash Flow Forecast
The free cash flow to equity for 2010 that was used is $0.0763 per share. The values used to
calculate the free cash flow to equity is obtain from the company’s financials from Fin Analysis.
The FCFE is calculated from the following equation below:
Assumptions for FCFE calculations:
Net Earnings are represented by net profit after tax (NPAT)
Debt ratio is calculated from Total Liabilities / Total Assets
The rest of the values are taken as is from Fin Analysis
The calculations for FCFE is then converted to a per share figure. In order to convert this to a per
share figure we divided the FCFE by number of shares outstanding. The number of shares
outstanding is calculated by the market capitalization of Transurban divided by the market price
at the end of the corresponding period. Table 15 shows the historical figures of FCFE of
Transurban between 2006-2010.
Table 15: Historical FCFE Growth Rates
*Source: company data (Fin Analysis) (2011)
67 | P a g e
The historical FCFE shows that its growth rate of FCFE is extremely volatile the extremes are
from 109.07% growth from one year to -108.05% in another year. This indicates that the forecast
for future expectations on Transurban’s FCFE is subject to certain extremes. However the
negative growth rate experienced in 2008 could be explained by the global financial crisis (GFC)
which we would expect to have a negative impact on the company’s cash flow.
The future FCFE growth rates have been forecasted based on the analysis detailed in section 8.1.1
of this report. Our analysis expects that Transurban will experience three phases of growth in the
coming future. However it is expected that the growth rate phase for FCFE will greater than the
growth rate phase from the dividend discount model. Our analysis expects this to be the case
since we expect that for the future periods for all the current financing projects that Transurban
has undertaken will be in near completion and they will not undertake new projects in the coming
future. We expect there to be an increase in cash inflow as the cash outflow is expected to
decrease because of the completion on their current projects in the next coming years. Our
analysis of the FCFE growth rates has concluded that Transurban will experience several phases
of growth, the slow growth stage, high growth stage and stable growth stage. The FCFE growth
rate forecast can be seen in table 16 below.
Table 16: Forecasted FCFE Growth Rates
PHASE 1: Slow - Moderate
Growth Stage
PHASE 2: High Growth Stage PHASE 3: Stable Growth Stage
2011 - 2013 2014 - 2016 2017 - Onwards
- FCFE growth rate of 32% -FCFE growth rate of 41% -FCFE growth rate of 3%
-The accomplishment of M2 & M5
enhancement
-The commencing use of the
upgrade projects
-Stable economy
-Construction on the Capital
Beltway (I-495) High Occupancy
Toll (HOT) lane project with its
first tolls expected in early 2013
-Traffic volume is expected to be
17,300 average daily trips by 2016
-FCFE growth rate close to the
level of macro-eco long term
growth
It can be seen from table 16 that the first phase (slow growth stage) will be from periods 2011-
2013 growing at a rate of 32% and phase 2 (high growth stage) will be from periods 2014-2016
growing at a rate of 41%. Phase 3 (stable growth stage) it is expected that Transurban will grow
at a constant rate of 3% as company enter into the mature stage of growth, which is expected to
grow at the level of macro-economic growth.
8.2.2 Intrinsic Share Price
Based on the forecasted growth rate for FCFE in section 8.2.2 the intrinsic value of Transurban
share is $5.45 which would suggest that its share price is trading at a discount of 2.5688% when
compared to the market price of $5.31 as of the 15/4/2011. The calculations and inputs for the
discounted FCFE model are shown in table 17.
68 | P a g e
Table 17: Transurban Group Intrinsic Share Price (FCFE Model Excel Calculation)
8.2.3 Sensitivity Analysis
The outcome and accuracy of the intrinsic value of the discounted FCFE model like the DDM
valuation is dependent on variables that have been forecasted in the model. Since they will have
an effect of the model it is necessary to test the significance of these variables. The variables that
will be tested are the growth phases and the required rate of return.
The inputs that effect Transurban required rate of return is the market risk premium and the beta.
In table 18 comparisons on the sensitivity of the required rate of return based on different market
risk premiums and beta values to measure the outcome of Transurban intrinsic share price.
Table 18: Discounted FCFE Model Beta and Risk Premium Sensitivity (Discount Sensitivity)
Table 18 shows an inverse relationship between Transurban intrinsic value based on the FCFE
model with Transurban’s beta and the market risk premium. As the market risk premium or
Transurban beta increases the intrinsic value of Transurban share value decrease and vice-versa.
This is also consistent with the sensitivity of dividend discount model computed earlier in section
8.1.3 of this report.
69 | P a g e
The growth rate sensitivity in certain growth phases and its influence on the intrinsic value using
is also considered. Table 19 represents the intrinsic price based on the sensitivities of the different
growth phases.
Table 19: FCFE Growth Rate Sensitivity
The growth rate phase of Transurban has a positive relationship with the intrinsic value of its
share derived from the discount FCFE model. If either growth from the first or second growth
phase increases the intrinsic value of a share will also increase and vice-versa. Holding the
required rate of return constant and increasing the growth rate input from what was previously
forecasted investors will be receiving a return greater, hence investors would be prepared to pay
more for the stock. The opposite effect will occur when the growth rate forecasted is lower.
