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Home | RARE Infrastructure Review: Transurban Rewards Listed Infrastructure Investment

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RARE Infrastructure Review: Transurban Rewards Listed Infrastructure Investment

August 31 2010

Ben May, RARE Infrastructure

On 12 August, listed infrastructure company Transurban reported its third year in a row of proportional double-digit EBITDA growth. The consistent strong performance during testing economic times highlights Transurban’s position as a world leading toll road operator with a portfolio of world class toll road assets. Transurban owns and operates intra-urban corridor network roads under long term concession agreements with contracted toll price escalation (at or above inflation for its Australian assets). Option value exists within the existing portfolio from low risk enhancement projects to expand capacity to meet growing demand. The combination of defensive and growth characteristics at the asset level is attractive for listed infrastructure investment.

For RARE Infrastructure, the cost reductions achieved at the corporate level were the highlights of the FY10 result. Transurban has reduced its cost base significantly over the last two years. The company reduced corporate costs (including business development activities) by 20% in FY10, bringing total corporate cost reductions in the last two years to A$45m, more than double the original cost reduction target of A$20m set in June 2008.

RARE Infrastructure believes that cost control and reduction is an under-appreciated aspect of managing long term infrastructure assets. Previous management teams at Transurban had pursued an expansion strategy with less focus on cost control. Yet the cost reductions achieved in the last two years, when compounded over the life of the assets, can be worth more to shareholders than acquisition-led growth.

There is further opportunity for Transurban to reduce costs across the business. Management has a flat nominal cost base target in the medium term with more than 100 current initiatives to reduce costs and increase revenues. At the asset level, the largest cost savings are expected from the renegotiation of three operations and maintenance contracts. Meaningful cost reductions at the corporate level may be more difficult as the low-hanging fruit has been picked.

The financial performance of Transurban in the last two years has demonstrated that publicly listed infrastructure companies are just as capable as unlisted infrastructure at creating shareholder value through active management, efficiency improvements and cost control.