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Transburn Valuation Report

In: Business and Management

Submitted By suravika
Words 12462
Pages 50
2011
Company Valuation Report

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Table of Contents
1. EXECUTIVE SUMMARY ........................................................................................................ 5 2. INTRODUCTION TO TRANSURBAN GROUP ................................................................... 9 2.1 Overview ................................................................................................................................ 9 2.2 History .................................................................................................................................. 10 2.3 Share Price Performance ...................................................................................................... 12 2.4 Products and Services ........................................................................................................... 14 2.5 Toll Roads ............................................................................................................................ 15 2.5.1 CityLink ......................................................................................................................... 15 2.5.2 M2 Hills ......................................................................................................................... 15 2.5.3 Lane Cove Tunnel .......................................................................................................... 15 2.5.4 M1 Eastern Distributor .................................................................................................. 15 2.5.5 M7 Westlink .................................................................................................................. 16 2.5.6 M5 Motorway ................................................................................................................ 16 2.5.7 Pocahontas 895 .............................................................................................................. 16 2.5.8 Capital Beltway HOT Lanes .......................................................................................... 16 2.6 Corporate Strategy and Objectives ....................................................................................... 16 2.7 Sources of Competitive Advantage ...................................................................................... 18 2.8 Ownership Structure ............................................................................................................. 19 2.9 Capital Structure ................................................................................................................... 20 2.10 Management Structure ....................................................................................................... 21 3. INDUSTRY ANALYSIS.......................................................................................................... 23 3.1 Overview .............................................................................................................................. 23 3.2 Industry External Drivers ..................................................................................................... 23 3.3 Market Segmentation: .......................................................................................................... 25 3.4 Products and Services Segmentation: ................................................................................... 25 3.5 Major Market Segmentation ................................................................................................. 26 3.6 Industry Participants/Competitors ........................................................................................ 27 3.7 Porter Analysis ..................................................................................................................... 29 3.8 SWOT Analysis .................................................................................................................... 31 3.9 Industry Outlook................................................................................................................... 34 4. ECONOMIC ENVIRONMENT ............................................................................................. 36 2|Page

4.1 Overview .............................................................................................................................. 36 4.2 Macroeconomic Indicators ................................................................................................... 36 4.2.1 Oil Prices........................................................................................................................ 36 4.2.2 Inflation .......................................................................................................................... 38 4.2.3 Interest Rates.................................................................................................................. 41 4.2.4 Exchange rates ............................................................................................................... 42 4.3 Economic outlook................................................................................................................. 44 4.3.1 Estimated Market Return ............................................................................................... 44 5. CURRENT ISSUES ................................................................................................................. 46 5.1 Macroeconomic Factors ....................................................................................................... 46 5.1.1 Increase in Oil Price ....................................................................................................... 46 5.1.2 Increase Level of Debt to Disposable Income ............................................................... 46 5.1.3 Availability of Public Transport .................................................................................... 46 5.1.4 Government ................................................................................................................... 47 5.2 Microeconomic Factors ........................................................................................................ 47 5.2.1 Potential Investments ..................................................................................................... 47 5.2.2 Competitors.................................................................................................................... 47 6. FINANCIAL ANALYSIS ........................................................................................................ 49 6.1 Dupont Analysis ................................................................................................................... 51 6.1.1 EBIT/Sales ..................................................................................................................... 53 6.1.2 Sales/Total Assets .......................................................................................................... 53 6.1.3 EBIT/Total Assets.......................................................................................................... 54 6.1.4 Interest Expense/Total Assets ........................................................................................ 54 6.1.5 Net Before Tax/Total Assets.......................................................................................... 55 6.1.6 Total Assets/Common Equity ........................................................................................ 55 6.1.7 Net Before Tax/Common Equity ................................................................................... 55 6.1.8 Tax Retention Ratio ....................................................................................................... 56 6.1.9 Return on Equity ............................................................................................................ 56 7. VALUATION ASSUMPTIONS ............................................................................................. 58 7.1 Required Rate of Return (CAPM) ........................................................................................ 58 8. VALUATION ANALYSIS ...................................................................................................... 60 8.1 Dividend Discount Model (DDM) ....................................................................................... 60 8.1.1 Dividend Forecast .......................................................................................................... 61

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8.1.2 Intrinsic Share Price ....................................................................................................... 63 8.1.3 Sensitivity Analysis ....................................................................................................... 63 8.2 Free Cash Flow to Equity Model (FCFE Model) ................................................................. 65 8.2.1 Cash Flow Forecast ........................................................................................................ 66 8.2.2 Intrinsic Share Price ....................................................................................................... 67 8.2.3 Sensitivity Analysis ....................................................................................................... 68 8.3 Pricing Earning Ratio ........................................................................................................... 69 8.3.1 Sensitivity Analysis ....................................................................................................... 72 8.4 Price/Book Value Ratio (P/B) .............................................................................................. 73 8.4.1 Sensitivity Analysis ....................................................................................................... 75 8.5 Net Tangible Asset Backing Model (NTA) ......................................................................... 75 9. VALUATION DISCUSSION .................................................................................................. 78 9.1 Dividend Discount Model (DDM) ....................................................................................... 78 9.2 Free Cash flow to Equtiy Model (FCFE Model) .................................................................. 78 9.3 Price / Earnings Ratio Model (P/E) .................................................................................. 79 9.4 Price/ Book Value Ratio (P/B) ............................................................................................. 80 9.5 Net Tangible Asset Backing Model (NTA) ......................................................................... 81 9.6 Preferred Valuation Method ................................................................................................. 82 10. CONCLUSION & RECOMMENDATIONS ...................................................................... 83 11. APPENDIX ............................................................................................................................. 84 11.1 Appendix 1: Excel Raw Beta and Adjusted Beta Calculations .......................................... 84 12. REFERENCES ....................................................................................................................... 85

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1. EXECUTIVE SUMMARY
Transurban Group (TCL) is an Australian based company that and was first listed on the Australian Stock Exchange (ASX) on the 14th March 1996. The industry that it is in is industrials and the sector is transportation on the ASX. It specialises in the operation and management of toll roads. TCL main headquarters are in Australia however their operations extend to North America. TCL also continues to search for other opportunities abroad to add to its portfolio of investments in toll roads. The share price movements of TCL have been extremely volatile in recent years the period from March 2006 through to March 2011; TCL was trading at prices ranging from a monthly high of $8.299 to a monthly low $3.996. In more recent times preceding August 2010 TCL share price has been experiencing an upwards trend which can be seen as a positive sign. At the start date of writing this report TCL share price was trading at $5.19 (as of 23/3/2011) and at the conclusion of this report TCL share price is trading now at 5.44 (as of 13/5/2011). Transurban operates and owns tolls, its operations provides specific products and services. Its main product is the electronic tagging devices used for toll roads. The electronic tagging devices that are known as e-TAG and e-PASS, the tagging device that is sold to commuters in Melbourne for use on CityLink is known as the e-TAG. The CityLink is Transurban flagship toll road. Transurban is also involved in the business of consulting and are experts in their industry. Their consulting clients are from the public sector such as councils and governments domestic and abroad. Their expertise is in the development and management of electronic toll roads, traffic projection and modelling. Transurban is a company that is highly leveraged and this is explored through examining their capital structure. The five years history of the company demonstrated that the company had a high net gearing ratio. This also indicated that Transurban Group had been heavily financed by the outside parties. A company should have a well balance net gearing percentage as debt is always a cheaper source of financing compared to equity financing but a highly geared company would be risky to the company as the interest repayment would be very high. On the other hand, the interest cover ratio of Transurban Group was relatively low for the past five years. Interest cover ratio is vital as it measures the amount of profit available to cover the interest expenses of the company. Therefore, the higher the ratio the less risks the company is bearing.

