Transurban share price hit by broker downgrade

a man holds his hands to the sides of his face and pulls it down in despair as he sits at the wheel of a car that is not moving, as though in a traffic jam.a man holds his hands to the sides of his face and pulls it down in despair as he sits at the wheel of a car that is not moving, as though in a traffic jam.

The Transurban Group (ASX: TCL) share price is stuck in reverse today after it was downgraded by a top broker.

Shares in the toll road operator skidded 1.94% to $14.41 in the last hour of trade on Monday. In contrast, the S&P/ASX 200 Index (ASX: XJO) recovered some of its early losses to trade 0.47% lower at the time of writing.

The underperformance of the Transurban share price comes after it zoomed ahead by around 20% since late January.

Transurban share price offers little inflation protection

Its shares have been well supported in this environment due to its relatively dependable earnings and dividends. Some have also jumped into the shares for its inflation protection properties.

But Transurban may not offer as much protection as investors might believe, according to Credit Suisse.

The broker downgraded the Transurban share price to “neutral” from “outperform”, noting the correlation between the group’s tolls and inflation is weak.

Outside the comfort zone

This is particularly in a higher consumer price index (CPI) environment where Atlas Arteria Group (ASX: ALX) offers a better inflation hedge, according to the broker.

Credit Suisse said in a note released today:

In a CPI range of 0-4%, there is only a 33% link of toll prices to CPI, and a 60% link when CPI is greater than 4%. At Atlas Arteria’s APRR toll network in France, the tolls increase at 70% of CPI. The toll formulas for Transurban’s roads tend to be optimized for CPI at 1-2% and are less optimal in 2-5% CPI range.

Rising debt costs drags on Transurban’s share price

Meanwhile, rising interest rates will put the squeeze on the company’s earnings too. The average cost of its Australian debt is 4%. When the debt is refinanced, it will likely rise, noted Credit Suisse.

Around 12% of Transurban’s debt will mature in FY23 with a similar amount due in the following three years.

While the broker increased its revenue forecast for the Transurban share price by 1.3% and 1.8% in FY23 and FY24 respectively, it cut its free cash flow expectations due to the rising cost of debt. This also means lower dividend per share (DPS) in the coming years.

Dividend pressure building

The broker explained:

We assume maturing debt is refinanced at a 5.0% rate. This raised debt cost by ~4%, ~10%, and 15% in FY23, FY24, and FY25, respectively. Free cash flow (excluding capital releases) and DPS forecasts fall 1.4% and 2.6% in FY24 and FY25, respectively.

Credit Suisse is telling investors to consider taking profits after the strong run in the Transurban share price. Its 12-month price target on the shares was cut to $13.60 from $14.60 a share.

The post Transurban share price hit by broker downgrade appeared first on The Motley Fool Australia.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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