09 September 2015 Asia Pacific/Australia Equity Research Highways & Railtracks (Infrastructure (AU))

Transurban

(TCL.AX) Rating OUTPERFORM* INITIATION

Price (09 Sep 15, A$) 9.71 Target price (A$) 11.00¹

Market cap. (A$mn) 18,662.31 Network advantage and investment horizon arb Yr avg. mthly trading (A$mn) 901 Last month's trading (A$mn) 1,061

Projected return: ■ Initiating Transurban on OUTPERFORM with an $11 target price: Capital gain (%) 13.3 Transurban is a toll road developer and operator, with potential to deliver Dividend yield (net %) 4.7 superior returns from new investment within or adjacent to its existing road Total return (%) 18.0 networks. Its dominant market position in the toll road markets of Australia's 52-week price range 10.5 - 7.6

* Stock ratings are relative to the relevant country benchmark. three largest cities enables it to negotiate investment deals with government ¹Target price is for 12 months. without strong price competition. It earns a premium from helping government solve today's road transport headaches, partial funding investment through Research Analysts concession extensions and toll increase on its adjacent roads. There is a Paul Butler 61 2 8205 4309 significant investment horizon arbitrage opportunity, in our view. Transurban [email protected] has two such deals starting construction (NorthConnex $2.1bn and CityLink Gretel Janu widening $1bn) and is negotiating a third with government (Western 61 2 8205 4028 [email protected] Distributor ~$5bn). These are likely to drive strong long-term cash flow growth. We expect a 12.5% dividend CAGR over the next five years. ■ Driverless cars and road usage charging: Adoption of driverless cars could significantly change travel behaviour. Per capita travel demand could increase 35%, and there could be road capacity benefits. But, it could take 20–30 years to get to 50% adoption of driverless vehicles. Transurban's longer-dated Brisbane and US concessions could benefit most. ■ Target price at $11 per share: We estimate fair value from a DCF based SOTP (WACC 7%–8%) and a value cap at 4% forward dividend yield. Risks to our view include development/construction risk, debt refinancing risk, weaker traffic growth, raising equity to fund growth and higher cost escalation.

Total return forecast in perspective Financial and valuation metrics

30% Year 06/15A 06/16E 06/17E 06/18E Revenue (A$mn) 1,860.0 1,923.6 2,134.5 2,351.1 20% CS tgt^ 10% EBITDA (A$mn) 782.0 1,369.2 1,556.0 1,758.8 Mean^ EBIT (A$mn) 231.0 639.5 826.3 970.3 Sh Prc 0% Net income (A$mn) -373.0 76.2 216.4 325.5 -10% EPS (CS adj.) (Ac) -19.55 3.97 11.26 16.94 -20% Change from previous EPS (%) n.a. — — — -30% Consensus EPS (Ac) n.a. 14.80 17.40 25.50 12mth Volatility* 52wk Hi-Lo IBES Consensus EPS growth (%) -223.3 120.3 183.5 50.4 target return^ P/E (x) -49.7 244.5 86.2 57.3

Dividend (Ac) 40.00 44.50 48.80 55.77 Performance Over 1M 3M 12M Dividend yield (%) 4.1 4.6 5.0 5.7 Absolute (%) -4.1 -0.9 19.4 P/B (x) 3.9 4.6 5.5 7.0 Relative (%) 3.1 7.0 28.2

Net debt/equity (%) 181.0 224.8 282.6 359.3 Relative performance versus S&P ASX 200.See Reference Appendix Source: Company data, ASX, Credit Suisse estimates, * Adj. for goodwill, notional interest and unusual items. Relative P/E against for a description of the chart. Source: Credit Suisse estimates, * ASX/S&P200 based on pre GW in AUD. Company PE calculation is based on displayed EPS Currency. Consensus, mean range from Thomson Reuters

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access

09 September 2015 Table of contents

Transurban investment summary 4 Stronger growth potential than other toll roads 4 Dominant position for new toll road investment 4 The future is driverless – upside for Transurban 5 Refinancing ahead but committed to div growth 5 Development/construction risk profile increasing 6 Valuation – target price at $11 per share 6 Blue sky scenario - 40% upside 6 Prefer Transurban over Sydney Airport 7 Expecting strong cash flow & dividend growth 8 Transurban profile 9 Development/construction risk profile increasing 10 Financial profile 10 Re-financing opportunity/risk 11 Investment growth opportunities 13 Current investment programs 13 Potential investment opportunities 14 Driverless cars - positive for TCL 17 Google to launch driverless in 2020 17 Adoption rates – 50% driverless in 20-30 years 17 Per capita travel demand growth of up to 35% 18 Efficiency of driverless to double highway capacity 19 Future highway needs could revert to today's levels 19 Road user charging – opportunity 21 Traffic growth, linking jobs & homes 23 VKT per capita – propensity to drive 23 Population growth – highest in Virginia 24 Employment growth 24 Socio-demographics of travelling 25 Sydney roads 27 Sydney traffic growth 27 Melbourne traffic growth 31 Brisbane roads 33 Brisbane traffic growth 33 USA –495 & 95 express lanes 36 Revenue growth 36 Valuation – fair value at $11ps 38 DCF based SOTP valuation - $12.3 per share 38 Dividend yield spread 39 Price multiples valuation 41 Peer comparison 41 Market price drivers 43 Shareholder base 44 ESG 45 Environmental 45 Social 46 Governance 47 MSCI ESG Rating 49 Valuation impact 50 Risks 51 PEERs 52 HOLT® 53