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The Toll Road Operators industry has been growing steadily over the last decade as governments seek to lower the cost of transport infrastructure through Public Private Partnerships (PPPs). And as the main supporting partner, Transurban contributes most to the growth by the enhancement projects of new toll roads and increased traffic on existing toll roads. The company holds the greatest market share in Australian toll road industry at around 33.6%. In the coming years, the industry revenue is expected to be pushed higher as the increasing opening of new toll road and tunnel. The strong Australia economy as well as increasing population density will see higher demand for toll road as a result of boosting road freight activity. However, any increase in the fuel price as a result of Carbon Pollution Reductions Scheme (CPRS) will infer users to switch from using toll road to using to public transportation. The porter’s 5 forces tool is a powerful tool helps to better understand the strength of the industry’s current competitive position as well as the strength of a position that the toll road operators are considering moving into. There are five important forces that determine competitive power in Australian toll road, but the most valuable force determining industry attractiveness is competitive rivalry. The competition in this industry is increasing and operators will face competition with price, customer service levels and product differentiation. The company’s major strengths include its leading position, holding dominant assets enable to maintain its market share in the industry. The enhancement of existing road assets not only deliver more value to the community but will also boost profit to TCL. However, TCL also suffers from outstanding debt problem which will affect shareholders’ dividends payments. Apart from that, the proposition of CPRS along with traffic congestion adds to the threats to Transurban with travel reduction. Transurban Group’s future potential growth can be affected by the economic environment such as macroeconomic and microeconomic factors. Examples of macroeconomic factors that will affect Transurban Group are oil price, level of debt to disposable income, inflation and government regulation. As the oil price increase, there will be less people using their cars as transportation and thus fewer consumers using the toll road. When the level of debt increases, the level consumer’s disposable income will decrease and consequently consumers have to reduce their level of expenditure by avoiding high petrol costs and toll costs. Inflation will cost the level of expenditure to rise, as the prices of the consumer goods increase. Thus, travelling with own transport will incur a higher cost. Government regulation such as increase in taxes and upgrading the public transports will also affect the company’s profitability level. 6|Page

Microeconomic factors are factors that affect individual economy choices as well as individual decision makers. Examples of the microeconomic factors that will affect the company are potential investments and competitors. It is imperative for the company to be consistent in discovering the potential investments which can bring in more revenue to the company. Potential investments for Transurban Group can be the acquisition of potential growth assets and upgrading the existing assets. Competitors play a vital role in affecting the decisions that will be made by Transurban. When the rivals are performing well, the company will need to resolve with alternative ways to boost up the company’s performance level as well as to outperform them. EBIT is used to measure the amount of profit that the company can generate irrespective of other external factors such as how the business if financed and government regulations. The five years historical data demonstrated that average growth of Transurban Group was 187%. On the other hand, EPS had been incurring negative figures from 2006 to 2009 and had a large increase in 2010 which overturned the figure into positive value. This also portrayed that the company’s profits generating ability was very high. The ROE of Transurban Group had been relatively low for the past five years. However, looking at the big increase in ROE in 2010 and upon the completion of the future upgrading projects, it is very likely that the ROE will increase in future. The preferred valuation method was the dividend discount model. This was the preferred model over the other models because Transurban historically consistently paid dividends and we expect would expect this to continue in the future. It was preferred over the discounted FCFE model because the FCFE future growth rates would be more difficult to predict and it was also preferred over the ratio relative valuation techniques since it was difficult to find companies that were similar to Transurban and its structure. The DDM and the FCFE models suggest that the share value of Transurban is underpriced and is currently trading at a discount of 3.1%, FCFE model suggests that TCL share is trading at a discount of 2.5688%. The relative valuation techniques used also suggests that the stock is worth buying with exception to the P/E ratio which suggest we should avoid holding the stock or even sell the stock. The five valuation methods used, four of our valuations conclude that Transurban stock is worth buying or holding, while only one of the method used would lead to the conclusion that investors should sell or avoid TCL stock. Based on this information we recommend a buy-hold recommendation on TCL stocks, since TCL shares are trading at a discount. TCL shares is trading at a discount of 3.1%, based on the market 7|Page

price of $5.31 as of the 15/4/2011 from the intrinsic value of $5.48 calculated from the dividend discount model.

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2. INTRODUCTION TO TRANSURBAN GROUP
Transurban Group Company Details:
ASX Listing Code Official Listing Date GICS Sector GICS Industry Group GICS Industry Internet Address Registered Office: Market Cap Total Shares Quoted Last Close TCL 14 March, 1996 Industrials Transportation Transportation Infrastructure http://www.transurban.com.au Level 3, 505 Little Collins St, MELB, VIC, AUSTRALIA, 3000 $7,478,000,000.00 1,443,500,000 $5.18 (as of 23/3/2011) *Source: Australian stock exchange (2011) & Morningstar DatAnalysis (2011)

2.1 Overview
Transurban Group (TCL) is an Australian based company with its headquarters located in Australia, TCL has offices in Melbourne and Sydney. They also have vested interests in North America so they have offices in America; their American offices are located in New York, Washington DC and Atlanta. The Group is currently in the top fifty companies listed on the Australian Stock Exchange. Transurban Group is in the industry of transportation and infrastructure. It’s a toll road owner, operator and they are involved in the development and management of electronic toll roads. The company started out as a single purpose business which was for the purpose of CityLink in Melbourne (Transurban 2011). They currently have interests in eight toll roads and have approximately 5 million customers around the globe. TCL interests can be seen in table 1.
Table 1: Transurban Group Interests in Toll Roads
ROAD AUSTRALIA CityLink (Melb) Hills M2 (Syd) Lane Cove Tunnel (Syd) Eastern Distributor M1 (Syd) Westlink M7 (Syd) Motorway M5 (Syd) Virgina, USA Pocahontas 895 Capital Beltway HOT lanes (under construction) INTEREST 100% 100% 100% 75.1 50% 50% 75% 67.5% *Source: Transurban (2011)

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2.2 History
Transurban group was formed in 1992, it started out as a joint venture between two engineering firms. The two firms in the joint venture at the time were Australian company Transfield Construction Pty Ltd and a Japanese company Obayashi Corporation. The joint venture was for a submission with the Government of Victoria to build, own, maintain and operate Melbourne City Link (Morningstar DatAnalysis 2011). In 1995 the Victorian Government accepted their submission and TCL was listed on the Australian Stock Exchange in 1996. The CityLink project consisted of two major sections, the Westlink which connects the Tullermarine and Westgate Freeways and the Southern Link which connects the Monash and Westgate freeways (TCL Annual Report 2000). The project involved financing design, construction, marketing, operation and maintenance of the toll roads. CityLink was first open to traffic in August 1999, the development of the electronics tolling system on City Link which is a cashless tolling system was a world first (InvestSMART 2011). The City Link project endured numerous setbacks. There was the late delivery of the Central Toll Computer System; this prevented the tolling of the Western Link until eight months after contracted completion date and four and a half months after the section opened to traffic. The Western Link operated without tolling on the 15th August 1999 and commenced tolling on the 3rd January 2000. Between the financial period of 30th June 1999 and 3rd January 2000 TCL derived no net revenue from the City Link project (TCL Annual report 2000). On the 19th February 2001, the Burnley Tunnel suffered a structural failure in an arch of its structure. As a result of the structural failure the tunnel was closed for nine days. Transurban lost approximately $1.9 million dollars in toll revenue and incurred $0.6 million dollars in consulting fees (TCL Annual Report 2001). In 2001 in an out of court settlement the Transfield Obayashi Joint Venture agreed to pay Transurban $157 million in damages (Millar R, & Moynihan, S 2007). In 2001-02 it was a big year for Transurban, it was a year of transformation. In August 2001 Transurban negotiates its release as a single-purpose entity with the Victorian government. Being a single-purpose entity the company was legally restricted to the business of operating and developing Melbourne CityLink (TCL Annual Report 2002). In April of that year the group filed an expression of interest for Lane Cove Tunnel in Sydney and in February 2002 and the management team makes a major trip overseas to find new business opportunities. Towards the end of the 2002 financial year Transurban group finalised a debt refinancing package worth $1.7 billion, this increased the company’s ability to raise capital and invest in other projects 10 | P a g e