The sensitivity analysis done for the discount FCFE model shows that the intrinsic value is
sensitive to the growth rate forecast and the calculated required rate of return. This suggests that
accuracy of the intrinsic values using this model is highly dependent on the forecasted growth
rates and calculations of the required rate of return. The sensitivity of the discounted free cash
flow model is just as sensitivity as the dividend discount model.
8.3 Pricing Earning Ratio
The P/E Ratio is the relative valuation ratios that compare the companies with similar attributes
on the basis of several relative ratios, say, comparing companies with similar risk and industry
life cycle. This model attempts to compare the current share price with the company’s earnings
per share. The P/E ratio model (Earning Multiplier Model) is used by investors to estimate the
value of common stock. For example, if investors are willing to pay 10 times expected or ―normal‖
earnings, they would value a stock they expect to earn $2 a share during the following year at $20.
The earning multiplier can be computed as follows:
70 | P a g e
Price/Earnings Ratio= Earnings Multiplier:
However, the infinite period dividend discount model (DDM) can be used to indicate the
variables that should determine the value of the P/E ratio as follows:
Now if we divide both sides of the equation (earning per share), the result is:
Therefore earnings multiplier can be ultimately simplified as:
Thus, this model implies that P/E ratio is determined by:
The expected dividend payout ratio (dividends divided by earnings)
The estimated required rate of return on the stock ( )
The expected growth rate of dividends for the stock (g)
However, this formula cannot be used for the company (TCL), for EPS does not growth at a
constant rate. Thus, in this report, we will use the earnings multiplier model formula to calculate
the P/E ratio.
Given the above formulas and information, we can now calculate the P/E ratio for Transurban:
Table 20: P/E Ratio forecast 2011
2010 2011f
Current market price 5.31
Dividend/EPS Growth rate 0.08
Earnings per share 0.046 0.04968
Estimated P/E ratio 106.88
*Market Price as of the 15/4/2011
Here we expect the growth of the earning derived from per share to be in line with dividend
growth rate in this slow growth stage as the enhancement projects of M2 and M5 are nearly
71 | P a g e
reaching completion. Our computed P/E ratio of 106.88 suggests that investors are willing to pay
$106.88 for every $1 of earnings that the company generates.
We will now then use this ratio and compare it to other benchmarks. In evaluating Transurban’s
P/E ratio to determine whether it is over / underpriced in the transportation sector, we can use
TCL's P/E ratio and EPS growth rate to compare it to its industry sector as well as the selected
company- Toll Holdings (TOL) in the same sector.
Table 21: TCL VS. The Transportation Industry Sector:
Industry F/cast year1-EPS Growth (%) Current Price/Earnings
Transportation 35.78 45.31
*Source: FinAnalysis Industry data (2011)
Transurban has a P/E (106.88) that higher than the market or industry average (45.31), this means
that the toll road industry is expecting big things in the coming future. For example, the company
will increase its influence on the industry, and probably has some comparative advantage to its
competitors operating in the same industry or market. A higher P/E ratio usually reflects a higher
expectation of future company growth (ThisMatter 2010), which means along with its larger
market value, Transurban’s investors expect the company to experience high growth in near
future.
Compared to the industry statistics, TCL has a considerable high P/E ratio and low earning
growth rate, this indicates the firm has to live up to the high rating by substantially increasing its
earnings, or the stock price will need to drop. Based on the P/E ratio and its growth rate the stock
is overpriced by the market when comparing it to the transportation industry.
TCL VS. TOL:
We also compare Transurban to other competitors in the same industry sector, we picked Toll
Holdings Limited (TOL).
According to the data from Fin Analysis, we are given 0.76 as the beta for TOL. Therefore the
required rate of return ( ) for TOL can be computed based on the previous outcome of CAPM as
shown below:
72 | P a g e
Recall that ( ) for Transurban is 0.0959, which is slightly less than that of TOL.
From the formulas:
We see the inverse relationship between re and stock price, which indicates that as re increases,
the price of stock will decrease. In table 22 TCL’s and TOL’s required rate of return ( ), EPS
growth rate and P/E ratio are presented to compare and make a relative valuation assessment.
Table 22: TCL VS. TOL:
Company Required rate of return(Re) in (%) Earnings growth rate (%) P/E ratio
TOL 9.698 11.31 13.82
TCL 9.59 8 106.88
*Source: FinAnalysis Industry data (2011)
It’s commonly understood that higher earnings growth rates translate to higher P/Es, because
investors are expecting higher earnings growth in the future compared to companies with a lower
P/E. Holding other things being equal, higher growth firms (TOL) should have higher P/E ratios
than lower growth firms (TCL).Since TOL has more than 3% higher EPS growth rate than TCL,
but a lower P/E ratio than that of Transurban. This means investors of TCL are hoping to get
substantial high growth in their earning but in fact it is not. Therefore, the share of Transurban
could be overvalued by the market in some extent.