Transurban (TCL.AX) 2 09 September 2015

Figure 1: Transurban - financial summary

Transurban (TCL) 2014 2015 2016 Year2017 ending 302018 Jun 2014 2015 In AUDmn,2016 unless otherwise2017 stated2018 Share Price: A$9.71 9/09/2015 11:42 Earnings 06/14A 06/15A 06/16E 06/17E 06/18E Rating OUTPERFORM c_EPS_SHARESEquiv. FPO (period avg.) mn 1,539.0 1,908.0 1,918.2 1,921.9 1,921.9 Target Price A$ 11.00 c_EPS*100EPS (Normalised) c 15.9 -19.5 4.0 11.3 16.9 vs Share price % 13.29 EPS_GROWTH*100EPS Growth % -223.3 120.3 183.5 50.4 c_EBITDA_MARGIN*100EBITDA Margin % 66.0 42.0 71.2 72.9 74.8 Transurban is a toll road operator and developer with toll road assets in Australia and the c_DPS*100DPS c 35.0 40.0 44.5 48.8 55.8 US. It holds longterm concessions (weighted average 32 years remaining) and can raise c_PAYOUT*100Payout % 220.8 -204.6 1,120.6 433.5 329.3 tolls at the rate of CPI or above. FRANKING*100Franking % 20.0 17.5 15.7 14.3 12.6 c_FCF_PS*100Free CFPS c 29.1 11.9 -56.5 -59.5 -41.9 Profit & Loss 06/14A 06/15A 06/16E 06/17E 06/18E c_TAX_RATE*100Effective tax rate % -22.6 -2.8 5.0 5.0 5.0 Sales revenue 1,150.0 1,860.0 1,923.6 2,134.5 2,351.1 Valuation EBITDA 759.0 782.0 1,369.2 1,556.0 1,758.8 c_PE P/E x 61.2 -49.7 244.5 86.2 57.3 Depr. & Amort. (330.0) (551.0) (729.7) (729.7) (788.6) PEG PEG x 1.8 0.2 2.0 0.5 1.1 EBIT 429.0 231.0 639.5 826.3 970.3 c_EBIT_MULTIPLE_CURREV/EBIT x 52.6 127.8 47.3 37.4 32.2 Associates 115.0 17.0 39.6 38.6 46.2 c_EBITDA_MULTIPLE_CUEV/EBITDA x 29.8 37.7 22.1 19.9 17.7 Net interest Exp. (345.0) (611.0) (598.8) (637.1) (673.8) c_DIV_YIELD*100Dividend Yield % 3.6 4.1 4.6 5.0 5.7 Other 0.0 0.0 0.0 0.0 0.0 c_FCF_YIELD*100FCF Yield % 3.0 1.2 -5.8 -6.1 -4.3 Profit before tax 199.0 (363.0) 80.2 227.8 342.6 c_PB Price to Book x 3.2 3.9 4.6 5.5 7.0 Income tax 45.0 (10.0) (4.0) (11.4) (17.1) Returns Profit after tax 244.0 (373.0) 76.2 216.4 325.5 c_ROE*100Return on Equity % 4.3 -7.8 1.9 6.4 12.3 Minorities 0.0 0.0 0.0 0.0 0.0 c_I_NPAT/c_I_SALES*100Profit Margin % 21.2 -20.1 4.0 10.1 13.8 Preferred dividends 0.0 0.0 0.0 0.0 0.0 c_I_SALES/c_B_TOT_ASSAsset Turnover x 0.1 0.1 0.1 0.1 0.1 Associates & Other 0.0 0.0 0.0 0.0 0.0 c_ASSETS/c_EQ_COMMONEquity Multiplier x 2.6 4.5 5.2 6.2 7.6 Normalised NPAT 244.0 (373.0) 76.2 216.4 325.5 c_ROA*100Return on Assets % 1.6 -1.8 0.4 1.0 1.6 Unusual item after tax 0.0 0.0 0.0 0.0 0.0 c_ROIC*100Return on Invested Cap. % 5.3 1.4 3.6 4.7 5.7 Reported NPAT 244.0 (373.0) 76.2 216.4 325.5 Gearing (SUM Net( c_BORROW, Debt to Net -c_B_CASHdebt + Equity , -c_B_CASH_OPER,% 39.7 -c_B_RESTR_CASH,64.4 69.2 c_NET_DEBT_ADJ)73.9 / SUM78.2 (c_EQ_SUM, c_BORROW, -c_B_CASH , -c_B_CASH_OPER, -c_B_RESTR_CASH, c_NET_DEBT_ADJ))*100 Balance Sheet 06/14A 06/15A 06/16E 06/17E 06/18E SUM (Net c_BORROW, Debt to EBITDA -c_B_CASH , -c_B_CASH_OPER,x 5.2 -c_B_RESTR_CASH,13.9 c_NET_DEBT_ADJ)/c_I_EBITDA8.5 7.9 7.1 Cash & equivalents 2,879.0 1,249.0 1,249.0 1,249.0 1,249.0 c_I_EBITDA/Int Cover c_I_NET_INTEREST (EBITDA/Net Int.) x 2.2 1.3 2.3 2.4 2.6 Inventories 0.0 0.0 0.0 0.0 0.0 c_I_EBIT/Int Cover c_I_NET_INTEREST (EBIT/Net Int.) x 1.2 0.4 1.1 1.3 1.4 Receivables 84.0 117.0 117.0 117.0 117.0 (c_C_CAPEX/c_I_SALES)*-100Capex to Sales % 6.3 4.1 27.4 25.9 7.8 Other current assets 0.0 4.0 4.0 4.0 4.0 (c_C_CAPEX/c_I_DEPR)*-100Capex to Depreciation % 251.7 202.6 1,045.7 1,097.8 337.9 Current assets 2,963.0 1,370.0 1,370.0 1,370.0 1,370.0 MSCI IVA (ESG) Rating AAA Credit Suisse View Property, plant & equip. 226.0 249.0 724.9 1,227.1 1,356.5 TP ESG Risk (%): 0 Intangibles 10,386.0 17,320.0 16,640.6 15,961.2 15,227.0 TP Risk Comment: We have not currently factored in any 10.6 Other non-current assets 1,293.0 2,300.0 2,289.6 2,268.1 2,219.3 specific ESG risk into our target price. Key risks that would 9.6 potentially lead to an adjustment to forecasts and valuation Non-current assets 11,905.0 19,869.0 19,655.1 19,456.4 18,802.8 would include environmental (land use) and regulatory risks. Total assets 14,868.0 21,239.0 21,025.1 20,826.4 20,172.8 8.6 Payables 181.0 340.0 340.0 340.0 340.0 7.6 Interest bearing debt 6,798.0 12,099.0 12,820.2 13,513.8 13,789.8 6.6 Other liabilities 1,927.0 2,804.0 2,716.6 2,632.7 2,552.7 5.6 MSCI IVA Risk: Neutral MSCI IVA Risk Comment: We see the current rating as Total liabilities 8,906.0 15,243.0 15,876.8 16,486.5 16,682.5 4.6 Net assets 5,962.0 5,996.0 5,148.3 4,339.9 3,490.3 appropriate given the policies in place relating to the 3.6 environmental impacts of its operations. Ordinary equity 5,704.0 4,769.0 4,054.3 3,375.8 2,651.9 Environment Social Governance Minority interests 258.0 1,227.0 1,093.9 964.2 838.4 Stock Local Sector Preferred capital 0.0 0.0 0.0 0.0 0.0 Country Global Sector Total shareholder funds 5,962.0 5,996.0 5,148.3 4,339.9 3,490.3 Net debt 3,919.0 10,850.0 11,571.2 12,264.8 12,540.8 Source: MSCI ESG Research

Cashflow 06/14A 06/15A 06/16E 06/17E 06/18E Share Price Performance EBIT 429.0 231.0 639.5 826.3 970.3 Net interest -276.0 -427.0 -465.7 -496.0 -525.2 10.80 Depr & Amort 330.0 551.0 729.7 729.7 788.6 10.30 Tax paid -3.0 -3.0 -4.0 -11.4 -17.1 9.80 Working capital 80.0 126.0 0.0 0.0 0.0 Other -39.0 -174.0 -1,456.6 -1,639.8 -1,838.8 9.30 Operating cashflow 521.0 304.0 -557.2 -591.3 -622.3 8.80 Capex -73.0 -77.0 -526.3 -552.5 -183.8 Capex - expansionary 8.30 Capex - maintenance 7.80 Acquisitions & Invest 0.0 -6,397.0 0.0 0.0 0.0 Asset sale proceeds 0.0 0.0 0.0 0.0 0.0 7.30 Other -830.0 -218.0 50.0 60.0 95.0 6.80 Investing cashflow -903.0 -6,692.0 -476.3 -492.5 -88.8 28/08/2014 28/10/2014 28/12/2014 28/02/2015 30/04/2015 30/06/2015 31/08/2015 Dividends paid -418.0 -570.0 -853.6 -937.9 -1,071.8 Equity raised 2,696.0 1,342.0 0.0 0.0 0.0 TCL.AX XJO Net borrowings 735.0 4,201.0 588.2 552.5 127.3 Other -9.0 -246.0 -70.3 -86.8 -103.4 1 Month 3 Month 12 Month Financing cashflow 3,004.0 4,727.0 -335.8 -472.2 -1,047.8 Absolute -4.1% -0.9% 19.4% Total cashflow 2,622.0 -1,661.0 -1,369.2 -1,556.0 -1,758.8 Relative 3.1% 7.0% 28.2% Adjustments 0.0 0.0 0.0 0.0 0.0 Net change in cash 2,622.0 -1,661.0 -1,369.2 -1,556.0 -1,758.8 Source: Reuters 52 week trading range: 7.58-10.50 Source: Company data, Credit Suisse estimates

Transurban (TCL.AX) 3 09 September 2015 Transurban investment summary We initiate coverage on Transurban shares with an OUTPEFORM rating and $11 price target. Transurban is a toll road developer rather than simply an operator. This gives it stronger growth characteristics than other toll roads. It also focuses on investing in urban toll roads that have more defensive traffic characteristics, rather than relatively more cyclical intercity roads Stronger growth potential than other toll roads In our view, it has potential to deliver superior returns from new investment within or adjacent to its existing road networks. Its dominant market position in the toll road markets of Australia's three largest cities allows it to reach investment deals with government in a collaborative environment without strong price competition. It earns a premium from solving today's road transport headaches, funded by cash flows from long-term concessions that are partly paid for by future generations. There is a significant investment horizon arbitrage opportunity, in our view. Transurban has two such deals starting construction (NorthConnex $2.1bn and CityLink widening $1bn) and is negotiating a third with government (Western Distributor ~$5bn). These are likely to drive strong long-term cash flow growth.