domestically and internationally. During the period CityLink also launches a cost reduction program to save $1 million per month on customer service and marketing costs, in July 2002 CityLink achieves that target and reduces cost down from $3.5 million to $2.5 million. Revenue from tolls and fees for traffic in 2002 financial year was up 41.8% from the previous year. TCL had another great year 2002-03; CityLink Revenue topped $230 million demonstrating higher growth than what was initially forecast. In that period revenue was 10.7% higher than the previous year. In the month of October Transurban’s consortium wins the $2.23 billion Westlink M7 project in Sydney at the time it held a 40% share in the Westlink M7 project. It was the first of many projects in Sydney; TCL financed the project by raising $430 million in equity (TCL Annual Report 2003). Over this period the company was prospering, the future looked bright and there was plenty of optimism about TCL. In 2003-04 financial year traffic on Melbourne increased by 6% that saw revenue grow by 10.1%, this was another positive year for TCL. Over the year they introduced other programs designed to increase revenue and cut costs. In July they introduced a new video tolling product which attracted more than 34,000 new accounts and generate over $1.5 million in revenue (TCL Annual Report 2004). CityLink continued to develop further programs to cut operating costs and increase revenue. In December 2003, Transurban and Macquarie Infrastructure Group agreed to set up a tolling venture as New South Wales (NSW) six tolling roads would eventually move from manual toll roads to electronic tolling, they already have a current joint venture in Westlink M7. Transurban continued to increase its stake in NSW roads when it purchased 8.1% share in Hills Motor way on 19th April. TCL was entering in further bids for business opportunities. Transurban was bidding to develop and operate the Mitcham-Frankston project and entered a tender in Sweden. The tender in Sweden was TCL first tender outside of Australia and the tender was unsuccessful (TCL Annual Report 2004). During this period it was one where TCL was actively seeking new projects domestically and overseas to increase returns to its stakeholders. The financial year for 2004-05 was an excellent year for investors, company securities grew from the start of the 2004-05 financial year from $4.87 a year and trading at a high of $7.45 (TCL Annual report 2005). That year Transurban was listed as one of the top fifty companies on the ASX. Transurban were also successful in a takeover bid for Hills Motorway (M2) where it would become 100% owner of the M2. The 100% ownership of the M2 and 40% ownership of the M7 made TCL a major stakeholder of around half of Sydney’s motorway. In early 2005 Transurban reached an agreement on the upgrade of the Tullermarine/Calder interchange, however they were unsuccessful in the bid for Mitcham-Frankston Freeway. TCL however continued its interest in 11 | P a g e

international opportunities. In the US they were targeting potential projects in the State of Virginia, whilst also setting up an office in the United Kingdom building relationship with potential partners and monitoring potential opportunities. Revenue on the CityLink was also up during the period it was up 8% during the 2004-05 period (TCL Annual Report 2005). Transurban had its first international toll road in June 2006, it was the Pocahontas Parkway in Richmond, Virginia in the United States. The Company’s portfolio of toll roads now consisted of four toll roads. TCL and its partners also opened Sydney’s Westlink M7 eight months early while TCL had the full electronic tolling system working ten months early earning a performance bonus of $8.3 million (TCL Annual Report 2006). The company continued enhancing its portfolio of toll roads by adding more toll roads to its portfolio. TCL takeover of Sydney Roads Group (SRG) increases TCL stake in five out of the nine motorways in Sydney (TCL Security holder review 2007). The Security holder review of Transurban (2007) states that on December 2007, TCL construction partner Fluor and the Commonwealth of Virginia reached a financial close on the Capital Beltway Hot Lanes project in Virginia. The joint agreement will allow TCL to operate the lanes for 75 years (TCL Security holder review 2007). On August 2008 TCL further increased its stake in its toll roads it already has interests in. It further increase an addition 2.5% in Westlink M7 taking its interest to a total of 50%. While in September 2007 TCL acquired an additional 3.8% in Airport Motorway Group, taking its invested interest in Eastern Distributor to 75.1% (TCL Security holder review 2008). During the 2009-10 financial year TCL posted an annual net profit turnaround. It posted a profit turnaround of $59.605 million which was up from the $16.134 million loss from the previous financial year (Herald Sun 2010). The profit turnaround for 2009-2010 financial year was the first profit made in ten years. TCL continued to increase its portfolio in toll roads it announced on the 10th of May 2010 that it had reached agreements to acquire the Lane Cove Tunnel, in August the group assumed operational control (Morningstar 2011). The 2011 results will be released in the near future.

2.3 Share Price Performance
The following chart (figure 1) compares the five year historical performance of TCL share price against the All Ordinaries Index from the period of March 2006 through to March 2011. During 12 | P a g e

that period TCL was trading at prices ranging from a monthly high of $8.299 to a monthly low $3.996. When TCL was trading at an all time high on May 2007 the share price rapidly declined from then. The All Ordinaries Index also declined in close proximity. This would suggest the share price of TCL is correlated to movements in market indices. It can be seen from figure 1 TCL share price has depreciated further than the market (relative to the All Ordinaries Index) through periods prior to March 2009 where it was trading at all time low. The 20 month moving average of TCL share price would suggest that there is a downwards trend however early 2010 the trend started to flatten out and the share price was improving, possibly even changing trends.
Figure 1: TCL Share Prices vs. All Ordinaries Index (5 Years Closing Monthly Prices)

*Source: ASX (2011)

The next chart (figure 2) compares the past six months of the daily share price of TCL with the six month daily change of the All Ordinaries Index. The pricing movements seen in figure 2 show that from periods preceding August 2010 TCL share price was experiencing an upwards trend following the trend of the All Ordinaries Index. This would also further clarify that TCL and the All Ordinaries are closely correlated. The upwards trend can also be seen from the twenty day moving average of TCL share price. The upwards trend slowly steadied from early November to present. During the six month period it can be said that the price of TCL stock price was extremely volatile as during the period there was a fluctuation in share price of around 19%, However TCL share price has improved which is a more positive sign.

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Figure 2: Share Prices vs. All Ordinaries Index (6 month Closing Daily Prices)

*Source: ASX (2011)

Transurban’s stock price was last trading at $5.30 at the close of trade (25th March 2011), although it is still trading below its previous high it has recovered from trading at its five year low in early to mid 2009.

2.4 Products and Services
Transurban operates and owns tolls in Australia and North America and through these operations it provides specific products and services. Its main product for what it’s known for is the electronic tagging devices used for toll roads. The electronic tagging devices that are used in Australia are known as e-TAG and e-PASS. The main tagging device that is sold to commuters in Melbourne for use on CityLink is known as the e-TAG, with e-TAG account commuters can travel through toll roads in Melbourne and Sydney. The e-PASS account is for commuters that only occasionally use toll roads and can only be used for travel on Sydney’s Westlink M7 tolls. The two accounts allow up to four vehicles to be registered on the one account. They also offer commercial e-TAG for businesses which require account holders to have at least five vehicles registered on the one account. Visitors that are in Sydney they can purchase the visitor’s e-PASS which allows visitors to travel on all Sydney toll roads for up to 30 days (Roam 2011). Transurban is also involved in the business of consulting they are experts in their industry and offer consulting services. Their consulting clients are from the public sector such as councils and governments domestic and abroad. Their expertise is in the development and management of electronic toll roads, traffic projection and modelling.

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2.5 Toll Roads
Transurban has interests in eight toll roads, six of the eight toll roads are in Australia and two are in America. The six toll roads in Australia are the CityLink, M2 Hills, Lane Cove Tunnel, M1 Eastern Distributor, M7 Westlink and M5 Motorway. The two toll roads in America are the Pocahontas 895 and Capital Beltway HOT lanes.

2.5.1 CityLink
The company flagship asset is CityLink which is 100% owned and managed by TCL. It connects to three major freeways, the West Gate, Tullermarine and Monash. The freeways link to Melbourne manufacturing hubs, city, port and airport with around 22 kilometres of motorway. Melbourne’s CityLink was one of the world’s first fully electronic toll roads with currently more than 1.8 million vehicles registered to use the toll roads. CityLink was first opened to traffic in August 1999 and the company has a concession to operate the road until 2034 (Transurban 2011).

