Is the Transurban Group (ASX: TCL) share price a bargain buy?
Since 21 February 2020 the Transurban share price is down by 25%. That's a painful decline considering Transurban is meant to be defensive and Australian interest rates have dropped to just 0.25%.
What's going on at Transurban?
The initial coronavirus disruption to life was the loss of air travel. The various stages of restrictions across Australia and North American are now causing people to stop driving as much. There aren't all those trips to work or to school every day.
Yesterday the toll road business gave an update.
As you might expect, things are progressively getting worse. In March, traffic across NSW was down 11% and across Victoria it was down 17%. Total traffic across the group was down 14%.
But it was the traffic in the fourth week of March that grabbed the headlines. In that fourth week NSW traffic was down 29%, Victoria traffic was down 43%, Queensland traffic was down 27% and North American traffic was down 65%.
It wasn't so bad for large vehicle traffic – for March it was down 1% and in that fourth week it was down 7%. Interestingly, large vehicle traffic made up 37% of revenue in that last week.
Trucks are an important part of keeping life and our economy going, so it's good for Transurban that large vehicle traffic can keep generating some earnings for the infrastructure business.
Anything positive other than heavy traffic?
Whilst Transurban couldn't point to good news for its own roads, it referred to the fact that Chinese traffic levels are starting to return to normal, though it's still lower than it was before. Transurban said that Chinese highway traffic has rebounded quicker than public transport, suggesting that social distancing is encouraging more people to commute using their cars.
Is its balance sheet safe?
The key for most businesses getting through this period is to have a strong enough balance sheet.
Transurban said it has sufficient liquidity to meet capital requirements and debt refinancing obligations to the end of FY21 with existing balance sheet capacity, and in the absence of any further refinancing activity.
There are opportunities to defer certain non-essential expenditure which should help a little too.
And what about the distribution?
Due to the current uncertainty with its outlook, Transurban withdrew its distribution guidance for this half-year period and advised it expects to pay a distribution in line with "free cash excluding capital releases". In other words, the distribution depends on its traffic and earnings over the next three months.
Is it a buy?
I've never been a huge fan of Transurban because it seemed expensive and less defensive than some people thought it was.
Let's assume traffic goes back to normal by the end of the year. At that point, the toll road operator would be able to start paying a normal distribution again. So the annualised 2021 calendar year yield could be around 5%.
For me, it's not cheap enough for the potential risks. I'd want it to be around $10 before thinking about it.