Figure 2: Transurban – proportional EBITDA by region Figure 3: Transurban – enterprise value by region USA (Northern Virginia) 6% USA (Northern QLD (Brisbane) Virginia) NSW (Sydney) 14% 25% 36% NSW (Sydney) 42%

QLD (Brisbane) 16% CitLink (Melbourne) CitLink 38% (Melbourne) 23%

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Dominant position for new toll road investment Transurban has concessions over all or most toll roads in Sydney, Melbourne and Brisbane. Its NorthConnex project in Sydney, currently in construction is an example of the network advantage that we believe Transurban has to extract value from new investment adjacent to existing road assets. The Federal and NSW state governments are contributing $800mn of the $2.9bn NorthConnex investment cost. However, $200mn of the government's $800mn contribution is indirectly contributed by Transurban in exchange for higher tolls and concession extensions for its M2 and Lane Cove Tunnel concessions. The benefit to these adjacent assets, from toll and traffic increases means Transurban can get an attractive return from the NorthConnex project with toll levels that are at commercially and politically feasible levels. It could be far more difficult for a toll road developer without these adjacent assets to get an economic return from the project. Transurban estimates that its involvement means the project is happening ten years earlier than it otherwise would, if left to government to initiate the investment. We think Transurban is likely to get a premium return as the negotiation process with government was not subject to strong price competition and the government is buying a good news story that is partly paid for by future generations.

Transurban (TCL.AX) 4 09 September 2015

Transurban's key advantages to deliver value from new investment include:

■ Network advantages with existing roads.

■ Outcome horizon arbitrage with short-term focused governments.

■ Consolidation of traffic analysis skills.

■ Track record of successful project completion and competent and stable toll road operator.

■ Relationship with government The future is driverless – upside for Transurban The development of driverless cars will significantly impact the way people travel. Travel demand (VKT, vehicle kilometres travelled) per person could increase by up to 35% from current levels. Highway capacity could double to 4000 vehicles per lane per hour following full market penetration of driverless vehicles. However, it could take 20–30 years to get to a 50% proportion of driverless vehicles on the road. We expect driverless car adoption to be positive for traffic volumes on Transurban's roads, but there may not be a significant benefit until after 2035. Transurban's Brisbane and US roads could benefit most, due to longer remaining concession life.

Figure 4: Transport demand growth from driverless cars 13,000

12,000

11,000

10,000

9,000

8,000

7,000 Annual VKT per capita perVKT Annual

6,000

5,000

4,000 1965 1971 1976 1982 1987 1993 1998 2004 2010 2015 2021 2026 2032 2038 2043 2049 2054 2060

Sydney Melbourne Brisbane

Source: Company data, Credit Suisse estimates Refinancing ahead but committed to div growth Transurban has $1.3bn–$3bn of maturing debt to refinance over each of the next three years. This could provide some opportunity to reduce the average cost of debt, but we expect management to prioritise extending the maturity profile of borrowings rather than seeking to benefit from short-term low rates. Given Transurban's financing needs it is committed to maintaining a strong investment grade credit rating (currently S&P BBB+/stable). There is low risk to the rating, in our view. It commits to consistently growing dividends. We expect a ~12% dividend CAGR over the next three years, and then higher growth at 13%–14% over the following years as CityLink upgrades and NorthConnex contribute to cash flows. However, a decision to invest in the $5bn–$5.5bn Western Distributor project could potentially limit higher dividend growth.

Transurban (TCL.AX) 5 09 September 2015

Development/construction risk profile increasing Transurban has historically expanded its portfolio through green/brown field development and acquisitions. However, apart from its investments into the CityLink, M7 and the US assets, other assets had been in operation before Transurban acquired them. The current investment in CityLink widening and NorthConnex and the potential future investment In Western Distributor could increase Transurban's exposure to development and construction risk. It has sought to mitigate this risk by hiring staff with program management experience and skills. We model this risk in our bear case scenario below. Valuation – target price at $11 per share We estimate fair value for Transurban shares using a DCF based SOTP with a 8.0% WACC for the US assets and 7.0% for other assets. This suggests fair value of $11.4 per share. We apply a cap to this based on a minimum forward dividend yield of 4%. This implies value of $11.0 per share, and is the basis of our target price.

Figure 5: Transurban – Sum-of-the-parts valuation Remaining LT pop EV/EBITDA concession Spare growth in FY16 EV % of EV FY16 FY26 FY36 Ownership life (years) capacity road corridor Annual toll indexation Hills M2 5,156 15% 24.5 10.8 6.6 100% 33 40% 1.4% Max of CPI or 4% Lane Cove Tunnel 1,027 3% 20.6 11.0 7.3 100% 33 43% 1.4% Max of CPI or 0% Cross City Tunnel 512 1% 15.7 8.7 100% 20 55% 2.0% 3% until Dec-17, then CPI M1 Eastern Distributor 1,408 4% 21.2 11.7 7.8 75% 33 13% 2.0% Max of CPI or 4% Roam & Tollaust 95 0% 7.4 7.7 7.0 100% M5 754 2% 7.3 4.4 50% 11 34% 2.1% Max of CPI or 0% NWRG (M7 & NCX) 3,950 11% 30.2 10.6 6.1 50% 33 57% 2.0% M7 CPI, NCX Max CPI or 4% Sydney 12,901 37% CityLink (Melbourne) 8,028 23% 14.5 7.4 100% 19 30%* 2.0% 4.5% until Dec-17, then CPI Gateway Motorway 2,479 7% 23.2 13.2 8.8 63% 36 40% 2.3% Bribane CPI Logan Motorway 1,864 5% 25.8 13.6 8.2 63% 36 48% 2.6% Bribane CPI Clem7 529 2% 30.1 14.0 8.5 63% 36 71% 2.3% Bribane CPI Go Between Bridge 207 1% 31.3 16.4 9.9 63% 48 73% 2.3% Bribane CPI Legacy way 498 1% 137.9 16.2 9.8 63% 50 85% 2.3% Bribane CPI Brisbane 5,578 16% 495 Express Lanes 3,318 9% 68.8 14.5 8.0 100% 72 42% 4.1% Dynamic, uncapped 95 Express Lanes 5,587 16% 74.2 14.7 7.9 100% 72 44% 4.1% Dynamic, uncapped USA (Northern Virginia) 8,906 25% Corp/other -467 -1% 13.7 11.3 9.2 100% Proportional EV 34,945 100% 24.0 10.4 10.1 Proportional net debt 13,072 37% Equity value 21,873 63% Equity value per share 11.4 Source: Company data, Credit Suisse estimates, * after CityLink Tulla widening project Blue sky scenario – 40% upside In a blue sky scenario there could be 40% upside for Transurban shares. In this scenario we include value from winning new projects at attractive returns and upside from the future adoption of driverless vehicles. In our bear case scenario there could be ~23% downside for the shares. We include cost overruns and delays on major projects and a discounted 10% capital raising to support the balance sheet in this scenario.

Transurban (TCL.AX) 6 09 September 2015

Figure 6: Transurban – 40% upside for Blue sky scenario Our view Scenario Bear case Bull case Blue sky Fair value per share ($) $7.40 $11.00 $13.51 % Upside -23% 14% 40% Share price ($) $9.63 Vauation approach Dividend yield > 5% DCF based SOTP & div yield > 4% DCF based SOTP ● NorthConnex & CityLink widening ● No value for WesternDistributor ● Develops WesternDistributor at 14% are delayed and run 30% over ROCE budget ● No value for AirportLink ● Wins AirportLink at 12% ROCE ● Capital raising required to maintain ● No benefit from driverless cars ● Higher growth from driverless BBB+ rating adoption after 2040 for NSW, QLD & US roads Source: Company data, Credit Suisse estimates Prefer Transurban over Sydney Airport Transurban and Sydney Airport are the remaining transport infrastructure plays in the Aussie market. Transurban has more defensive characteristics than Sydney Airport due to its topline exposure to defensive road travel, rather than air travel. The dividend yield spread has narrowed dramatically over the past three years. Previously Transurban traded at a 200bps premium valuation (i.e. 200bps lower dividend yield) to Sydney Airport. Since then Sydney Airport has rerated to now trade in line with Transurban. We believe the rerating has been driven by an expectation for higher airline traffic and passenger spending, driven by a growing middle class in Asia. While we agree that this is positive for Sydney Airport, Transurban has the potential for higher dividend growth in the medium term, in our view.

Figure 7: TCL vs. SYD share price performance Figure 8: TCL vs. SYD dividend yield 3.0 1 10

2.8 9 2 2.6 8 2.4 3 2.2 7

2.0 4 6 TCL/SYD 1.8 5 5 (%) yield Dividend 1.6 4 1.4 6 1.2 3 1.0 7 2 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

TCL/SYD Aussie Gov 10y TCL fwd div yield SYD fwd div yield Aussie Gov 10y

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Transurban (TCL.AX) 7 09 September 2015

Expecting strong cash flow and dividend growth Our revenue and EBITDA estimates are at the top end of consensus by FY18, partly due to including the currency benefit from the US assets.