2.5.2 M2 Hills
Sydney’s M2 motorway was first open to traffic in 1997 and was acquired by Transurban in June 2005. The M2 in Sydney has 21 kilometres of motorway, it links the lower north shore of the city with the northwest regions and connects to the Westlink M7 and the Lane Cove Tunnel. The M2 is a combination of electronic toll and cash toll connections, there are certain lanes for each. The company has 100% interest in the M2 and currently has a concession to operate the road until 2042 (Transurban 2011).

2.5.3 Lane Cove Tunnel
Lane Cove Tunnel has about 3.6 kilometre of motorway it connects to the M2 and has a fully electronic tolling system. The tunnel is located in Sydney it was opened to traffic in 2007 and was acquired by Transurban in August 2010. It is 100% owned by the company and they have a concession to operate the road until 2037 (Transurban 2011).

2.5.4 M1 Eastern Distributor
The M1 is 6 kilometres of motorway that links Sydney’s City Centre, Harbour Bridge and Tunnel, southern suburbs and Sydney’s airport. The road contains a combination of electronic and cash tolling and includes a 1.7 kilometre tunnel. The road was first opened to traffic in 1999 and was acquired by the company in 2007 with a concession to operate the road until 2048. TCL has a 75.15% interest in this asset (Transurban 2011).

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2.5.5 M7 Westlink
The M7 Westlink consists of 40 kilometres of motorway in Sydney and links to M2, M4 and the M5. The road is a full electronic toll operated road and improves access to Western Sydney by helping motorist avoid traffic lights. The M7 was opened to motorist in 2005 and was acquired by the company also in 2005. They currently have 50% interest and a concession to operate the M7 until 2037 (Transurban 2011).

2.5.6 M5 Motorway
Transurban’s sixth asset in Australia is the M5 in Sydney, the M5 is 22 kilometres of road and connects the F5, M5 East and M7 Westlink motorway. The motorway contains a combination of electronic and cash tolling system. It was first open to traffic in 1992 and was acquired by TCL in 2007. The company has a 50% interest and a concession to operate the toll road until 2023 (Transurban 2011).

2.5.7 Pocahontas 895
The Pocahontas 895 was the first international toll road added to Transurban toll road portfolio. TCL acquired the asset in 2006 with a 75% stake and has a contract to operate the road until 2105. The Pocahontas 895 is a 14 kilometres stretch of road in Richmond, Virginia, USA and is a combination of cash and electronic tolls (Transurban 2011).

2.5.8 Capital Beltway HOT Lanes
The Capital Beltway HOT Lanes is a project that Transurban is currently completing, the construction began in early 2008 and is expected to open in 2013. The construction consist of 22 kilometres of electronically tolled HOT lanes with an additional two lanes added to each direction bring the total to twelve lanes. TCL has a 67.5% interest in this asset which is still currently under construction (Transurban 2011).

2.6 Corporate Strategy and Objectives
According to the Transurban annual report (2010) the chairman of Transurban Group, Mr Lindsay Maxsted, year 2010 was a great year in term of growth in revenue on all the Australian assets and 13% of increment in EBITDA. These results had facilitated the generation of 31.8% growth in underlying free cash to $347.5 million. Since year 2008, objective to reduce cost had been delivered successfully this will save the corporation $45.3 million, twice as much as what 16 | P a g e

was expected from the original cost cutting target. The following highlights the projects that will be carried out by Transurban Group as part of their development strategy and objectives to be achieved in the coming future: 1. MI-Citylink upgrade in Melbourne Extra lanes and freeway management system will be constructed to improve the traffic flow and reduce congestion on M1 which includes CityLink’s southern section. The cost is estimated to be $1.39 billion. The upgrading of M1 is forecasted to increase the traffic level to additional 7% on CityLink within 5 years and improving the safety level when travelling on the busy road corridors. 2. Hills M2 upgrade in Sydney Additional lanes will be built in both directions along 14.5km of the motorway and widening the tunnel as well as installing new tolled ramps to improve the access to the motorway and alleviate congestion. The cost is approximately $550 million. Upon the completion of the upgrade, it is expected to drive in more traffic by approximately 17,300 average daily trips by year 2016. 3. M5 widening in Sydney (Interlink Road Project) Expanding the 21km motorway which is the main route for freight, passenger and commercial between Port Botany and Sydney airport and South West Sydney to three lanes in each direction to reduce traffic jams. The cost of the project is approximately from $350-$450 million. The project is estimated to increase the traffic and boast up the revenue. In terms of economy benefits, M5 widening will enhance the network connection between the airports, industrial hubs and ports. The overall outcome is it will reduce the travelling time for road users. 4. Building 58 new bridges and two electronic tolled Hot Lanes in Washington DC (US) On a 22km section of the 1-495 ring road, two new electronically tolled Hot Lanes will be built in each direction which increase the total number of lanes from 8 to 12.In term of replacing the old infrastructure, 58 new bridges and overpasses will be constructed. The project will cost approximately $US2 billion. In terms of economic benefits, over the year of 2008 to 2013, the massive project opens up 11,800 jobs for the public and $2.7 billion in the economic for the Washington metropolitan area. 5. 1-95/395 Hot Lanes Project Collaborating with Fluor-Lane, both are working with the Virginia Department of 17 | P a g e

Transportation in reviewing and finalising the financial plan, scope and timeline for the 195/395 Hot Lanes Project Transurban Group is very optimistic about the future where the projects are to be carried out will boost the corporation’s cashflows in long term, driving the returns and creating value for the shareholders.

2.7 Sources of Competitive Advantage
Transurban Group has been actively carrying out massive multi millionaire dollars projects as part of their development plan to expand their territory in Australia as well as in United States. Several factors that make Transurban Group being competent in the market are: 1. Technology advancement enables the Transurban Group to appear as the world leader in electronic tolling and providing excellent customer service with more than one million fully interoperable e-Tag devices. 2. High barriers to entry into the market due to the government regulation and high cost of establishment make Transurban Group one of the dominant players in the road tolling market. 3. Transurban’s traffic forecasting is highly regarded which strengthen the asset acquisitions and projects enhancement. 4. Efficiency of the operation and management teams in ensuring all the massive projects are constructed effectively according to the timeline. 5. Diversification of capital funding options. 6. Good relationship with the lenders, stakeholders and governments which creates more business and development opportunities in future. (TCL Annual Report 2006) The definition of competitive advantage is an advantage that the company has over its competitors which allow the company to perform better in the market. Examples of competitive advantage are customer service, company’s cost structure, product and facilities offered, network distribution and the company’s management (Investopedia 2011).

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2.8 Ownership Structure
Table 2: Transurban Substantial Shareholders as at Last Notice 01/09/2010
Shareholding Share Held (%) Capital Partners Pty Ltd 187,139,384 13.50 Canadian Pension Plan Investment Board 182,552,346 12.90 *Source: Transurban Group Annual Report (2010)

The two largest shareholders of the Transurban Group since 2009 were Capital Partners and Canadian Pension Plan Investment Board. From year 2009 to 2010, there was a declination of total shares held by Capital Partners which was 2.09% and CPPIB was 0.51%. Ontario Teachers’ Pension Plan Board was in the list of the substantial shareholders in year 2009 withholding 12.22% of the securities and was dropped out in 2010. Other companies that were substantial sold over the past 12 months were National Australia Bank, BlackRock Investment Management Limited, Capital Partners and Ontario Teachers’ Pension Plan Board (MorningStar 2011).
Table 3: Distribution of Shareholders of Stapled Securities
Ordinary Shares 1-1,000 1,001-5,000 5,001-10,000 10,001-100,000 100,001 > Total Number of shareholders 24,717 31,107 7,109 3,845 225 67,003 Number of Shares 9,743,880 78,306,126 50,916,469 81,493,545 1,220,830,613 1,441,290,633 *Source: Transurban Group Annual Report (2010)