On the other hand, a higher required rate of return indicates higher risk for the company, that is,
the investment in TOL would be more risky than TCL. Holding other things being equal, higher
risk firm is supposed to have lower P/E ratios than lower risk firms. As the risk of two firms is
similar, they should have similar P/E ratio but in fact there is a big difference of their value of P/E.
Again, TCL’s share price must be overpriced.
8.3.1 Sensitivity Analysis
The result obtained by the P/E model will be influenced by the changes in dividend growth rate
assumption as we have assumed the EPS growth rate is in line with dividend growth rate.
Therefore, when dividend growth rate increases, the value of EPS will rise. However, due to the
inverse relationship with earnings per share and P/E ratio, the higher growth rates will generate
lower value of P/E ratio.
73 | P a g e
Table 23: P/E Growth Rate Sensitivity
This also indicates that our twelve month forecast will have a small influence on our calculated
P/E ratio and on our conclusion of our valuations. If our forecast were slightly off it would make
an insignificant influence on the outcome of our evaluation as the P/E ratio is still over 100 and
well above the industry’s and TOL’s P/E ratio.
8.4 Price/Book Value Ratio (P/B)
This model attempts to measure and allows the investors to compare the company’s market value
of equity to book value of equity. Thus, this model is effective for investors to identify those
stocks that are currently undervalued. A stock where the market value is lower compared to the
expected book value ratio is definitely worth buying. Before calculating the Price/book value
ratio, there are few steps needed to be completed such as the calculating expected book value of
the company and the expected book value per share.
Expected book value is computed as:
After computing the expected book value, expected book value per share can be calculated by
EBV/No. outstanding shares. The balance sheet for Transurban Group in 2010 demonstrated the
number of shares outstanding which manage to make the calculation proceed further.
Current share price as at (15th
April 2011): $ 5.31
Number of outstanding shares: 1414.29 million
Therefore,
The formula that is used to calculate the price/book value ratio is:
74 | P a g e
Using the forecasted growth rate which was 8%, the ratio indicated that at the financial year end,
Transurban Group’s share will be trading at 1.66 times its expected book value of 3.19 per share.
The purpose of the ratio is to serve as a reference for the investors in seeking for share’s value
before it is discovered by other potential investors which cause the price to bid up subsequently.
A more effective way of analysing the P/B ratio is to compare the ratio with the past years
performance.
Table 24: Transurban Book Share Value 2006-2010
Year 2006 2007 2008 2009 2010
Book Equity (‘000 in $) 2462200 4016900 4074600 3841100 4176500
Shares Outstanding (‘000) 816630 1068380 1218260 1281360 1414290
Book Value ($ per share) 3.02 3.39 3.07 2.74 3.19
Current Market Price ($) 6.95 8.01 4.23 4.18 4.24
P/B Ratio 2.31 2.13 1.26 1.39 1.44
*Source: FinAnalysis(2011)
The table above (table 24), shows P/B ratio was decreasing from 2006 to 2008 and had increased
again from 2008 to 2010. A relatively high P/B ratio would be the preference of value investors
while a relatively low P/B ratio would be the preference of growth investors. According to the
table 24, the P/B ratio for the 5 consequent years did not go below 1 which indicated that the
company did not trade below its book value. Comparisons of the P/B ratio with the direct
competitor will portrait a better view in term of the equity value of the company.
Table 25: Comparison of P/B ratio of Transurban Group with Competitor
Year 2006 2007 2008 2009 2010
TCL 2.31 2.13 1.26 1.39 1.44
TOL 1.46 2.57 1.86 1.67 1.41
*Source: FinAnalysis(2011)
The table showed that Transurban Group P/B ratio was lower compared to Toll Holdings from
2007 to 2009. The latter showed that the Toll Holdings’ equity was more of value compared to
Transurban Group. Nevertheless, Toll Holdings had been experiencing decline in P/B ratio from
2008 until 2010 and Transurban Group was experiencing an increase in the ratio. In 2010,
Transurban Group’s P/B ratio was higher compared to its competitor indicated that the value of
the company had increase. Therefore for 2010, the equity for Transurban Group has more value
75 | P a g e
compared to Toll Holdings. Hence, looking at the upward trend of Transurban Group in the P/B
ratio, investors are willing to pay more per dollar of book value of shareholders equity of
Transurban than Toll Holdings. Therefore evaluating the P/B ratio and also enforced by the
calculation of the forecasted growth rate, in future the share price is expected to increase and thus
it is attractive at the moment for the investors to buy. Furthermore, compared to year 2006 and
2007, the P/B ratio is relatively higher than 2010, and thus ratio of 1.44 seems to be a fair
valuation for the investors.
8.4.1 Sensitivity Analysis
As to examine the relationship between the growth rate and the P/B ratio, different value of
growth rates had been computed.