Figure 9: Credit Suisse vs. consensus EBITDA Figure 10: Credit Suisse vs. consensus DPS 1,900 0.58 1,800 0.56

1,700 0.54 1,600 0.52 1,500

DPS($) 0.50 1,400

EBITDA ($m) EBITDA 0.48 1,300 1,200 0.46 1,100 0.44 1,000 0.42 FY16e FY17e FY18e FY16e FY17e FY18e

Consensus +/- 1 standard deviation High/Low CS Consensus +/- 1 standard deviation High / Low CS

Source: Company data, IBES, Credit Suisse estimates Source: Company data, IBES, Credit Suisse estimates

Transurban (TCL.AX) 8 09 September 2015 Transurban profile Transurban is a toll road operator with ownership interests in 14 toll road assets in both Australia and the United States. It has weighted average remaining concession life of 28 years. In Australia, the assets include the CityLink, which joins three of Melbourne's major motorways, as well as six roads in the Sydney orbital network and five roads in Brisbane. Australian toll road concessions consist of four wholly owned operational toll road concessions (CityLink in Melbourne and Hills M2, Cross City Tunnel and Lane Cove Tunnel in Sydney) and six partially owned operational toll road concessions. In the State of Virginia, USA, TCL has interests in two toll road concessions; 495 and 95 Express Lanes, which connect to the Capital Beltway (I-495), the major thoroughfare circling Washington D.C.

Figure 11: Transurban's Assets City Toll Road Open Concession Years Length Tunnel TCL Lanes Toll Increases date Expiry left km km interest Sydney Hills M2 1997 2048 32.8 21 0.6 100% 2x3 Escalated quarterly by the greater of quarterly CPI or 1%.

Sydney Lane Cove 2007 2048 32.8 3.8 3.5 100% 2x2, some Escalated quarterly by quarterly CPI. The toll Tunnel 2x3 cannot be lowered as a result of deflation, however, until inflation counteracts the deflation the toll cannot be increased

Sydney Cross City 2005 2035 20.3 2.1 2.1 100% 2x2, 2x3 Escalated 4% annually to December 2011; 3% Tunnel ramps annually to December 2017; CPI to concession end

Sydney M1 Eastern 1999 2048 32.8 6 1.7 75.1% 2x3, some Escalated quarterly by the greater of a weighted Distributor 2x2 sum of quarterly AWE and quarterly CPI or 1%

Sydney M5 South 1992 2026 11.2 22 0 50% 2x3 Escalated quarterly by quarterly CPI. The toll West cannot be lowered as a result of deflation, however, until inflation counteracts the deflation the toll cannot be increased

Sydney Westlink 2005 2048 32.8 40 0 50% 2x2 Escalated or deescalated quarterly by quarterly M7 CPI

Melbourne CityLink 2000 2035 19.3 22 5.2 100% ~2x4 Escalated quarterly by the greater of quarterly CPI or 1.1065% for the first 16 years, then quarterly by CPI. This is subject to a cap of annual CPI plus 2.5%, which cannot be exceeded.

Brisbane Gateway 1986 2051 36.3 23.1 0 62.5% 6,8,10 & 12 Tolls escalate annually at Brisbane CPI Motorway Brisbane Logan 1988 2051 36.3 38.7 0 62.5% 2x2 Tolls escalate annually at Brisbane CPI Motorway Brisbane Clem7 2010 2051 35.9 6.8 4.8 62.5% 2x2 Tolls escalate annually at Brisbane CPI

Brisbane Go 2010 2063 48.3 0.3 0 62.5% 2x2 Tolls escalate annually at Brisbane CPI Between Bridge Brisbane Legacy 2015 2065 49.8 5.7 4.6 62.5% 2x2 Tolls escalate annually at Brisbane CPI way Virginia, 495 2012 2087 72.3 22 0 100% 2x2 HOT Dynamic USA Express Lanes Virginia, 95 Express 2015 2087 72.3 46.6 0 100% 2-3 Dynamic USA Lanes reversable HOT Source: Company data, Credit Suisse estimates

Transurban (TCL.AX) 9 09 September 2015

Development/construction risk profile increasing Transurban has historically expanded its portfolio through green/brown field development and acquisitions. However, apart from its investments into the CityLink, M7 and the US assets, other assets had been in operation before Transurban acquired them. The current investment in CityLink widening and NorthConnex and the potential future investment In Western Distributor could increase Transurban's exposure to development and construction risk. It has sought to mitigate this risk by hiring staff with program management experience and skills.

Figure 12: Transurban – investment timeline

Funded acquisition Acquired ED and M5 fom Eastern Distributor through capital raising Sydney Roads Group 71.35% 75.1%

LCT - 100%

Queensland Motorways 62.5%

Acquired fom Hills Hills M2 - 9.1% 100% Motorway Group

1995 1998 2001 2004 2006 2009 2012 2014 2017

CCT - 100%

M7 - 40% 45% 47.5% 50% Acquired CityLink - 100% CCT's distressed debt assets

USA - 67.5% 495 - 77.5% 100% Did not exercise its pre-emptive 95 - 96% right to acquire MIG's 50% stake in the Westlink M7 in Jan 09 USA assets originally owned by DRIVe( 90%) M5 South West - 50% and Fluor (10%). TCL owned 75% of DRIVe. TCL acquired Fluor's 10% holding in 2Q14.

Source: Company data, Credit Suisse estimates Financial profile In FY15, Toll Revenue accounted for approximately by ~81% of revenue, whilst Fee, Construction and Business Development explain the remaining ~19%. Transaction costs and Net Finance costs continue to account for the largest proportion of the cost base at 23% and 33% of revenue, respectively. Additionally depreciation and amortisation is also a significant hindrance on profit, at 30% of revenue and this is estimated to further increase into the forecast years. A negative NPAT margin of 9.8% in FY15 is reflective of these high costs. Transurban is likely to have low corporate tax rates over the next 10 years due to the low tax profitability of assets (high amortisation of intangible assets) and the stapled structure. The dividends for FY15 were only 17.5% franked, and the franking level is likely to remain low.

Transurban (TCL.AX) 10 09 September 2015

Figure 13: Profit & Loss profile FY15 2% 100% 10% 6% 13% 6% 81% 10% 80% 23%

60% 6% 30% 40%

20% % of total revenue totalof % 0%

-9.8% -20% 33% 0.9% 0.5% 10.3%

-40%

Tax

D&A

NPAT

Minorities

Toll revenue Toll

Fee Revenue Fee

Employee cost Employee

Corporate costs Corporate

Net finance costs finance Net

Transaction Costs Transaction

Construction costs Construction

Share of equity inv equity of Share

Road operating costs operating Road Construction revenue Construction

Business development Business Source: Company data, Credit Suisse estimates

Re-financing opportunity/risk Transurban has $1.3bn–$3bn of maturing debt to refinance over each of the next three years. This could provide some opportunity to reduce the average cost of debt, but we expect management to prioritise extending the maturity profile of borrowings rather than seeking to benefit from short-term low rates.

Figure 14: Corporate debt maturities Figure 15: Non-recourse debt maturities 1200 2500

1000 2000

800 1500

600 A$ Million A$ A$ Million A$ 1000 400

500 200

0 0 2016 2018 2020 2022 2024 2026 2028 2030 2032-41 2016 2018 2020 2022 2024 2026 2028 2030 2032-41

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Credit rating stable at BBB+ Transurban targets a BBB+ credit rating. S&P's suggests it needs to maintain FFO/debt sustainably at or above 8% to maintain the BBB+ rating. In FY15 FFO/debt was 7.9% and we expect a similar level for FY16, and then a significant improvement after that (Figure 16). An upgrade to A- by S&P's could be possible if FFO/debt is sustainably above 9%. Excluding

Transurban (TCL.AX) 11 09 September 2015 significant additional debt funded investment, this could be possible after FY18. We think there is low risk to the credit rating and Transurban's access to attractive debt funding sources. However, if Transurban pursues significant additional investment before FY18 (AirportLink or Western Distributor) a partial asset sale or capital raising could be required. Transurban was downgraded from A- to BBB+/stable by S&P's earlier this year. It is Baa1 rated by Moody's and A- by Fitch.

Figure 16: Transurban – FFO / debt Figure 17: Transurban – net debt / EBITDA 12% 10

11% 9

10% 8 9% 7

FFO / Debt / FFO 8% 6

7% Net debt / EBITDA / debtNet 5 6%

5% 4

4% 3 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Transurban's capital strategy includes the following key points

■ It commits to consistently grow dividends.

