Transurban and its monopoly on the toll road industry

By: Matthew Khoo, Arief Nugroho Wibisono, Jessica Xu, Nathan Chin
Editor: Naren Rajan

A top 20 publicly listed company in Australia by market capitalisation. This

is where Transurban Group (ASX: TCL) stands today. The Melbourne-based
company that was founded just two decades ago is now positioned as a
key player of Australias equity market.The incorporation of Transurban
into the ASX20 is a remarkable milestone for the toll and infrastructure
company given that no infrastructure company has been a constituent of
the index before. Transurban stands next to the most coveted companies
in Australia while many of its smaller rivals have either been acquired (by
Transurban itself or by other major players) or liquidated. Such success
warrants our attention and has prompted us to launch an investigation on
factors behind Transurbans stellar performance.
Transurbans financial performance is nothing short of incredible. The
company has recorded a capital gain of 100% over the past 5 years and
has beaten the market index by 160% over the same period (Figure 1).
The company dominates in the industry with 67% of market share and is
actively expanding to further cement its foothold in the industry (Figure
2). It has just recently acquired Queensland Motorways in 2014 and is
widening its international reach by venturing to the highly lucrative
American freeway industry. Domestically, Transurban has numerous
projects in its pipeline and notable among them are the construction of
Western Distributor in Melbourne and NorthConnex in Sydney.
Figure 1

Data source: http://www.asx.com.au/

Figure 2

Data source: http://www.ibisworld.com.au/

Transurban has reaped billions from Australian motorists and is constantly
posting record-breaking profits. Such profit, apparently is not worthy of
the Australian Taxation Offices (ATO) attention given that TCL paid only a
meagre amount of tax on its billion dollars of profit. Compounding that
ability to evade tax with its monopoly on the industry and you will get a
highly successful toll-operating company such as Transurban. Ultimately,
all growth in earnings can be traced to two fundamentals - how much the
firm is investing in new projects, and what returns these projects are
expected to generate for the firm. The key drivers behind Transurbans
success as the largest player in the Australian toll industry can be
attributed to its full proof business model and lucrative operating and
economic environment. The company generates the majority of its
earnings through toll revenues. With the constant rise in the number of
road users in Australia and the strategic locations of Transurban toll
stations on many major highways, the companys vast span of operations
continue to grow making consumer demand for its toll services to be
relatively inelastic. This suggests that Transurban have significant pricing
power, inflation protected revenues, and are largely immune from the
economic fluctuations of the business cycle. According to the Australian
department of infrastructure, they expect to see significant growth in total
investment on transport infrastructure in Australia. The high expected
future growth in the Australian property market is an important conduit
that would increase linkages and road traffic within Australia, pathing the
way for positive growth in future earnings.

Transurbans rise to monopolistic power began a mere two decades ago.

In 1996, the company was formed after the Victorian CityLink contract
was awarded to Australia's Transfield Services and Japan's Obayashi
Corporation. It was an innovative and massive project - about eight times
larger than the previous largest road project in Melbourne. Construction
was completed in 2000 and tolling commenced the same year.
Fast-forward seven years, and Transurban has been given the all-clear by
the Australian Competition and Consumer Commission (ACCC) to take
over main rival Sydney Roads Group (SRG). The friendly takeover was
supported by SRG, who cited as advantages an improved balance of
concessions by remaining life and by level of risk, and savings through
pooling of expertise, administrative overheads and joint management.
Graeme Samuel, the chairman of ACCC in 2007, advised that an extensive
review and inquiries of interested parties had supported the conclusion
that the $1.26 billion acquisition was unlikely to substantially lessen
competition under terms of Australian monopoly law. Samuel explains
that Transurban's increased control over roaming fees will be in NSW
where the materiality of roaming fees is mitigated by the presence of
competing tags issuers with a significant tag issuing base. This means
that motorists have the ability to choose another tag provider if
Transurban administration fees were to rise.
Transurban has since acquired several more interests in motorways and
associated companies in Sydney and Brisbane. Its portfolio now boasts of
13 Australian roads, with significant shares in two express lanes in
Virginia, U.S.A. In addition to the benefits mentioned earlier, a larger
company has the opportunity to modernize and integrate toll systems, the
possibility of coordinated variable toll strategies in consultation with the
Australian government and access to lower cost capital for improvements
and to participate in new projects.

References
Tollroadsnews.com. (2007). Monopoly regulators clear big Australia tollroad
takeover by Transurban. Retrieved 14 April, 2016, from

http://tollroadsnews.com/news/monopoly-regulators-clear-big-australiatollroad-takeover-by-transurban
News.com.au. (2007). $13bn Transurban bid gets nod. Retrieved 14 April, 2016,
from http://www.news.com.au/national/bn-transurban-bid-gets-nod/storye6frfkp9-1111113121430