Table 26: P/B ratio over Growth Rate Sensitivity
Growth Rate (%) 5 6 7 8 9 10 11
EBV ($ in millions) 4385.33 4427.09 4468.86 4510.62 4552.39 4594.15 4635.92
EBVPS ($) 3.10 3.13 3.16 3.19 3.22 3.25 3.28
P/B 1.71 1.7 1.68 1.66 1.65 1.63 1.62
*Source: FinAnalysis (2011)
According to the table, there was an inverse relationship between the growth rate and the P/B
ratio. As the value of the growth rate increased, the value of the P/B ratio decreased and vice
versa. The objective of the table is to measure the accuracy and the sensitivity of how the
different value of growth rate will affect the P/B ratio. The table also demonstrated direct
relationship with the expected book value per share. As the growth rate was larger, the EBVPS
was larger. If the growth rate was forecasted inaccurately, it would cause the inaccuracy in the
calculation of P/B ratio. Therefore, it is imperative to use an accurate growth rate or it would
cause discrepancies in the calculation of P/B ratio.
8.5 Net Tangible Asset Backing Model (NTA)
The net tangible assets per share ratio demonstrate how much per share investors would receive if
the company is to be liquidated immediately. Investor’s capital loss would be represented by the
difference between the purchase price of the share and ratio. Thus, this model is to provide the
insight to the investors the level of security that the company will be provided when the company
is liquidated.
Net tangible asset per share ratio is to be calculated as followed:
76 | P a g e
Transurban Group 2010 balance sheet demonstrated the following values:
Net Assets: $4176.5 million
Intangible Assets: $7678.59 million
Number of Shares: 1414.29 million
Therefore, NTA= (4176.5-7678.59)/1414.29 = -2.48
The negative value indicated that when the company went into liquidation, the investors would
not be getting any value for the shares. Due to the limited liability investors will not have to pay
for the share but lose all the shares if the company went into liquidation.
To provide a thorough analysis on the NTA per share ratio, comparison of the company’s current
share price to its NTA per share by dividing the current share price by NTA can be made as
follows:
Current Share Price / NTAB= 5.31/2.48 = 2.14x
The value demonstrated that the investors are currently paying 2.14 times higher than the value of
one unit of its NTA. To make a precise interpretation regarding the NTA value, it is always better
to make comparison with its direct competitor.
Table 27: NTA Backing Model Comparison
Year 2006 2007 2008 2009 2010
TCL 2.03 0.38 0.8 -3.39 -2.48
TOL 3.56 -1.52 2.17 1.23 1.52
*Source: FinAnalysis (2011)
From the table, it indicated that Transurban Group had been weak in providing insurance to the
investors if the company went into liquidation. For year 2009 and 2008, Transurban Group’s
NTA ratio had been negative showing bad indication to the investors when the company goes
into liquidation.
Table 28: Current Share Price Per NTA
Year 2006 2007 2008 2009 2010
TCL 3.42 21.1 5.29 -1.23 -1.71
TOL 3.95 -9.53 2.77 5.08 3.61
*source: FinAnalysis (2011)
77 | P a g e
The table above demonstrated comparison of the current share price over NTA with its direct
competitor. In year 2007 and 2008, the value placed on Transurban Group was far much greater
than Toll Holdings. However, in 2009 and 2010, the valued placed on Transurban Group was
very much lower compared to Toll Holdings. Two assumptions can be derived base on the low
price to NTA ratio are Transurban Group is highly undervalued as compared to its competitor and
Toll Holdings is overpriced compared to its peer. Base on this model, Transurban Group share
will appear to be more attractive to the investors.
78 | P a g e
9. VALUATION DISCUSSION
9.1 Dividend Discount Model (DDM)
In order to use this model we had to forecast the expected growth rates for the future dividends.
We made our forecast based on historical dividends, our future expectation on the economic
climate and expected future attributes of the company. It was extremely difficult to forecast the
future growth rates as Transurban was an unusual company which paid out higher dividends per
share relative to its earnings per share. However we did manage to forecast Transurban’s future
growth rates and growth phases.
Sensitivity analysis was also conducted after the intrinsic value was computed. The purpose of
the sensitivity analysis was to test the significances of our forecasted and calculated inputs. The
sensitivity analysis concluded that the accuracy of the forecasts and calculations would play a
significant part in deriving our intrinsic values, hence the importance of conducting research of
great integrity (GIGO - Garbage in garbage out).
Our analysis formulated by the dividend discount model derived an intrinsic value of $5.48 and
suggest that Transurban shares are trading at a discount of 3.1%, based on the market price of
$5.31 as of the 15/4/2011. Since the share price is trading at a discount the analysis using this
model concludes that the market share price for Transurban is undervalued and we would expect
the market to correct this in the future.
The dividend discount model we believe is a suitable model for the purpose of analysing
Transurban’s share price as the company has been paying consistent dividends and we believe
they will continue to do so in future periods.
9.2 Free Cash flow to Equtiy Model (FCFE Model)
The discounted FCFE model is computed a similar the dividend discount model however for the
FCFE model we use free cash flow to equity per share available to shareholders instead of
dividends paid to shareholders. Both models are discount cash flow models.
In this model we are also required to forecast the future FCFE. In forecasting future growth rates
for FCFE we have based our forecasted of the dividend growth rates and historical FCFE growth
rates. Our forecasted growth phases are the same as the forecasted growth phases for dividends,
however we expect the growth rates on FCFE to growth at a higher rate than the dividend growth
rates. We justify this analysis in section 8.2.1 of this report.