■ Maintaining strong investment grade credit metrics.

■ It has recently been focused on diversifying funding sources and extending the maturity of the debt profile.

Transurban (TCL.AX) 12 09 September 2015 Investment growth opportunities Transurban has a continuous initiative to identify and develop investment opportunities in its four markets of operations (NSW, Vic, Qld and Northern Virginia). It seeks to have up to one project in each market in construction and one project in feasibility/development. Management has suggested that it targets returns in the low- to mid-teens, depending on the risk profile. Current investment programs Transurban is investing $2.2bn over the next four years in the three projects, greenfield construction of the NorthConnex tunnel and widening of its CityLink and M2 roads. This will be funded from operating cash flows and debt. Transurban negotiated these investments with government in a non-competitive process, and we expect it to achieve high investment returns. CityLink Tulla widening – $1bn investment Transurban is due to start construction on the $1bn widening of its CityLink toll road in Melbourne in October this year, with completion expected in early 2018. This will increase capacity by ~30%. Transurban earns a return on the widening investment from:

■ Higher traffic levels.

■ A one-year extension of the CityLink concession to 2035.

■ An additional year of higher toll increases (4.5% or above) and higher truck tolls. NorthConnex – $2.9bn investment Transurban's NWRG JV (North West Roads Group, 50% Transurban) started construction on the $2.9bn NorthConnex road tunnel in the north of Sydney earlier this year, with completion expected by the end of 2019. The tunnel will link the main route north of Sydney with the Sydney orbital toll road (M2 & M7). The tunnel is likely to drive higher traffic volumes on the M7 (50% Transurban, through NWRG JV) and M2 (100% Transurban). The Federal and state governments provide $800mn of funding and Transurban is funding the half share of the remaining $2.1bn. The compensation for this investment includes:

■ Toll revenue from traffic on NorthConnex.

■ Higher traffic on M7 & M2 roads.

■ An 11.4-year concession extension for the M7 to 2048.

■ 200% higher truck tolls on the M7. M2 extra lane – $105mn investment Transurban is adding an additional west bound lane on its M2 toll road to facilitate a better transition from traffic entering from the NorthConnex road. It will also make a $200mn payment to government that will contribution to the government's $800mn subsidy for NorthConnex. The compensation for this investment ($305mn) includes:

■ Higher traffic levels on the M2.

■ A 2.1-year concession extension for the M2 and a 11.5-year extension for the Lane Cove Tunnel road, both now ending in 2048.

■ 50% higher truck tolls for the Lane Cove Tunnel, and then a higher toll growth rate.

Transurban (TCL.AX) 13 09 September 2015

Potential investment opportunities Transurban suggests that it targets project returns in the low to mid-teens (13%–15%). That's a highly attractive level of return, even with development risk (traffic estimates, construction, etc.), in our view. As we discussed above, when Transurban invests in Greenfield projects, it tends to be in transport corridors that are congested and have significant latent demand. These type of projects may have a lower risk profile. Negotiating Western Distributor Transurban is working with the Victorian state government on an unsolicited proposal to develop a Western Distributor toll road to relieve congestion on the West Gate Bridge and West Gate Freeway. A further announcement on the $5bn–$5.5bn project could be available later this year. Transurban could get a highly attractive return on this potential investment, as it is negotiating with government in a non-competitive environment and there is a significant transport need (congested roads) with social implications that government is not otherwise likely to address. Compensation for the investment could include:

■ Toll revenue from traffic on the new asset.

■ Higher traffic on Transurban's CityLink road.

■ A concession extension for CityLink currently expiring in 2035.

■ An extension of higher toll increases on CityLink (greater of CPI or 4.5% vs just CPI). The ability to get a return from the project partly through a concession extension on the adjacent CityLink is a key advantage over investors that might contemplate such an investment proposal.

Transurban (TCL.AX) 14 09 September 2015

Figure 18: Western Distributor (Melbourne)

Source: Company data Bidding for AirportlinkM7 TQ (Transurban Queensland, 62.5% owned by Transurban) is currently in a bidding process for the AirportlinkM7 toll road in Brisbane (6.7km). We estimate the asset could be worth $1bn–$2bn. An announcement on a successful bidder is likely later this calendar year, with completion expected early next year. AirportlinkM7 connects to TQ's existing Clem7 and Legacy Way tunnels. There are likely operating synergies with these adjacent roads, and TQ is the obvious buyer with potential to generate higher returns from the assets. However, it's not a must have asset, and there is limited development risk where Transurban could earn a return by managing. The competitive bidding process limits the value creation upside. The potential returns on unsolicited projects that Transurban is persuing are likely to be higher. Opportunities in Northern Virginia Following the success of Transurban's 495 and 95 Express Lanes in northern Virginia, the government is interested in express lane systems on the I-66 and I-395. Transurban expects a competitive process for awarding the design, build and operation of I-66 express lanes later this year. We believe, Transurban's experience with the I-495 and I-95 express lanes gives it a unique advantage in bidding for other similar projects.

Transurban (TCL.AX) 15 09 September 2015

Figure 19: Opportunities on I-66 and I-395 in Northern Virginia

Source: Company data

Transurban (TCL.AX) 16 09 September 2015 Driverless cars – positive for TCL The development of driverless cars will significantly impact the way people travel in society. Highway capacity could double to 4000 vehicle per lane per hour following full market penetration of driverless vehicles. Studies also show travel demand (VKT, vehicle kilometres travelled) per person could increase by up to 35% from current levels. We expect both of these impacts from driverless car adoption to be positive for traffic volumes on Transurban's roads. Google to launch driverless in 2020 The possibility of driverless cars is increasing as we continue to make advancements in technology. Throughout 2014, Google, the leading developer of the technology, created a fully functional driverless car that had neither a steering wheel nor pedals and has now tested the vehicle with over 1 million miles of driving. It plans to launch driverless cars for public use in 2020. Adoption rates – 50% driverless in 20–30 years Adoption of the driverless vehicles is likely to be driven by convenience, productivity gains, independent mobility needs, safety improvements and cost savings. We think the ownership model for vehicles is likely to change from the current high level of individual ownership toward a higher proportion of car-sharing of driverless cars and driverless taxis. This could significantly reduce the cost of independent vehicle travel and support adoption of driverless cars.

■ Increased safety due to the elimination of human error in driving. Currently 90% of crashes are due to human errors. Despite these risks being essentially eliminated with driverless cars, this may be offset by additional risks that road users take once they are perceived to be safe.

■ Independent mobility for aged, youth, disabled. Driverless cars will increase the autonomy and independence for those who are unable to drive themselves. Parents may have the option to send their child alone in a driverless car to school and other activities (assuming legality). Additionally, the elderly and disabled will also demand driverless vehicles to increase their independence within their daily lives.

■ Increased productivity and convenience – Consumers could multi-task and complete alternative tasks (e.g. catching up on sleep) whilst travelling in between destinations.

■ Lower cost – Cars currently spend 95% of the time parked. That's an extraordinarily poor utilisation of capital. Some advocates claim that driverless cars will reduce vehicle ownership by 43% while increasing travel per vehicle by up to 75%. A North American Shared Use Vehicle Survey suggests that 9–13 vehicles are taken off the road for each car-sharing vehicle. Driverless car sharing and driverless taxis could significantly reduce the cost of independent vehicle travel while still maintaining most of the benefits of individual car ownership. This would drive a higher utilisation of the vehicle fleet and a reduction in the size of fleet, and therefore a significantly improvement in capital utilisation.

■ Don't invest in car parking. A smaller vehicle fleet with higher utilisation could significantly reduce the need for car parking.

■ Legal constraints – there will be economic, legal and social constraints that will affect the pace of adoption. Vehicle innovations tend to be adopted more slowly compared to other technological changes, due to the legal and safety considerations as well as the slow fleet turnover. Large increases in new vehicle purchase is required if most vehicles were driverless by 2050.

Transurban (TCL.AX) 17 09 September 2015

The table below summarises the academic studies' forecasts as to when they believe driverless cars will penetrate a certain percentage of the market. The variation is quite evident and at the very least it can be concluded that it will still take decades before the full effects of driverless cars are felt on the roads.

