The Toll Road Operator Industry in Australia

Industry Analysis: The toll road operator industry in Australia is heavily regulated, with high capital intensity providing significant barriers to entry. As a result, the market is highly concentrated, with only a handful of major players, of which TCL is a leader – dominating competitors with a 67% domestic market share.

The industry is sensitive to these key economic drivers, however a steady 2% p.a. growth in Australian vehicle registrations, and a forecasted 8.3 % increase in Australian employment by 2020 provide the basis for a forecasted CAGR of 2.5% for the industry growth. TCL has solidified its position in the market with a with a margin of 68%, outclassing the industry average of 41%.

Firm Analysis: We believe this to be a result of their strong business model, which provides it a competitive moat. They operate in PPP, structured in a BOOT framework, where the state provides TCL a concession for financing, building and ultimately operating an asset for a designated period of time. This framework is aligned with their ultimate goal to be the “Partner of Choice” for governments, which is critical in executing their long-term strategy.

Short-term: Debt Maturity

In the first half of the financial year, TCL has re-financed close to $2 bn of maturing debt, as a result flattening their maturity profile from 7.8 years to 9.1 years. TCL also has an additional $1.8 bn of debt maturing over the next 2 years. Under normal circumstances this is viewed as a threat to shareholder value, however in the current macroeconomic environment, Australia is experiencing unprecedentedly low interest rates, with the futures market still pricing in a 10% probability of further cuts to rates. As a result, TCL can provide some inorganic growth in EBITDA in the short run by decreasing the debt burden in this favourable funding environment.

Note: The cost of debt in FY15 was 7.1%. It is expected to be 5.5% in FY 17.

Short-term: Dividend Growth

In FY2015, management initially provided a dividend guidance of 39 cps. At the culmination of FY15, TCL issued dividends of 40 cps, a 19% increase from prior year, beating analyst and investor expectations. The FY16 dividend guidance is 45.5 cps, 14% higher than last year. This consistent growth in dividends is expected to continue throughout our forecast horizon, driving further value for shareholders in the short run.

Additionally, the implementation of the electronic tolling and data system GLIDe, in Victoria and NSW attributed to $9 million of additional concession retention. The rollout of GLIDe across the remaining assets in QLD in the coming year will further minimise toll leakage. Additionally, the data retained from it will also contribute towards optimising operational