The total numbers of individual shareholders were 67,003 and the total numbers of shares held were 1,441,290,633. Ordinary shareholders have voting rights and each share represents one vote. Besides that, there were 5,687 holders of less than a marketable parcel of shares.
Table 4: List of the Top Twenty Shareholders as at 01/09/2010
Shareholder AMP Life Ltd ANZ Nominees Ltd ANZ Nominees Ltd (i) Argo Investments Ltd Australian Foundation Investment Co. Ltd Australian Reward Investment Alliance Bond Street Custodians Ltd Citicorp Nominees Pty Ltd Cogent Nominees Pty Ltd CS Third Nominees Pty Ltd Djerriwarrh Investments Ltd HSBC Custody Nominees (Australia) Ltd Shares Acquired 11,785,190 10,029,735 5,175,821 3,405,099 14,825,726 8,776,444 3,266,846 33,402,284 17,403,961 5,055,376 3,895,156 479,852,426 Shares (%) 0.82 0.70 0.35 0.24 1.03 0.61 0.23 2.32 1.21 0.35 0.27 33.29

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145,496,316 10.09 J P Morgan Nominees Australia Ltd 349,974,664 24.28 National Nominees Ltd 7,156,613 0.5 Queensland Investment Corporation 9,404,426 0.65 RBC Dexia Investor Services Australia Nominees Pty Ltd 4,880,206 0.34 RBC Dexia Investor Services Australia Nominees Pty Ltd (i) 2,867,732 0.20 RBC Dexia Investor Services Australia Nominees Pty Ltd (ii) 12,389,880 0.86 UBS Nominees Pty Ltd 10,422,999 0.72 UBS Wealth Management Australia Nominees Pty Ltd Total 1,139,466,900 79.06 *Source: Transurban Group Annual Report (2010)

The total shares held by these top twenty shareholders were 1,139,466,900 which was equivalent to 79.06%.

2.9 Capital Structure
Table 5: TCL Net Gearing Ratios

Year Net Gearing (%)

2006 150.51

2007 87.97

2008 83.62

2009 100.04

2010 80.43

*Source: Morningstar DatAnalysis (2010)

Net gearing ratio is measured by (total liabilities– cash) divided by shareholders equity. It gives the measurement of the contribution of long term lenders to the long term capital structure of the business taken into consideration of how much cash received by the company. The level of gearing is vital in assessing the risks where it represents the extent where the company is financed by outside parties (Atrill et al.2008). A high net gearing means that the company is heavily financed by outside parties therefore it is vital for a company to have a well balance net gearing percentage. From 2006 to 2008, the gearing ratio dropped significantly by 66.9% and remained at 80.43% in 2010. This is positive change as a decrease in gearing ratio means that the company reducing its risk as debt represents a financial obligation. As compared to 2006, the net gearing was very high, which indicated that the company went into negative gearing where the company geared more than it should. However, the net gearing percentage was still very high in 2010. Gearing is often necessary to finance the business and it increases the return on equity provided it is justified by the returns generated from the assets.
Table 6: TCL Interest Cover Ratio

Year Net Interest Cover Ratio

2006 0.08

2007 0.31

2008 -0.11

2009 0.68

2010 1.14

*Source: Morningstar DatAnalysis (2010)

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Interest cover ratio demonstrates the measurement of the amount profit available to cover the interest expenses of the company. Interest Cover Ratio is profit before interest and tax divided by interest expenses (Atrill et al.2008). For 2006, the interest cover ratio was relatively low, 0.08 which mean that the level of profit to cover the interest payments was low and therefore higher risk. For 2008, the ratio was -0.11 indicating that the business performance was bad because the level of profit was insufficient to cover the interest payments and as a result the corporation needed to come out with a solution to maximise the level of profit. There was an improvement in ratio from 2009 to 2010 which was partly due to the cost reduction plan successfully being carried out in 2008 which save the company $45.3million. Hence, the higher the interest cover ratio, the lower the risk and vice versa.

2.10 Management Structure
Figure 3: TCL Management Structure

The board of directors of Transurban Group comprises of eight non executive directors, one chairman and a chief executive director. The board is being structured where each of the members of the board has different experience, qualifications and skills to ensure effective discussion as well as efficient decision making. The main role of the board is to provide strategic guidance and effective management for the company. Non executive directors do not get 21 | P a g e

involved in running the day to day business, therefore they are considered as independent from the management. They only monitor the executive activities and play an important role when there is conflict of interest. On the other hand, executive director get involved in the day to day business management and is normally a full time employee. There are three committees being established to assist the board in discharging the responsibilities which are Remuneration Committee, Nomination Committee and Audit and Risk Committee. These committees comprise of only non executive directors. Remuneration Committee is accountable of integrates financial report, audit functions of external and internal and deal with risk management systems whereas Nomination Committee is to deal with appointing new board members and performance of the committee and board. Audit and Risk Committee focuses on directors’ remuneration as well as incentives and remuneration packages for CEO and other senior executives.

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3. INDUSTRY ANALYSIS
3.1 Overview
The industry which the Transurban group primarily operates within is Australia’s Toll Road Operators industry. The primary activities of this industry include the terminal facilities provision as well as the operation of toll bridge, toll road, weighbridge, and vehicular ferry or punt. For TCL Ltd, it mainly involved in the development and management of toll roads in Australia and the USA. According to IBISWORLD (2010), The Toll Road Operators industry has been growing steadily over the last decade as governments seek to lower the cost of transport infrastructure through Public Private Partnerships (PPPs). As a result, industry revenue has grown by an average of 3.8% per annum to be worth an estimated $2.6 billion in 2010-11. Growth has been supported by new toll roads and increased traffic on existing toll roads. And the increasing opening of new toll roads is bound to have a large effect on the industry, providing a large source of growth. Despite the internal factor of the high demand for toll bridge and road operations, the key success of the industry also results from the external factors, such as: Optimum capacity utilization, Long-term site tenure and location to provide stability, provision of a related range of goods/services ("one stop shop") and advanced technology to reduce costs and increase efficiencies (IBISWORLD 2010).

3.2 Industry External Drivers
The Key External Drivers section mainly looks at the key factors outside the control of an individual business that determine the industry's performance. For Australian’s toll road operator, there would be four dominant factors boosting the development of the industry in accordance with 2010 industry report. The first factor of the demand for passenger travel is caused by the rapid growth of vehicle ownership. The industry is sensitive to motor vehicle usage in the cities, both private and commercial vehicles. Our research report predicts the number of motor vehicles will tend to increase significantly in the following years, and by 2014 the number of vehicle owners will reach to around 17million (Figure 4). These rising amount will to a large extent support the stable income of the industry.

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Figure 4: Expected Number of Motor Vehicles in Recent Years

*Source: IBISWORLD (2010)

Apart from the rising number of vehicle, real household disposable income contributes proportionally towards the operation of the industry. The greater the disposable income of households the greater the expected demand for use of toll roads. Toll roads provide convenient travel routes but toll fees can be costly especially when a free alternative route available (IBISWORLD, 2010). Figure5 shows that the disposable income fluctuates dramatically from 2007 to 2012.
Figure 5: Expected Household Disposable Income In Recent Years

*Source: IBISWORLD (2010)

Moreover, legislative compliance requirements for services to road transport and the demand for road freight transportation will provide sustained momentum for the steady growth for the industry as well. 24 | P a g e

3.3 Market Segmentation:
Market segmentation is the process of splitting customers, or potential customers, in a market into different groups, or segments.

3.4 Products and Services Segmentation:
Toll road operators are the most profitable segment of the products and services in the industry (figure 6), contributing 79% of industry value in 2011 (IBISWORLD 2011). Beyond the operations of toll roads, the market also includes the provision of support and maintenance services. Industry revenue is expected to boost over the next five year with the opening of the Clem Jones tunnel and Hale Street Link in Brisbane. The Brisbane Airport link is due to be completed in 2012. Container parking, handling, equipment and refurbishment facilities make up the second main resource of income for toll road provider. The industry report states that this segment is closely linked to the port and international trade activity. And it will be hit by the looming Australian recession as trade activity freezes. Besides, the segment of weigh bridges it is closely related to the transportation industry and plays a considerable role in the industry (8%). However, as economic activity grow slowly in Australia; the amount of freight being transported falls significantly which to some extent drives down the revenue from this segment. Vehicle ferries which provide ferry and punt services for vehicles only takes up 1% according to the figure 6. This segment provides services to locals and tourists, as the economic condition improves; demand is expected to recover in the following years.