79 | P a g e
The sensitivity of the forecast and calculations were also analysed and produced similar results to
the sensitivity analysis done on the dividend discount model. The sensitivity analysis concludes
that the inputs used for deriving the company’s intrinsic value is sensitive and requires
forecasting to the highest degree of integrity.
The intrinsic value of Transurban share was $5.45 this suggests that its share price is trading at a
discount of 2.5688% when compared to the market price of $5.31 as of the 15/4/2011. This
indicates that the market is undervaluing Transurban’s share and we expect that the market will
correct this at some point.
Discounted FCFE model is a great valuation model when evaluating intrinsic values of
companies that do not pay or consistently pay a dividend. We believe that this model is an
appropriate model as it does provide an intrinsic value in the range of the intrinsic value
calculated in the dividend discount model; the intrinsic value of the FCFE model being $5.45 and
$5.48 in the dividend discount model. However we prefer to conduct our valuation on the
dividend discount model as this company does historically consistently pay dividends where as in
FCFE of Transurban can be quite volatile. Due to the unpredictability of FCFE forecasts we have
made conservative growth estimates, this could under state the intrinsic value we calculated using
this model. The company’s intrinsic value could be trading at an even greater discount.
9.3 Price / Earnings Ratio Model (P/E)
The price earnings model (P/E) is a very important and common method to analyse company
stock and this model provides how much investors are willing to pay for a dollar of the
companies expected earnings. However, P/E ratio is the relative valuation ratios that is more
useful when compared to a company with similar risk and industry life cycle and comparing it to
the industry. We compare TCL with the transportation industry sector and Toll Holdings Limited
(TOL). We use the current price of $5.31 (as of the 15th
of April 2011) dividend by the expected
12-month earning to calculate the P/E.
When analysing the P/E ratio’s typically, the higher the P/E the more the market is willing to pay
for the company’s earnings and hence investors have higher expectations on the company’s
prospects. Conversely, low price earnings model indicates that low confidence in the company by
the market. However, it could also mean that the stock just has been overlooked by the market
and represents a potential for gain.
80 | P a g e
Using the Earnings Multiplier Model formula, P/E ratio for Transurban is 106.88; this indicates
that investors are willing to pay $106.88 for every $1 of earnings that the company expected
earnings.
To help determine whether the share price of TCL is over / under priced, we can use the P/E ratio
to compare the prices of companies in the same sector against each other. For example, we have
compared TCL and TOL. Holding all else being equal, an intelligent investor would prefer to
purchase shares of TOL; although the share price is higher, what he would gain is more than 8
times of the earning power. In addition, we also compare Transurban with the toll road industries.
Transurban has a P/E (106.88) that higher than the market or industry average (45.31), thus high
P/E ratio and low earning growth rate means the stock price will be expected to decline some
point in the future.
In order to look at the change the EPS growth rate influence the P/E ratio, we completed the
sensitive analysis which was to test the significances of our forecasted and calculated inputs. The
sensitivity analysis put it that there is inversely relationship between the P/E ratio and the EPS
growth rate and also indicated that there would not be a significant influence on our results.
The biggest advantage of the P/E ratio is that it is easy to use and fathom. It can be used to make
quick decision although it is only a basic tool and method of evaluating the worth of the shares of
a company. Because of the volatile nature of stock prices, P/E ratio is largely due to the
subjective in nature, thus it is the disadvantage of the P/E ratio. Another disadvantage is there
being no ―right‖ P/E ratio because it depends on the investors’ willingness to pay for earnings.
The more you are willing to pay (you believe the company has good long term prospects over and
above its current position) the higher the ―right‖ P/E ratio is for that particular stock. In this case
we do not think that the P/E ratio is a suitable tool used to evaluate the value of Transurban share
as we only use one year forecast of its potential earnings. Also we do not think it is suitable as it
was difficult to find a competitor that was similar to the business and company structure to that of
TCL.
9.4 Price/ Book Value Ratio (P/B)
This model is useful in identifying which company is overvalued and which company is
undervalued based on the P/B ratio to ROE. If a company has a high P/B ratio and low ROE, then
it is likely that the company to be overvalued. However, if the company has both high P/B and
ROE, this indicates that the company has strong return to shareholders but still undervalued based
on P/B ratio.
81 | P a g e
According to the data for Transurban Group, there was a decrease in the ratio from 2006 to 2008
and had slight increase from 2008 to 2010. From the analysis of P/B ratio, it showed that the
shares had been trading constantly above the book value per share. This shows that the company
are being valued by the market.
However, it is very tough to use P/B ratio to analyse the value of the company as there are many
other factors that may need to be taken into consideration. Although the P/B ratio gives the
investors the insight of which stocks are being undervalued, nevertheless it demonstrates very
restricted information for some industries with hidden assets which have great value are not
reflected in the book value (Investopedia 2011). Another factor that might cause discrepancies for
the P/B ratio calculations is the payout ratio for Transurban Group. The payout ratio for
Transurban Group in 2010 was absolutely high which was 525.2% and there was no previous
record of the previous payout ratio. As the payout ratio plays a fundamental part of the
calculation to compute the expected growth rate. Therefore the data retrieved might not be
sufficient to come to a conclusion of how the company is valued under this model. This model is
only appropriate for the investors who are looking at capital intensive or finance related business.
