Transurban-led consortium Sydney Transport Partners (STP) has been selected by the NSW government to acquire a 51% equity stake in WestConnex for $9.3bn. STP comprises Transurban (with a 50% share), AustralianSuper (20.5%), Canada Pension Plan Investment Board (CPPIB, 20.5%) and Tawreed Investments (9.0%).
The key elements of the transaction are as follows:
- STP will pay $9.3bn for its interest in WestConnex. Using the WestConnex traffic forecasts contained in the NSW government’s ‘Updated Strategic Business Case’, we estimate this implies an enterprise value to operating earnings (EV/EBITDA) transaction multiple of 36.9x in FY28E – being the first full year of WestConnex’s operation – and a project internal rate of return (IRR) of just 5.6%. However, management expects the IRR to be above the company’s weighted average cost of capital (WACC), which we estimate at about 7%. Based on the WestConnex tolling regime, we estimate the traffic forecasts will need to be almost 50% higher than the NSW government’s forecasts in order to generate a return greater than WACC.
- Subject to the customary completion conditions – approvals from the Australian Competition and Consumer Commission (ACCC) and the Foreign Investment Review Board (FIRB) have been granted – financial close is expected in late September.
In our view, investors should have confidence in Transurban’s ability to accurately forecast long-term traffic volumes and deliver shareholder value, given its track record. In addition, the difference in forecasts could be explained by factors such as conservatism on the part of government forecasters – who may not have included the benefits of proposed projects, such as the F6 – and Transurban taking a more optimistic view of the take-up and impact of connected and automated vehicles, as well as Sydney’s economy more generally.
We maintain our Buy recommendation on Transurban, although our target price has fallen to $13.25 from $14.00 as we incorporate WestConnex into our forecasts.