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Figure 6: Products and Services Segmentation

*Source: IBISWORLD (2011)

3.5 Major Market Segmentation
The major market of this industry is primarily made up of three segments: private motoring (44%), commercial motoring (36%) and trade activity (20%) (IBISWORLD 2010). Private motoring the main resource of revenue, demand from private motorists is negatively related to the price of oil. Due to the soaring price of oil, many motorists simply choose to use public transport than pay the high price for fuel in addition to tolls, parking fees and a congestion levy on inner city car parks. However statistics from IBISWORLD shows the lower price of fuel, and public transport systems that are stretched to capacity will cause some motorists to shift back to the use of toll roads in 2009-10. On the other hand, the use of commercial vehicles is influenced by the economic condition. For example, demand from commercial uses fell in 2008-09 as slower economic conditions decreased freight volumes in Australia. However it rebounded in 2010-11 as Australian consumers increase spending, and retailers and manufacturers rebuild inventory levels. The trade activity segment involves import/export and wharf-related logistics operations, which are subject to movements in trade volumes (IBISWORLD 2010).Since imports and exports in this industry are low and steady, domestic demand will equal to revenue in the absence of imports and exports.

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Figure 7: Major Market Segmentation

*Source: IBISWORLD (2011)

3.6 Industry Participants/Competitors
The dominant competitors in the Australian toll group are Transurban Group, ConnectEast Group and Queensland Motorways Limited and other companies. The followings are the snapshot of major participants in the industry.

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3.7 Porter Analysis
Porter's 5 Forces analysis deals with factors outside the toll road operator industry that influence the nature of competition within it, the forces inside the industry (microenvironment) that influence the way in which firms compete, and so the industry’s likely profitability is conducted in Porter’s five forces model. Porter defined the forces which drive competition, contending that the competitive environment is created by the interaction of five different forces acting on a business. In addition to rivalry among existing firms and the threat of new entrants into the market, there are also the forces of supplier power, the power of the buyers, and the threat of substitute products or services. Porter suggested that the intensity of competition is determined by the relative strengths of these forces. These five forces can be neatly brought together in a diagram like the one below:
Figure 8: Porter’s Five Forces

*Source: Mind Tools (2011)

1. Supplier Power: The analysis of supplier power typically focuses first on the relative size and concentration of suppliers relative to industry participants and second on the degree of 29 | P a g e

differentiation in the inputs supplied. The ability to charge customers different prices in line with differences in the value created for each of those buyers usually indicates that the market is characterized by high supplier power and at the same time by low buyer power. The key selling industries to the toll road operator make up of metal container manufacturing, lifting and material handling equipment manufacturing and road and bridge construction. Supplier power is high in this case. The technology applies to those specialized manufacture as well as construction is unique and patent. This means there are mere substitutes to replace suppliers in this industry. 2. Buyer Power: The most important determinants of buyer power are the size and the concentration of customers. Other factors are the extent to which the buyers are informed and the concentration or differentiation of the competitors. This force is relatively high where there are few large players in the market. However, as the toll road operator industry is marketed directly to private vehicle users and different commercial transportation industries in various areas, therefore the relative buying power is relatively low. 3. Competitive Rivalry: The intensity of rivalry, which is the most obvious of the five forces in an industry, helps determine the extent to which the value created by an industry will be dissipated through head-to-head competition. The most valuable contribution of Porter's ―five forces‖ framework in this issue may be its suggestion that rivalry, while important, is only one of several forces that determine industry attractiveness. Competition in this industry is medium and the trend is increasing and competition for toll roads are public roads that act as substitutes (IBISWORLD, 2010). While with a large number of operators, competition in the container services industry is fierce. Operators compete on price, customer service levels and product differentiation. 4. Threat of Substitution: A threat from substitutes exists if there are alternative products with lower prices of better performance parameters for the same purpose. They could potentially attract a significant proportion of market volume and hence reduce the potential sales volume for existing players. Threat of substitution is considerable high, public road and transportation acts as substitutes for commercial traffic along with transport of freight. The high price of fuel will result in a significant number of commuters abandon their cars in favour of public transport. Beyond the high price of fuel, the tough economic conditions will keep pressure on toll roads as many Australians cut spending and use public transport.

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5. Threat of New Entry: The threat of new entrants is usually based on the market entry barriers. They can take diverse forms and are used to prevent an influx of firms into an industry whenever profits, adjusted for the cost of capital, rise above zero. In contrast, entry barriers exist whenever it is difficult or not economically feasible for an outsider to replicate the incumbents’ position. Barriers to entry in this industry are high and are steady; the ability to demonstrate to governments the benefits associated with Build-Own-Operate-Transfer (BOOT) and Public Private Partnerships (PPP) schemes is the main barrier by entering in this industry. Besides, the incredibly high cost of building transport infrastructure prevents new firms who intending to get involved in.

3.8 SWOT Analysis
SWOT Analysis is a useful technique for understanding a company’s external and internal environment which is an important part of strategic planning process. Internal factors to the firm usually can be classified as strengths(S) or weaknesses (W), while external factors are defined as opportunities (O) or threats (T) (QuickMBA 2010). The SWOT analysis provides information that is helpful in matching the firm’s resources and capabilities to the competitive environment in which it operates. The company Transurban will be analyzed by this four aspects as follows: Strengths:  Leading player in the market  Holding dominant toll road assets in Australia  Asset enhancements  Good road performance and safety  Innovative transport solutions Transurban, a major player in the marketplace holds approximately 33.6% market share in Australian toll roads industry. Its assets include CityLink (Melbourne), Westlink M7 and Hills M2 (both in Sydney). Apart from that, Transurban also acquired Sydney Roads Group (SRG), which had interests in three major toll roads – Eastern Distributor M1 (75.15%), M4 (50.61%) and M5 (50%) (IBISWORLD,2010). These advanced electronic toll road assets play dominate roles in Australian toll road market and it also represent the main income for TCL. According to IBSIWORLD 2010, there were approximately 3.2 million customers using all Transurban roads

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in 2006, and the number of toll road users as well as revenue increase due to the increasing activity of Australia’s economy. On the other hand, Transurban always devotes to upgrade their existing road assets - projects such as enhancing CityLink's corridor in Melbourne and the Hills M2 motorway in Sydney – which will deliver more value to the community. The enhancement improves congestion, safety, driver experience, and travel times. The benefits are moving towards a substantial growth profile. TCL considers ―Safety‖ as the first priority and insists that safe workplace for their employees and safe roads for the customers. The company undertakes a number of routine safety initiatives on roads where they have management control including routine road safety inspections, incident inspections, and independent road safety audit etc. In some extent, these series of conducts will minimize the probability of road accident as well as establish a reputation for its safety. TCL is a provider of Innovative solutions; Transurban always looks at new pieces of infrastructure and develops new ways to improve their transport networks. Transurban has the expertise and experience to play a strategic role in addressing different challenges which make their existing infrastructure work better and create a more sustainable future. Weaknesses:  Outstanding High Debt Levels Given the massive investment and enhancement required, without doubt, Transurban need a large amount of fund to finance its projects. However, statistics from Crude Oil Peak shows the company has accumulated a debt mountain of around $4billion. Up to now, most of the previous debt has not been paid back, but refinanced. The refinancing is done for longer periods to avoid early capital repayments and the repayment problem is pushed into the future. This rolling over of debt has continued recently, when Transurban obtained a bank loan of $740 million for the M2 widening in Sydney. Shareholders might also suffer from the debt problem in that interest payments reduce the dividends they receive, not to mention that the share value drops with higher debts. There does not appear to be any intention to pay back debt in the foreseeable future. The next debt for the M5 widening is already around the corner. Opportunities:  Potential Future Transactions 32 | P a g e

