The NSW government has offered free vehicle registration to eligible owners from 1 July 2018 if they spend more than $25 a week, on average, on tolls over a 12-month period. According to the premier, Gladys Berejiklian, “the majority of eligible motorists will save $358 a year on registration costs”.
We believe this should see greater use of Sydney's tolled network, to the benefit of Transurban investors. When the M5 cashback scheme commenced in early 1997, there was a notable spike in its use. We estimate average daily traffic grew 10.8% per annum over the three years following, 2.5 times the local economy growth rate.
It seems logical to us that investors should expect Transurban’s NSW network to receive a boost from the rego rebate – but how much of a boost? According to Transurban, only 12% of its NSW toll road users pay $100 or more per month, or $25 or more per week. We question what proportion of the 7% of motorists who pay more than $15 a week, but less than $25, might be encouraged to use a toll road more in order to be eligible for free rego? If we assume the entire 7% of motorists do make greater use of toll roads, then we estimate the possible revenue increase for Transurban could be up to $70m, which would represent a 4% upgrade to our FY18 group operating earnings forecast.
This announcement from the NSW government, combined with Transurban’s recent operational performance and future growth opportunities, leads us to believe this stock is heading in the right direction. We maintain our Buy recommendation with a target price of $13.50.