9.5 Net Tangible Asset Backing Model (NTA)
The net tangible asset backing indicates to us if investors would be able to get their money back
in the event of liquidation. Generally, a company is undervalued if its share price per unit of NTA
is more than the current share price. This means that investors will get more value for what they
are paying for which makes it attractive.
It is important to distinct total value of the business from net tangible asset as NTA does not
include intangible assets such as patents and rights. In theory, simple valuation of organisations
can be done independently of its tangible assets but in reality NTA is extremely vital as intangible
assets cannot be liquidated into money in the event of liquidation. Thus, any intangible assets
such as goodwill should always be compared to its net tangible assets of the business for
reasonableness.
In the case of TCL, this model is appropriate as TCL has a significant amount of assets which
makes NTA a very relevant measure. However, this measure can vary a lot between one firm’s
structure of assets and liabilities to another organisation’s structure so one must be cautious when
comparing to other assets. It is best to compare directly with an organisation with a similar
structure and industry to allow for meaningful comparisons.
82 | P a g e
One weakness of the model is that it is based on historical data hence it does not take into account
of future cash flows and growth. This could significantly undervalue organisations that have just
started up or are heavily investing in revenue generating assets. Therefore, it should be noted that
while this measure is useful in business and valuation analysis, it should be used in conjunction
with other measures and analysis to give an accurate evaluation.
9.6 Preferred Valuation Method
Our preferred valuation method was the dividend discount model. This was our preferred model
over the other models because Transurban historically consistently paid dividends and it is
expected they would continue to do so in the future. It was preferred over the discounted FCFE
model because the FCFE future growth rates would be more difficult to predict since historically
the growth rates of FCFE have been extremely volatile making it difficult to forecast. The DDM
was also preferred to over the ratio relative valuation techniques since it was difficult to find
companies that were similar to Transurban and its structure. Another issue with the valuation
techniques was it does not give incites to the stocks intrinsic value and only gives incites to its
value compared to other companies ie; it might be good value compared to other companies
however there nothing to say that the company that the ratio is compared to is at fair market value.
83 | P a g e
10. CONCLUSION & RECOMMENDATIONS
After completing our evaluations conducted in our valuations analysis in section 8 of this report,
we received mixed results. The DDM and the FCFE models suggest that the share value of
Transurban is underpriced and is currently trading at a discount. The relative valuation techniques
used also suggests that the stock is worth buying with exception to the P/E ratio which suggest
we should avoid the stock or even sell the stock. Out of the five valuation methods used four of
our valuations would conclude that Transurban stock is worth buying or holding onto while only
one of the method used would lead to the conclusion that investors should sell or avoid TCL
stock.
We also believe that the dividend discount model was the best and most appropriate analysis
valuation of TCL stock, which was also one of the four models that stated TCL share price was
undervalued. Based on this information we would place a buy recommendation on TCL shares as
it is trading at a discount of 3.1%, based on the market price of $5.31 as of the 15/4/2011 from
the intrinsic value of $5.48 calculated from the dividend discount model.
At the completion of writing this report TCL share obtained from the ASX (2011) website was
trading at $5.44 as of the 13th
of May 2011. It can be observed that TCL share price had resin
from when we previous completed our valuation. Based on our required rate of return calculated
on the 15th
of April 2011 TCL share price would still be trading at a small discount.
Concluding this report we would place a buy-hold recommendation on TCL stocks, since TCL
shares are trading at a slight discount.
84 | P a g e
11. APPENDIX
11.1 Appendix 1: Excel Raw Beta and Adjusted Beta Calculations
*** Further Excel spreadsheets can be provided on request. Not all calculations have been
included in the appendices as the calculation, formula and inputs have been explained throughout
this report.
85 | P a g e
12. REFERENCES
Atrill, Harvey, Jenner & Mclaney 2008, Accounting: An Introduction, 4th edn, Pearson Education
Australia, Frenchs Forest, NSW.