Figure 20: Academic forecasts for market penetration of driverless vehicles 25% 50% 75% 95% Princeton University (Bierstedt et. al.) 2035 2035-2050 >2035 >2040 Victoria Transport Policy Institute (Litman) 2050 2060 Institute of Electrical and Electronics Engineers (IEEE) 2040 Navigant Research 2035 Source: Princeton University, Victoria Transport Policy Institute, IEEE, Navigant Research Per capita travel demand growth of up to 35% Driverless vehicles provide independent mobility for aged, youth and disabled as well as increased productivity and convenience and potentially lower cost. These factors are likely to raise per capita demand for independent vehicle travel. We expect this to disproportionally benefit Transurban. The following tables highlight the increase in VKT (vehicle kilometres travelled) per person in both multi-modal regions (with public transport) as well as auto-dependent regions as driverless vehicles penetrate the market at different rates. It is evident that it is only at the very high penetration rates (75% and 95%) that we will see significant increases in VKT per capita. The greatest increases in demand occur on free flowing roads such as Transurban's toll roads, while demand increase on the alternative less free flowing city and suburban roads is likely to be lower.

Figure 21: Increase in VMT per capita in multi-modal regions Market Penetration Locations where Use Permitted 25% 50% 75% 95% Exclusive freeway lanes 5% 10% 15% 20% Mixed freeway lanes and ramps 0% 5% 10% 15% Auto-dominated arterials 0% 5% 10% All multi-modal streets 0% 5% Without a legal driver aboard 25% 35% Source: Bierstedt et. Al. 2014, "Effects of Next-Generation Vehicles on Travel Demand and Highway Capacity", Princeton University.

Figure 22: Increase in VMT per capita in auto-dependent regions Market Penetration Locations where Use Permitted 25% 50% 75% 95% Exclusive freeway lanes 10% 20% 30% 35% Mixed freeway lanes and ramps 5% 10% 20% 30% Auto-dominated arterials 5% 10% 20% All multi-modal streets 5% 10% Without a legal driver aboard 35% 35% Source: Bierstedt et. Al. 2014, "Effects of Next-Generation Vehicles on Travel Demand and Highway Capacity", Princeton University. Car-pooling is the downside risk Driverless taxis and share-cars could provide an opportunity for higher levels of car- pooling. There is a risk that this could reduce or limit the increase of vehicle kilometres travelled even with an increase in travel per person. However, we think this is unlikely to significantly impact the upside for Transurban.

Transurban (TCL.AX) 18 09 September 2015

Efficiency of driverless to double highway capacity Maximum highway capacity is estimated at 2000 cars per lane per hour, based on current vehicle technology and road design. Driverless vehicles could be equipped with CACC (co-operative adaptive cruise control) systems that communicate between vehicles and allow shorter vehicle separation at high speed. CACC systems can organise routes to be more efficient, ensure that congestion is limited and reduce energy consumption. Automated and connected vehicles will have an effect on freeway operations and capacity, depending upon the share of fleet mix and their ability to react to traffic conditions beyond the vehicles immediately adjacent to them. Studies show that driverless technology can significantly help in reducing inter-vehicle spacing, even in the presence of buses and trucks. A study completed by The University of California anticipates that Highway Lane Capacity can double if there is full penetration of the co-operative adaptive cruise control (CACC) technology, due to the formation of multiple-vehicle automated platoons, automated merging of vehicles and increased shared information between vehicles (Figure 24).

Figure 23: Required road capacity in Australia Figure 24: Highway Lane Capacity as a function of Normalised to 2014 values changes in CACC market penetration rate

300% 4500

4000 250% 3500 200% 3000

150% 2500

2000

Road Capacity (%) Capacity Road 100%

Lane Capacity (vphpl) (vphpl) Capacity Lane 1500 50% 1000

0% 500 2008 2012 2016 2020 2024 2028 2032 2036 2040 2044 2048 0 Do Nothing Impact of Sharing Economy 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Impact of Telecommuting Impact of Driverless Vehicles Market Penetration Rate

Source: Bradlow et. al. 2015, "How digital infrastructure can substitute Source: Shaldover et. al,. 2012, "Impacts of Co-operative Adaptive for physical infrastructure", The United States Studies Centre. Cruise Control on Freeway Traffic Flow" ,The University of California. Future highway needs could revert to today's levels Based on currently vehicle technology and expected population growth (1.3% CAGR), road capacity needs (number of road lanes) could more than double by 2040 (Figure 23). However, the impact of new technology adoption over the next 25 years could reduce the road capacity requirement to levels similar to today's available capacity. The risk for Transurban is that if it invests in new road capacity at a high rate over the next 10–15 years, it could end up with road utilisation below the full potential and dilute the potential upside from driverless cars. Sources The information presented on driverless cars was gathered from numerous academic studies as per below.

Transurban (TCL.AX) 19 09 September 2015

Figure 25: Academic Sources on Driverless Cars Authors Year Name of article Key takeaway Research Affiliate Bierstedt, J., 2014 Effects of Next- ● Favourable effects on the efficiency of the roadway network will Princeton University Gooze, A., Generation Vehicles on vary from an increase in AVs (efficiency capped at 45%). Gray, C., Travel Demand and ● Need to expand infrastructure to keep pace with population Peterman, J., Highway Capacity growth. Raykin, L. and ● Benefits of AVs include improved mobility, increased safety, Walters, H. reduced incident-related congestion and reduced environmental costs.

Litman, T. 2015 Autonomous Vehicle ● Explores the impact of AVs on travel demands and Victoria Transport Policy Implementation transportation. Institute Predictions ● Benefits such as reduced traffic and parking congestion, (Implications for independent mobility, increased safety and energy will occur Transport Planning) when AVs become more affordable in mid- 21st Century.

Pinjari, A., 2013 Highway Capacity ● While AV technology can lead to significant improvements in University of South Augustin, B., Impacts of Autonomous traffic flow behaviour, penetration of AVs into the personal Florida Menon, N. Vehicles: An automobile markets can induce additional travel with additional Assessment capacity needs.

Bradlow, H. 2015 How digital ● Road capacity demand is expected to 2.5x more in 2050 than The United States Study and infrastructure can we have today. Centre at the University Jayachandra, substitute for physical ● This paper estimates that, the road capacity requirement in of Sydney A. Infrastructure 2050 will be roughly equivalent to the capacity existing today, given the increase in technology.

Martin, E. 2010 Impact of Car-sharing ● 9 to 13 vehicles taken off the road for each car-sharing vehicle. University of California, Shaheen, S. on Household Vehicle ● The average fuel economy of car-sharing vehicles used most Berkley Lidicker, J. Holdings (Results from often by respondents is 10 mi/gal more efficient than the average North American vehicle. Shared-Use Vehicle ● The median age participating in car-sharing within household is Survey) 11. Eno Center for 2013 Preparing a nation for ● Focusses on the potential benefits, barrier to implementation Eno Center for Transportation Autonomous Vehicles and policy recommendations. Transportation ● Project that the annual economic benefits could be in the range of $25 billion with only 10 % market penetration of AVs.

Shaldover, S., 2012 Impacts of Cooperative ● The results show that the use of ACC is unlikely to change lane University of California Su, D. and Lu. Adaptive Cruise Control capacity significantly. However, CACC is able to greatly increase X. on Freeway Traffic capacity after its market penetration reaches moderate to high Flow percentages.

Navigant 2015 Advanced Driver ● Provides a detailed examination of the emerging market for Navigant Research Research Assistance Systems different levels of fully and semi-autonomous driving. and the Evolution of ● Global market forecasts by region for volumes of vehicles with Self-Driving Level 2, 3, and 4 autonomy, along with the associated revenue, Functionality: Global extend through 2035 Market Analysis and Forecasts Tientrakool, P. 2011 Highway Capacity ● The increase in highway capacity is a function of the fraction of Colombia University Benefits from Using the vehicles that use a technology. Vehicle-to-Vehicle ● If all of the vehicles use sensors alone, the increase in highway Communication and capacity is about 43%. While if all of the vehicles use both Sensors for Collision sensors and vehicle-to-vehicle communication, the increase is Avoidance about 273%. van Arem, B., 2006 The Impact of Co- ● The results show an improvement of traffic flow stability and a Twente University (IEEE van Driel, C. operative Adaptive slight increase in traffic flow efficiency with vehicles using CACC. Intelligent Transportation and Visser, R. Cruise Control on traffic Systems Society) flow characteristics Source: Compiled by Credit Suisse

Transurban (TCL.AX) 20 09 September 2015 Road user charging – opportunity At some stage the Australian government is likely to attempt to introduce road user charging (RUC) to offset an expected decline of fuel excise revenue, in our view. Rising fuel efficiency of vehicles and more electric vehicles could reduce the government's ~$9.5bn fuel excise take by 15% by 2050. RUC presents two potential benefits for Transurban.