Transurban continue to look for further opportunities in the US and Australia that fit their strict investment criteria. In the US, they are actively monitoring significant long-term opportunities, with a focus on Virginia and Georgia (Transurban 2011). For example, the company is developing HOT lanes on the Capital Beltway (I-495)–one of the most congested roadways in Washington,DC. The project will maximize capacity and adding value to existing infrastructure corridors.  On-going Population Growth The On-going population growth in Australia indicates the generation of higher traffic Volumes. Transurban knows their current toll way assets can’t satisfy the increasing needs and that is the reason why TCL undertakes project upgrades. The recent CityLink upgrade is starting to deliver higher traffic flows and enhancements to the M2 & M5 in Sydney should be completed in 2012. As a result, TCL revenues are expected to continue to grow steadily as toll road users increase.  The Purchase of Lane Cove Tunnel In May 2010 Transurban brokered a deal to purchase the Lane Cove Tunnel for an estimated $630.5 million (IBISWORLD, 2010). Transurban said that the acquisition of the Lane Cove Tunnel, a 3.6 kilometre roadway in Sydney's north, would increase Transurban's exposure to Sydney's north-west corridor, one of the city's fastest growing business and residential areas. And the Lane Cove Tunnel toll-road concession arrangement will incrementally benefit Transurban's strong business profile by providing some further cash flow diversity to the group. Threats:  The Proposition of Carbon Pollution Reductions Scheme (CPRS): Toll roads generate revenue through motor vehicle use and that travel produces greenhouse gas (GHG) emissions. Public policies and community action designed to cut emissions. The Australian Federal Government’s proposed emissions trading scheme-the Carbon Pollution Reduction Scheme (CPRS) is one of the action aimed for GHC, which is scheduled to commence in July 2011. Transurban may be exposed to indirect impacts from the introduction of the CPRS in the form of higher energy prices (like fuel price), higher construction materials costs and a potential impact on traffic numbers (Transurban, 2009). In the case of transport fuels, that is the oil refineries. The increased costs will be passed to consumers of fuel. The carrying out of the scheme will have the potential to reduce travel and revenue on toll roads.  Urban Congestion and Traffic Management

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In Australia, the Bureau of Infrastructure, Transport and Regional Economics estimate that, without reform, urban road congestion could cost the national economy $20 billion by 2020 – nearly double today’s estimates. High traffic volumes have resulted in low speeds, slow travel, and significant delays in peak periods. Given the challenges posed by climate change, simply building more roads and allowing cities to continue to sprawl is not the answer. How to develop new ways in addressing the challenges posted by urban congestion is another problem that Transurban faces.

3.9 Industry Outlook
According to IBISWORLD’s prediction, the next five years Australian toll road operator will be dominated by the opening of the Clem Jones Tunnel and Hale Street Link in 2010 and the Brisbane Airport Link in 2012. Increased capacity will push industry revenue higher, up by an average of 3.4% per year over the five years through 2015-16 to be worth $3.1 billion. The strong development of Australia’s economy, the numbers of trucks as well as commercial vehicles will increases. This will combine with the opening of opening new toll roads in Brisbane and the completion of upgrades to CityLink in Melbourne to boost industry revenue. Besides, as the economy recovers, real household disposable income are expected to increase and Australian customers are deemed to spend their higher disposable income. Therefore, the demand for toll road will be boosted which is supported by higher road freight activity. In 2010-11, road freight revenue is forecast to grow by an average of 4.4% per year over the next five years after growing by a strong 6.6 % (IBISWORLD 2010). The proposition of the Carbon Pollution Reductions Scheme (CPRS) will impose a carbon cost on the upstream producers of carbon emissions. In the case of transport fuels, the increased costs will be passed on to consumers of the fuel. Any increase in the price of fuel as a result of a carbon price will see a small percentage of private motorists move from the use of cars to public transport while others will seek to reduce their transport costs by using public roads and avoiding toll roads. However, this scheme has been delayed until 2013 and the delay in implementation and possible changes and amendments means it is unclear what, if any effect a carbon price will have on the industry. Secondly, in the past couple of years, the fuel prices have been experienced extraordinary fluctuation and are not expected to return. As global economies begin to recover from 2010-2011, the price of oil is expected to cool down and demand will increase. For many Australian, vehicles 34 | P a g e

become an essential transport tool and the stable fuel price encourages the extensive use of vehicles (IBISWORLD 2010). This will support an increase in the number of vehicle journeys on toll roads over the period through 2015-16. Road congestion Australia is expected to increase significantly over the next 20 years with the Bureau of Infrastructure, Transport and Regional Economic forecasting that road congestion will cost the Australian economy $20.4 billion per year by 2020. Apart from that, due to an increasing population density in cities across the country it is likely that any new major road projects will include significant land acquisitions costs or require the building of tunnels (IBISWORLD 2010). It is impossible that governments alone can fund the required investment in new roads, bridges and tunnels. Therefore, government is likely to seek assistance from private operators to fund such projects, creating new toll roads and this would boost industry revenue. New traffic projections of North-South tunnel (a new toll road) in Brisbane indicate that the potential number of vehicles using the tunnel could be higher. The 6.8 kilometre tunnel running from Woolloongabba in Brisbane's south underneath the Brisbane River and Story Bridge to Bowens Hills in the city's inner-north opened in 2010 and the project of the airport link is expected to be completed and opened to traffic in 2012 (IBISWORLD 2010). The new road and tunnel will boost the industry revenue.

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4. ECONOMIC ENVIRONMENT
4.1 Overview
After a sharp, broad and synchronized global downturn in late 2008 and early 2009, an increasing number of countries have registered positive quarterly growth of gross domestic production (GDP), along with a notable recovery in international trade in 2010 and 2011 ( World Economic Outlook 2011). The world economy is expected to grow at about 4.5 percent a year in both 2011 and 2012, with advanced economies growing at only 2.5 percent and emerging developing economies growing at a higher 6.5 percent (World Economic Outlook, 2011). Emerging Asian economics are leading the world recovery; particularly China while advanced economies Europe and United States lag behind International Monetary Fund 2011). The world economic is on the mend. However, the recovery is expected to remain sluggish and uneven. The conditions for sustained growth remain fragile (IMF 2011). Transurban Group is a toll road owner and operator with interests in Australia and North America. Its business comes from the Australian market and American markets, thus future earnings are leveraged primarily from the outlook of these economies. Thus we will focus on Australian and American economies for the macroeconomics analysis.

4.2 Macroeconomic Indicators
It is important to look at a range of macroeconomic indicators to evaluate the state of the current economy and forecast the future outlook. In this report, oil prices, inflation, interest rates and exchange rates will be discussed.

4.2.1 Oil Prices
Crude oil prices behave much as any other commodity with volatile price swings in times of shortage or excess supply. The crude oil price cycle may extend over several years responding to changes in demand as well as OPEC and non-OPEC supply (WTRG Economics 2009). Oil prices have surged to about $110 a barrel April 2011, as precautionary demand and risk premiums have increased in response to the oil supply shock triggered by events in the MENA (Middle East and North Africa) region. The key cyclical factor was stronger-than- expected growth in demand for commodities during the second half of 2010, which drove up oil prices for 2011 to about $90 a barrel by early January2011, up from the $83 a barrel expected in April 2010.

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Figure 9: Global Oil Demand and Production by Region (Millions)

*Source: International Monetary Fund (2011)

The run-up in oil prices preceding the onset of the oil supply shock reflected a number of factors. Annual growth in oil demand in 2010 was 3.4 percent, the highest rate since 2004.Oil supply responded to the unexpected increase in oil demand, but not to the full extent possible. Global oil production is estimated to have increased by 3.2 percent in 2010 (World Economic Outlook 2011).