Australian Bureau of Agricultural and Resource Economics and Sciences 2009, Australian
Commodities: Oil, Australian Bureau of Agricultural and Resource Economics and Sciences,
Australia, viewed 10th
April 2011, http://www.abare.gov.au/interactive/09ac_dec/htm/oil.htm
Australian Securities Exchange (ASX) 2011, Transurban Group, ASX Limited, Australia,
viewed 27th
March 2011,
<http://asx.com.au/asx/research/companyInfo.do?by=asxCode&asxCode=TCL>
Bureau of Labour Statistics 2011, Consumer Price Index Summary, United States Department of
Labour, viewed 26 April, 2011, < http://www.bls.gov/news.release/cpi.nr0.htm>
Business Spectator 2009,Transurban to upgrade M2 motorway, Business Spectator Pty Ltd,
viewed 4th
May 2011, <http://www.businessspectator.com.au/bs.nsf/Article/Transurban-to-
upgrade-M2-motorway-WRUU8?OpenDocument>
Crude Oil Peak 2010, Will Transurban ever pay back its debt, Crude Oil Peak, viewed 22nd
April
2011,< http://www.crudeoilpeak.com/?p=2373>
Denning, D 2010, Australia Has Highest Household Debt to Disposable Income Ratio in World,
The Daily Reckoning, viewed 10th April 2011, <http://www.dailyreckoning.com.au/australia-
has-highest-household-debt-to-disposable-income-ratio-in-world/2010/02/03/>
FinAnalysis 2011, Transurban Group (TCL), viewed 16th
April 2011,
<http://www.aspectfinancial.com.au.ezproxy.lib.rmit.edu.au/af/company/mainview?ASXCode=T
CL>
George Cunningham 2010, Australia’s Real Exchange Rate, The University of Queensland,
viewed 27 April 2011, <http://www.rba.gov.au/econ-compet/2010/pdf/second-prize.pdf>
Herald Sun 2011, Floods to add to inflation rate, says Treasurer Wayne Swan, Herald Sun
Australia, viewed 26th
April 2011, < http://www.heraldsun.com.au/business/floods-to-add-to-
inflation-rate-says-treasurer-wayne-swan/story-e6frfh4f-1225996192401>
86 | P a g e
Herald Sun 2011, Transurban toll profit up, Herald and Weekly Times, viewed 27th
March 2011,
<http://www.heraldsun.com.au/business/transurban-toll-profit-up/story-e6frfh4f-1225904447033>
IBIS World 2010, Toll Road Operators in Australia, IBISWorld, viewed 30th
March 2011,
<http://www.ibisworld.com.au.ezproxy.lib.rmit.edu.au/industryau/default.aspx?indid=481>
IBIS World 2010, Toll Road Operators in Australia: Major companies, ISIBWORLD, viewed
21st April 2011,
<http://www.ibisworld.com.au.ezproxy.lib.rmit.edu.au/industryau/Majorcompanies.aspx?indid=4
81>
International Energy Agency, 2010, Annual Statistical Supplement 2010, viewed 19th
April, 2011,
<http://omrpublic.iea.org/>
International Monetary Fund 2011, World Economic Outlook Update Global Recovery Advances
but Remains Uneven, viewed 20 April 2011,
<http://www.imf.org/external/pubs/ft/weo/2011/update/01/index.htm>
Investopedia 2011, Investopedia ULC, Australia, viewed 27th
March 2011,
<http://www.investopedia.com/> & <http://www.investopedia.com/terms/c/capm.asp>
InvestSMART 2011, Transurban Group TCL, InvestSmart Financial Services Pty Ltd, Australia,
viewed 26th March 2011, <http://www.investsmart.com.au/shares/asx/Transurban-Group-
TCL.asp>
Investopedia 2011, Using the Price to Book Ratio to Evaluate Companies, Investopedia ULC,
viewed 12th
May 2011, http://www.investopedia.com/articles/fundamental/03/112603.asp
Millar R, & Moynihan, S 2007, Transurban action over tunnel walls, The Sydney Morning
Herald, Australia, viewed 27th
March 2011,
<http://www.smh.com.au/news/business/transurban-action-over-tunnel-
walls/2007/01/22/1169330827274.html>
Mind Tools 2011, Porter’s Five Forces, Mind Tools Ltd, viewed 28th
March 2011,
<http://www.mindtools.com/pages/article/newTMC_08.htm>
87 | P a g e
Morningstar DatAnalysis 2011, Connect East Annual Report 2010, MorningStar DatAnalysis,
viewed 10th April 2011,
<http://datanalysis.morningstar.com.au.ezproxy.lib.rmit.edu.au/af/company/annualreport?ASXCo
de=CEU&daterange=all&subtype=03001&subtype=03017&subtype=03011&anntypes=0,1,2,3&
xtm-licensee=dat>
Morningstar DatAnalysis 2011, Morningstar Inc, Australia, viewed: 27th
March 2011,
<http://datanalysis.morningstar.com.au.ezproxy.lib.rmit.edu.au/af/company/annualreport?ASXCo
de=TCL&daterange=all&subtype=03001&subtype=03017&subtype=03011&anntypes=0,1,2,3&
xtm-licensee=dat>
NSW Department of Transport 2011, Fast Track of North West Rail Link Underway, NSW
Department of Transport, viewed 10th
April 2011, http://www.transport.nsw.gov.au/fast-track-
north-west-rail-link-underway
Open Briefing 2011, Transurban Group Half Yearly Report 2011, Orient Capital, viewed 10th
April 2011, <http://openbriefing.com.au/files/326/tcl_hyr11_final.pdf>
Queensland Motorways 2009, Current Project, viewed 10th
April 2011,
<http://www.qldmotorways.com.au/currentprojects.aspx>
QuickMBA 2010, SWOT Analysis, QuickMBA: Strategic Management 1999-2010, viewed 19th
April 2011, <http://www.quickmba.com/strategy/swot/>
RBA 2011, Exchange Rate, Reserve Bank of Australia, viewed 27th
April 2011,
<http://www.rba.gov.au/chart-pack/exchange-rates.html>
Reserve Bank of Australia, 2011, Inflation Target, Reserve Bank of Australia, viewed at 25th
April, 2011, <http://www.rba.gov.au/monetary-policy/inflation-target.html>
RBA 2011, Monetary Policy Decision, Reserve Bank of Australia, viewed 26th
April 2011,
<http://www.rba.gov.au/media-releases/2011/mr-11-06.html>
RBA 2011, Statistics: Household Finances-Selected Ratios, The Reserve Bank of Australia,
viewed 10th
April 2011, <http://www.rba.gov.au/statistics/tables/index.html>
88 | P a g e
Reilly, F & Brown, K 2009, Investment Analysis and Portfolio Management, 9th
Edn, South-
Western Cengage Learning, USA.