■ Firstly, charging for use of alternative roads reduces the price gap to using the toll road (presuming that RUC does not apply to toll roads or Transurban is compensated). Also it creates a higher acceptance of paying for road use, and while the toll levels on Transurban's roads are significantly higher than the likely level of RUC (4c per km to neutralise fuel excise), customers may be less discerning on price.

■ Secondly, Transurban could be well placed to operate an RUC system on behalf of the government. It has the appropriate experience and operational capability. It would be a politically sensitive project for the government and we would expect it to be extremely risk averse in awarding a contract to provide the service. While there are numerous technology providers that could provide an RUC system, Transurban is the obvious low risk partner, in our view. Road excises in Australia In Australia road users are only charged for registration and license costs (revenue collected by the state governments) and by the consumption based fuel excise which is levied at the pump (revenue collected by Federal government). However, from CSIRO's 2015 report titled "Projecting Future Road Transport Revenues 2015–2050", we can see that the fuel excise is contributing less and less to government revenue. This is due to the change towards more fuel efficient vehicles. The CSIRO projects that by 2035, the fuel excise revenue will increase 6% relative to 2015 levels (bear case 17% reduction in revenue). By 2050, CSIRO projects a 15% decline in revenue, relative to 2015 levels (Figure 26). This levy will not be effective in raising the revenue for the maintenance of roads. For this reason, we believe that the Government will turn towards other types of road user charges.

Figure 26: Projected road excise revenue to 2050 (real 2015 dollars)

Source: CSIRO

Transurban (TCL.AX) 21 09 September 2015

New Zealand case study New Zealand first adopted a Road User Charge (RUC) in 1978 where it taxed vehicles based on the weight of the vehicle as well as the time and distance travelled. The amendments made in 2012 to the act have modernised and simplified the system, making it more indicative of the overall use of the road network and the associated costs that vehicles impose on the roads. All the revenue collected from the RUC goes into the National Land Transport Fund, paying for road construction and maintenance. The New Zealand rates vary from as little as NZ $0.062/km for a light ordinary car (Figure 27) up to a maximum charge of NZ $0.391/km for a heavy weight, three-axle vehicle.

Figure 27: New Zealand RUC Rates

Source: NZ Transport Agency Impacts of RUC System If Australia was to adopt a RUC System similar to New Zealand, where vehicles are charged based on weight, location and distance travelled, there would be little impact on demand by consumers. Numerous academic studies have found that the price elasticity of demand for roads in Australia is inelastic and in the range of -0.2 to -0.5, representing how there is little travel alternatives to roads. That being said, private car drivers have greater price elasticity compared to commercial and heavy vehicles, being that those consumers often have more options as to choice of travel as opposed to drivers of heavy vehicles. Ultimately, this means that small changes in price to roads will not affect the demand and therefore should have a very miniscule impact on traffic volumes. RUC rates in Australia BITRE estimates that the VKT per person in a year is 10,126 kilometres a year. To neutralise the fuel excise (so that the Government still receives the same amount of revenue as it is currently receiving for the fuel excise), an average charge of less than 4c per kilometre can be charged to each driver. This implies that the average person would pay ~$388 per year assuming that they drive 10126km (average VKT per capita in Australia for 2014–15). Adjusting for the weight of the vehicle and location of the travel, it has been found that light vehicles pay up to an 80% discount of heavy vehicles and travelling in a rural destination will reduce in up to 75% of urban travelling.

Transurban (TCL.AX) 22 09 September 2015 Traffic growth, linking jobs and homes Transurban, as the name of the company suggests, focuses on investing in urban or intra- city toll roads rather than inter-city roads. Furthermore, it focuses on investing in roads that link growing residential areas with centres of employment growth. Transurban's roads are well position to benefit from geographic areas of higher population and jobs growth, in our view. Traffic growth on its roads is likely to be significantly higher than underlying population growth in the region. In the longer term, the adoption of driverless cars could change travel behaviour and result in higher per capital car travel. Traffic – influenced by population, jobs, fuel cost and behaviour Traffic growth in a region is driven by propensity to travel (access to a vehicle, employment, fuel cost, travel behavior) and population growth. Traffic levels within a particular transport corridor are also influence by the population and jobs growth at each end of the corridor or along the corridor. And then there is the traffic growth on specific roads along the corridor; this is driven by expectations of transit time and toll cost. Within an urban transport corridor, toll roads are frequently the only uncongested route with spare capacity. Where this is the case, the toll road can get much higher traffic growth than the average demand growth for the whole corridor or region. VKT per capita – propensity to drive The chart below shows VKT (vehicle kilometers travelled) per person for each of the markets where Transurban operates toll roads. Historically VKT has risen due to increases in car ownership, however this has peaked. VKT per person peaked around 2004 and has since declined due to higher fuel prices and employment changes. It troughed in 2011 and has since been stable. We forecast relatively flat VKT per person until around the 2030s, when the adoption of driverless vehicles could change travel behavior and increase the propensity for car travel. Our short-term forecasts are significantly below BITRE estimates that VKT per person in Australian cities will recover to historical peak levels by 2020. VKT per person is lowest in Sydney, as public transport is used more frequently than in Melbourne, Brisbane or the US. Significant investment in public transport and a change of behavior to use it could impact VKT levels, but we don't see this as a significant risk in the short to medium term.

Figure 28: Vehicle kilometres travelled per person 16,000

14,000

12,000

10,000

8,000 Annual VKT per capita perVKT Annual

6,000

4,000 1965 1971 1976 1982 1987 1993 1998 2004 2010 2015 2021 2026 2032 2038 2043 2049 2054 2060

Sydney Melbourne Brisbane Urban USA

Source: Company data, Credit Suisse estimates

Transurban (TCL.AX) 23 09 September 2015

Population growth – highest in Virginia High population growth in Virginia of ~4% CAGR over the next 25 years could provide strong growth for Transurban's I-95 and I-495 HOT lanes. In Transurban's Australian markets, Brisbane is likely to have the highest population growth followed by Melbourne and Sydney (Figure 30). The majority of growth is expected to occur in the outer regions (relative to the CBD), accounting for 56% of the total growth in Sydney, 60% in Melbourne and 68% in Brisbane (Figure 31). Transurban's road are well placed to benefit from the higher growth in these outer areas.

Figure 29: High population growth in Virginia to benefit Transurban's I-495 & I-95 City Population CAGR 2006–2031 (*2040) Areas of fastest growth Sydney 1.2% South west, north west, west central Melbourne 1.4% Outer south, outer west Brisbane 1.9% Outer west, outer north Virginia 4.1*% Source: ABS, University of Virginia

Figure 30: Projected population growth, 2006–2031 Figure 31: Share of projected population growth by area 100% 6 1.2% CAGR

5 1.4% CAGR 80%

4 60% 3

1.9% CAGR 40% 2 68% Projected population (mn) populationProjected 56% 60% 1 (%) populationof growth Share 20%

0 0% 2006 2011 2016 2021 2026 2031 Sydney Melbourne Brisbane Sydney Melbourne Brisbane Outer Middle Inner

Source: BITRE Source: BITRE Employment growth State government projections anticipate jobs growth of 1.4% CAGR in Sydney, 1.3% in Melbourne and 2.2% in Brisbane over 2006–2031. Employment is expected to also grow fastest in the outer region of each city, accounting for 48% of total growth in Sydney, 41% in Melbourne and 34% for Brisbane.

Figure 32: Projected employment growth in each city City Employment CAGR 2006 – 2031 Areas of fastest growth Sydney 1.4% North west, CBD, south west, west central Melbourne 1.3% CBD, outer south, inner Brisbane 2.2% Inner, outer west, middle north, CBD Source: BITRE

Transurban (TCL.AX) 24 09 September 2015

Figure 33: Projected employment growth, 2006–2031 Figure 34: Share of projected employment growth by area 3.5 100% 1.4% CAGR 3.0 80% 2.5

1.3% CAGR 60% 2.0

1.5 40% 2.2% CAGR Projected population (mn) population Projected 1.0 48% Share of population growth (%) populationof growth Share 20% 41% 0.5 34%

0.0 0% 2006 2011 2016 2021 2026 2031 Sydney Melbourne Brisbane

Sydney Melbourne Brisbane Outer Middle Inner

Source: BITRE Source: BITRE Socio-demographics of travelling Socio-demographic characteristics such as age, household composition, employment and income also influence travel behaviour.

