Transurban’s Scott Charlton warns of unrealistic pricing

Transurban chief executive Scott Charlton says the company will remain disciplined in bidding for new toll roads.

Scott Charlton says Transurban will remain disciplined and patient. Picture: AAP

Transurban chief executive Scott Charlton says the company will remain disciplined in bidding for new toll roads, and has warned of the danger of excessive debt levels and unrealistic traffic forecasts creeping back into the sector as financial buyers pay high prices for infrastructure assets.

Mr Charlton told the company’s investor day in Sydney yesterday that the company would be prepared to take minority equity positions in toll roads to build its network, which already included the majority of major privately owned roads in Australia.

“It doesn’t always have to be that we go in and buy and develop 100 per cent,’’ Mr Charlton told investors, noting it was a small and subtle change in the company’s strategy.

“We might start by taking a smaller equity percentage.’’

Transurban owns a 50 per cent stake in Sydney’s M5 Southwest motorway and Westlink M7 toll roads and has traditionally taken a controlling or majority stake in the roads it has invested in.

He said the company was awaiting details on the NSW government’s plans to sell down its stake in Sydney’s $16 billion WestConnex motorway, but was not actively looking at any other deals.

There had been speculation the NSW government may sell a 50 per cent stake in the asset, which would leave Transurban to bid for a lower stake than had been the norm in its history.

Mr Charlton also questioned whether the current heady appetite for infrastructure assets from financial advisers and asset managers globally was leading to unnecessary risk taking.

Prices in the unlisted and listed infrastructure sectors had become bullish in recent years due to low interest rates globally.

Mr Charlton stressed that excessive leverage had yet to creep back into bidding for toll-road assets, but was wary it had returned to other classes of infrastructure.

“We are again seeing sub-debt products and ways to find more leverage,” he said. “Given it is starting to occur in other sectors it may not be too long before it returns to the toll road sector.”

He said investment funds were becoming more willing to take on construction risk for new roads.

Transurban has $9bn worth of projects in Australia under development and remains on the lookout for new opportunities, but Mr Charlton stressed it would remain disciplined in paying for new assets.

“Can we be competitive? Absolutely, if people use reasonable assumptions. We can’t be competitive if you use unrealistic assumptions on capital and leverage,’’ he said.

One-third of Transurban’s toll-road portfolio was bought in the aftermath of the global financial crisis as a range of toll-road and road-tunnel assets fell into receivership after failing to generate enough traffic to pay back the cost of construction.

They included Brisbane’s Clem Jones and Airport Link tunnels, as well as the Lane Cove and Cross City tunnels in Sydney.

“We will remain disciplined. We are long-term, patient investors,’’ Mr Charlton said, stressing the company was not reliant on merger and acquisition activity for growth.

Transurban shares fell heavily in the second half of last year as investors became wary of the impact of rising interest rates around the world on the toll-road operator, but the shares have recovered over the past six months as those fears subsided.

They have risen from below the $10 mark in November last year to close at $12.36, their highest level since August last year.

Transurban is also proposing to build the $5.5bn Western Distributor motorway in Melbourne and is a key partner in Sydney’s $2.9bn NorthConnex project linking the Pacific Motorway to the M2 in the city’s north.

It is also eyeing more road projects in the US.