Roam 2011, Roam Tolling Pty Ltd, Australia, viewed 29th
March 2011,
<http://www.roam.com.au/content/application/default.asp?CC=110&SC=26&CN=174>
Saving to invest 2011, 2011 Economic Outlook and How to Invest and Prepare for the Year
Ahead, saving and making you money in today’s economic, viewed 27th
April 2011,
<http://www.savingtoinvest.com/2010/12/2011-economic-outlook-and-how-to-invest-and-
prepare-for-the-year-ahead.html>
The age 2010, Transurban buys Lane Cove Tunnel, Theage, Australia, viewed 20th
April 2011,
<http://www.theage.com.au/business/transurban-buys-lane-cove-tunnel-20100510-umfd.html>
The Age 2009, Transurban cuts luxuries as crisis bites, Mathew Murphy, viewed 3rd
May 2011,
<http://www.theage.com.au/business/transurban-cuts-luxuries-as-crisis-bites-20090218-8bj6.html>
Thismatter, Price/Earnings ratio (P/E ratio), Thismatter, Viewed 12th
May 2011,
<http://thismatter.com/money/stocks/valuation/price-earnings-peg-ratios.htm>
Thewest 2010, Transurban flags dividend hike on profit lift, Thewest, viewed 4th
May2011,
<http://au.news.yahoo.com/thewest/business/a/-/national/7749426/transurban-flags-dividend-
hike-on-profit-lift/>
Tom Reid 2011, Rate hikes on the way says Westpac economist, Gold Coast Business News,
viewed 26th
April 2011,
<http://www.goldcoastbusinessnews.com.au/article2741/RATE%20HIKES%20ON%20THE%20
WAY%20SAYS%20WESTPAC%20ECONOMIST.html>
Trading Economics 2011, Australia Inflation Rate, Trading Economics, viewed 25th
April, 2011,
<http://www.tradingeconomics.com/australia/inflation-cpi>
Trading Economics 2011, Australia Interest Rate, Trading Economics, viewed 26th
April 2011,
<http://www.tradingeconomics.com/australia/interest-rate>
Trading Economics 2011, United States Inflation Rate, Trading Economics, viewed 26th
April,
2011, < http://www.tradingeconomics.com/united-states/inflation-cpi>
89 | P a g e
Trading Economics 2011, United States Interest Rate, Trading Economics, viewed 26 April 2011,
< http://www.tradingeconomics.com/united-states/interest-rate>
Transurban 2009, Sustainability Report: Customer Safety, Transurban Limited, viewed 19th
April
2011, < http://www.transurban.com/sr09/4112.htm>
Transurban 2009, Transurban Group Submission to Carbon Disclosure Project 7, Transurban
Group, viewed 22nd
April 2011,
<http://www.transurban.com.au/Transurban_CDP7_submission_June_2009.pdf>
Transurban 2011, Transurban Limited, Australia, viewed 26th
March 2011,
<http://www.transurban.com.au/24.htm>
Transurban Annual Report 2000 – 2010, Reports and Publications, Australia, viewed 27th
March
2011, <http://www.transurban.com.au/83.htm>
Transurban Security Shareholder Review Report 2007 – 2008, Reports and Publications,
Australia, viewed 27th
March 2011, <http://www.transurban.com.au/83.htm>
United Nations 2010, World Economic Situation and Prospects 2010: Global Outlook, United
Nations Department of Economic and Social Affairs (DESA), New York, viewed 19th
April 2011,
<http://www.doc88.com/p-34967242181.html>
Victoria Department of Transport 2011, Regional Railway Stations Upgrade, Victoria
Department of Transport, viewed 10th
April 2011,
<http://www.transport.vic.gov.au/web23/Home.nsf/AllDocs/5143CA792094ABD9CA25762500
1C43EB?OpenDocument>
WTRG Economics 2009, Oil Price History and Analysis, WTRG’s Home Page, London, viewed
19th
April 2011, < http://www.wtrg.com/prices.htm>
Yahoo! 7 FINANCE 2011, Yahoo!7 Pty Limited, Australia, viewed 27th
March 2011,
<http://au.finance.yahoo.com/q/bc?s=TCL.AX&t=5y&l=on&z=l&q=l&c=^AORD%2C^AXJO>
YarraTrams 2011, January 2011 performance results, YarraTrams, viewed 10th
April 2011,
<http://www.yarratrams.com.au/desktopdefault.aspx/tabid-121/58_read-2744/>