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Figure 10: OPEC and Non-OPEC production

*Sources: IMF Primary Commodity Price System (2011)

OPEC crude oil production, which is subject to production quotas, rose by 1.8 percent, contributing one-quarter to the increase in global supply (Left panel and figure 10). Global oil production is estimated to have increased by 3.2 percent in 2010. Higher-thanexpected non-OPEC production contributed about half of the surprise increase in supply. Declines in the North Sea were more than offset by higher production elsewhere, notably in Brazil, China, Russia, and the United States, reflecting incentives for investment and field decline management embodied in rising oil prices and, in the case of Russia, changes to the tax regime to cover high production and development costs (Right panel and figure 10).

Owing to the raising crude oil price, consumer may choose other transportation instead of Transurban Group’s toll roads, it would be expected that families will be cutting back on expenses for family budgets. Consequently, Transurban Group’s trading in South America and Australia will be influenced.

4.2.2 Inflation
In mainstream economics, the word ―inflation‖ refers to a general rise in prices measured against a standard level of purchasing power. Previously the term was used to refer to an increase in the money supply, which is referred to as expansionary monetary policy or monetary inflation (Trading Economic 2011). The inflation rate in Australia was last reported at 2.7 percent in the fourth quarter of 2010. The most well known measures of Inflation are the CPI which measures consumer prices, and the

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GDP deflator, which measures inflation in the whole of the domestic economy (Trading economic 2010).
Figure 11: Australia Inflation Rates (2008 -2010)

*Source: Trading economics of Australia (2011)

Figure 12: Australia Long Run Inflation (1960-2010)

*Source: Reserve Bank of Australia (2011)

The Governor and the Treasurer have agreed that the appropriate target for monetary policy in Australia is to achieve an inflation rate of 2–3 per cent, on average, over the cycle. Seeking to achieve this rate, on average, provides discipline for monetary policy decision-making, and serves as an anchor for private-sector inflation expectations. Inflation in Australia is moderate due to slow wage growth, exchange rate appreciation and easing demand (Inflating Target RBA 2011).

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Treasurer Wayne Swan believes inflation is expected to rise a quarter of a percentage point in the March quarter of 2011, as a result of Australia's devastating floods (Herald Sun 2011). As inflation rises, the price of oil and the price of consumer goods are expected to rise, this will result in a decrease of the demand which in result an expected fall in consumption. Consumers will take the cheaper alternatives of transportation, Transurban Group will possible face a decrease in revenue in Australia.
Figure 13: US Inflation Rates (2005-2010)

*Source: Trading Economic (2011)

As we can see from the chart, the inflation starts to increase at the beginning of 2010. The inflation rate in United States was last reported at 1.6 and 2.1percent in January and February of 2011 and at 2.7 % in March of 2011. US Consumer Price Index for All Urban Consumers (CPI-U) increased 2.1 percent before seasonal adjustment over the last 12 months, the Bureau of Labour Statistics reported on March 17. For the month, the index increased 0.5 percent prior to seasonal adjustment in 2010 (Trading Economic 2011). However, in the US oil prices played a lead role in the rise of inflation during 2010 — the current level of inflation (Dec 2009- Nov 2010) is 1.1%, and energy prices increased in the U.S. by 3.9%. (Bureau of Labour Statistics (BLS) 2011) Because of increasing inflation, the price of oil and consumer goods will rise; this will lead to decrease in demand and consumption. Consumer may choose the cheapest way to travel (e.g: public transaction) instead of toll road.

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4.2.3 Interest Rates
Figure 14: Australia Interest Rates (2004-2010)

*Source: Trading Economic (2011)

From 2004 to 2010, Australia's average interest rate was 5.81 percent reaching a record high of 7.50 percent in 2008 and a record low of 3.00 percent in April of 2009. Interest rates are controlled by the central bank (Reserve Bank of Australia). The official interest rate is the cash rate. The cash rate is the rate charged on overnight loans between financial intermediaries, this is determined in the money market as a result of the interaction of demand and supply of overnight funds (Trading Economic 2011). Since the global financial crisis, the RBA has reduced the cash rate to record lows in order to help stimulate the economic. The cash rate in Australia was last reported at 4.75 percent. Reserve Bank of Australia decided on the 1st March 2011, to keep interest rate unchanged at 4.75% (RBA 2011). Westpac Economist Bill Evans predicts that the next interest rate rise will come in April 2011, and this will be the first of three for that year (Tom Reid 2011).

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Figure 15: US Interest Rates (2002-2010)

*Source: Trading economic (2011)

US Interest rate (2002-2010) shows that the interest rate in US has increased by 4.28% from 1.02% in May 2006 to 5.3% in October 2007 and has decreases to 0.25% in January 2009, this can be seen in figure 15. In the United States, interest rate decisions are divided between the Board of Governors of the Federal Reserve (Board) and the Federal Open Market Committee (FOMC). The Board decides on changes in interest rates after recommendations submitted by one or more of the regional Federal Reserve Banks. The FOMC decides on open market operations, including the desired levels of central bank money or the desired federal funds market rate. According to Trading Economics 2010, the Federal Reserve has kept interest rates unchanged at 0.25% from January 2009 to August 2010 (Trading economic 2011). The low interest rates would make it attractive for business spending as it would be cheaper for Transurban to fund new projects and also reduce current debt. Less interest expenses will result in increase in net profit.

4.2.4 Exchange rates
The behaviour of currencies in the foreign exchange market is hard to forecast because there are many factors to consider across many countries.

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Figure 16: Australian Dollars vs US Dollars (2010-2011)

*Source: RBA (2011)

Australia’s real exchange rate has appreciated over the last years, driven largely by an increase in the term of trade and bringing with it benefits and challenges for the broader economy. Many variables have been identified as correlating with the real exchange rate, including productivity, inflation and investor perceptions (RBA Economic Competition 2010). The rise of interest rate has had positive effect on the AUD in the last month. Inflation has increased as a result of a decrease in money supply (i.e. currency), this means an increase in inflation rates will cause increase in the price of Australian products. This will create less demand for Australian product (decrease Australian export) which leads to a depreciation in AUD (appreciation in USD). The stronger currency is likely to negate higher earnings from the growing commodity exports and may result is cautious business sentiment for sometimes. For example, Australia dollar appreciation will affect business in America and the profit in America will decline. Thus, there will be a higher risk of exchange between the countries.

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4.3 Economic outlook
Figure 17: World Economic Growth Rate (2004-2010)

*Source: World Economic Situation and Prospect (2010)

Overall, the world’s GDP is expected to climb in the future since economic recovery is on the mend. In 2010 it was a year of recovery, it was sputtering and many questioned whether the recovery was real and if it could be sustained. In 2011 things are looking brighter following a booming stock market up 13%, a new 2011 Tax Stimulus package, and housing markets stabilizing around the country. But the one major area of concern is unemployment, which is high around 10% despite improving corporate and small business profits (Today’s Economic 2011). As a result of the positive economic outlook consumer and business confidents is expected to be strong as the world economy is experiencing the expansionary phase of the business cycle.

4.3.1 Estimated Market Return
Since Gross Domestic Product (GDP) growth serves as an indication of the level of economic activity, we assume expected market returns are driven by the changes in GDP growth. If GDP growth is high, then it indicates that the level of economic activity in the economy is high and consequently investors are optimistic and confident about the current economic condition as they are expecting a higher return for their investments. As seen in the table below, if change GDP is over 5%, then estimated market return will be 25% and the assumed probability that it will occur is 15%, there will be a weighted expect market return of 3.75%. Inversely, if GDP declines, then it indicates that the economic activity is slowing down and investors may not expect as high of a market return. The table below shows that if the change in GDP declines is in the range of 3% 4%, then estimated market return will be 15% and the probability of that occurring is 40% there will be a weighted 6% expect market return. We expected that there will be a strong to weak 44 | P a g e

growth in RGDP hence we have weighted the probability heavily in those periods (75%). The table below shows the inputs that have been used to calculate the expected market return for the current period. The expected market return for the period is expected to be 11%.
Table 7: Estimated Market Return
Macroeconomic Performance (% Change in Real GDP Very Strong (>5%) Strong (3% - 4%) Weak (1% - 3%) Very Weak (

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