It’s always a double edged sword being interviewed by the media. Obviously it’s good for business to get some publicity. But the interviewer always has their own agenda, and they get the final cut (just ask Tony Abbott).
I spent about half an hour with ABC Lateline Business’s Andrew Robertson earlier this week. One third of the time was spent explaining Transurban’s accounting (why you should ignore it), another third was spent explaining why the debt wasn’t an issue and the remainder was spent explaining why my concern is Transurban’s propensity to acquire.
When the first episode went to air on Wednesday night (Toll company set to release results), the focus was on Transurban’s return on equity. One point six percent apparently. And its ‘heavily indebted’ nature, nearly ‘five and a half billion dollars after a decade of expansion’. Finally, they put me on there talking about Transurban’s acquisitive strategy. Nothing about why the accounting doesn’t matter. Nothing about why the debt is perfectly manageable.
Then they followed it up last night with an interview with Chris Lynch, Transurban’s CEO (Toll operator delivers 40% revenue growth). Of course, the whole interview was focussed on accounting return on equity and how Transurban could buckle under its enormous debt burden.
They may have a propensity to do stupid things but most bankers are not stupid. And if there’s one thing they know how to do well, it’s construct a loan amortisation schedule. Does anyone really think they are going to leave themselves owed a fortune when the toll-road concessions run out?
The cash flows from these assets are highly predictable. It’s really not that hard to work out how much needs to be repaid each year to make sure the loan balance ends up at zero. If you want a real life example, you only need to look at Sydney’s M4, which was handed back to the government last year just as the last of the debt was repaid.
Transurban’s debt levels are perfectly reasonable. The loans will be repaid. And the financial performance of the assets is perfectly acceptable despite the seemingly low return on equity.
There are a number of reasons the accounting doesn’t make sense. Depending on the ownership level, some assets are consolidated and some are equity accounted. The financing is often structured so that Transurban’s equity is accounted for as debt (this enables them to distribute the cash when there are no accounting profits). And the biggest issue of all is that the depreciation charges massively overstate the cash required to maintain toll roads in good working order, particularly in the early years of a concession.
That makes the accounts irrelevant but, fortunately, the underlying economic reality is dead simple: collect tolls, pay expenses, maintain the road and pay the rest out to debt and securityholders. If you are analysing it, all you need to do is focus on the cash.
Perpetuating widespread misunderstanding of these assets is doing Australian investors a disservice. It’s no surprise that the Canadian pension funds are snapping up our infrastructure assets. They represent a long-term, inflation-linked stream of cashflows perfect for annuity seeking investors.
Transurban isn’t cheap enough for me but Australia’s superannuation investors, self-managed or otherwise, could do a lot worse.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.