■ Age: Younger groups (<40 years) are increasingly walking and using public transport, whilst people over 60 are relying more on a car. Thus, in the aggregate, the proportion of trips by car remained broadly stable despite the aging population.

Figure 35: Mode share of trips by age group

Source: NSW Transport

■ Employment and income: Unemployed and low income workers prefer walking and public transport, whilst higher income workers prefer using car. Travel increases with increasing income.

■ Household composition: There is effectively no difference in number of trips on a per person basis between persons that are part of a 'couples with children' household and a 'single person' household. The higher number of trips by 'couples with children' households reflected the higher number of people in households. Thus, population growth appears to be a greater influence on travel than the composition by household type of that population.

Transurban (TCL.AX) 25 09 September 2015

■ Multiple car ownership: Despite the proportion of households with multiple cars increasing from 43% to 49%, this is not reflected in an increase in distance travelled, with VKT growing only 10%.

■ Car occupancy: Car occupancy has decreased at approximately the same rate each year over 2003–2013. There have been one fewer passenger for every 58 cars in the morning peak and every 33 cars in the afternoon peak.

Transurban (TCL.AX) 26 09 September 2015 Sydney roads Transurban currently holds interests in six Sydney toll roads, and together with NWRG (M7), will construct and operate NorthConnex which is expected to open in 2019 (Figure 11). Geographically, Transurban has cemented its position in controlling Sydney's orbital network (Figure 42). The M2, NWRG (M7 & NorthConnex), M5 & Eastern Distribution contribute ~85% of EBITDA from NSW assets and close to 90% of value.

Figure 36: Sydney roads – revenue, EBITDA & EV (FY16) Figure 37: Fastest population growth within Sydney 100% 1.2 90% 1.4% CAGR 80% 1.0 70% 0.8 60% 2.1% CAGR 50% 0.6

40% Population(mn) 30% 0.4 20% 2.0% CAGR 10% 0.2 0% Porportional revenue Proportional EBITDA Proportional EV 0.0 2007 2012 2017 2022 2027 Hills M2 NWRG (M7 & NCX) M5 M1 Eastern Distributor Lane Cove Tunnel Cross City Tunnel CBD South West North West

Source: BITRE Source: BITRE Sydney traffic growth The chart below shows our traffic growth estimates for Transurban's larger Sydney toll road assets. We forecast 2.5% traffic growth until traffic on each road reaches our estimate of capacity. We estimate the Eastern Distributor hits capacity in the early 2020s, M2 in early 2030s and M7 by 2040s. The swing in traffic levels on the M2 and M7 during the past few years was due to the impact of construction widening works on the M2 and then a recovery and strong growth once the additional lanes opened. We expect a couple of years of strong growth for the M2 and M7 once the connecting NorthConnex tunnel opens in FY20. Forecasting traffic for Transurban at twice the level of underlying demand growth NSW Bureau of Transport expects the number of car journeys to increase at 1.2% CAGR from 11.1mn journeys per day in 2011 to 16.7mn in 2046. With average journey distance forecasted to decrease nominally at -0.2% CAGR, this produces similar VKT growth of 1.0% CAGR over the period. This is in line with expected population and employment growth of 1.1% CAGR. The number of car journeys during the morning (7–9am) and afternoon (3–6 pm) peak periods are both forecasted increase at 1.2% CAGR over the period.

Transurban (TCL.AX) 27 09 September 2015

Figure 38: Transurban – Sydney traffic growth 15%

10%

5% Traffic growth Traffic

0% FY07 FY10 FY13 FY16 FY19 FY22 FY25 FY28 FY31 FY34 FY37 FY40 FY43 FY46

-5%

Hills M2 M7 M1 Eastern Distributor M5

Source: Company data, Credit Suisse estimates NSW government – road investment plans – likely to benefit Transurban's roads The NSW and Federal government are investing significantly in the metropolitan roads network in Sydney.

■ The WestConnex project in the inner west of Sydney could boost traffic levels on Transurban's M5.

■ The Western Harbour Tunnel is likely to divert traffic away from Transurban's Eastern Distributor, but we estimate traffic levels on the Eastern Distributor are approaching full capacity within the next 10 years anyway.

■ The proposed M12 linking the new Western Sydney Airport with Transurban's M7 is likely to support traffic on the M7. There are also other projects that improve connectivity to the M7.

Figure 39: Major roads projects in Sydney Project Cost Details Bringelly Road $1.25bn ($1bn Federal Government Upgrade Elizabeth Drive between the M7 and The Northern Road from 2 Upgrade contribution, $250mn NSW Government) to minimum of 4 lanes Western Harbour $4.5b Supports WestConnex by linking west and north while bypassing CBD; Tunnel takes pressure off Harbour Bridge, Anzac Bridge and Eastern Distributor NorthConnex $3bn ($405mn contribution each by NSW and Approval granted for construction and operation on 13 Jan 2015; early Federal Governments) work activities started on site on 5 Feb 2015 and will continue until major construction begins mid-2015 to target operation by 2019 Pinch point Program $246mn total over 1 Jul 2007 - 30 Jun 2017 Targets peak hour traffic hotspots and investigates ways to relieve traffic congestion; 11 projections under construction and 25 proposals The Northern Road $1.6bn ($1.3bn Federal Government Upgrade to minimum of 4 lanes from Narellan to M4 starting 2015 to Upgrade contribution, $300mn NSW Government) target completion by 2020 WestConnex $10 - 13bn ($1.8bn committed by NSW New and enhanced motorway capacity, extending M4 to Sydney Airport Government) and duplicating M5 East Western Sydney $1.25bn ($1bn Federal Government New 4 lane east-west motorway between M7 and The Northern Road for Airport Motorway contribution, $250mn NSW Government) direct access to Western Sydney Airport Source: Department of Infrastructure Sydney population growth The maps below illustrate the anticipated areas of fastest population and employment growth over 2006–2031. The location of Transurban's Sydney toll roads are also provided for comparison. The fastest growing south-west and north-west regions of Sydney are serviced by the M2 and M5 motorways.

Transurban (TCL.AX) 28 09 September 2015

Population growth is projected to be highest in the north-west and south-west regions, particularly in Camden, Blacktown, Liverpool, Wyong and Baulkham Hills, with employment growth expected to be highest in the north-west, CBD and south-west. Thus, a traffic growth will be directed from the outer regions to major employment precincts (e.g. Parramatta-Westmead, Olympic Park and Wetherill Park). BITRE modelling projects public transport use to decrease given the existing public transport network structure (i.e. shorter commutes within regions would be by road not rail). A further implication is that average morning peak road speeds are projected to decline in most parts of Sydney, particularly in the south-west and north-east. We expect this to provide support for marginal shift to toll roads. Even with completion of all major transport projects (e.g. M2 to F3, F6 to Loftus, M5 East, South West Rail Link, Parramatta to Chatswood rail link, North West Rail Link), the transport infrastructure is inadequate, the rail system has insufficient capacity, and there is a need to expand road networks in the outer areas.

Figure 40: Projected population growth – Sydney (2031) Figure 41: Projected employment growth – Sydney (2031)

Source: BITRE Source: BITRE

Transurban (TCL.AX) 29 09 September 2015

Figure 42: Transurban's Sydney assets

Source: Company data

Transurban (TCL.AX) 30 09 September 2015 Melbourne traffic growth Transurban's Melbourne assets consists of the CityLink which connects three major urban freeways, the West Gate, Tullamarine and Monash and links Melbourne's manufacturing hubs and the city centre, port and airport. Transurban holds a concession to operate the road until 2035. We expect weak traffic growth on CityLink over the next couple years due to the impact of the road widening construction. Once this is completed there could be a strong recovery. We estimate traffic could reach capacity levels by the late 2020s. BITRE expects traffic in Melbourne to recover from the effects of the GFC and resume its long-term trend, with potential for a ~1.7% traffic CAGR over 2012–2020. We would be more cautious and expect underlying traffic demand growth in Melbourne closer to the level of population growth ~1.4%. However, CityLink is likely to experience higher levels of demand growth, in our view.

Figure 43: CityLink – traffic estimates Figure 44: Fastest population growth within Melbourne 15% 1.2 1.9% CAGR 1.0

10% 0.8

0.6

5% Population(mn)

Traffic growth Traffic 0.4 1.9% CAGR 2.4% CAGR 0% FY07 FY11 FY15 FY19 FY23 FY27 FY31 0.2 4.2% CAGR

0.0 -5% 2007 2012 2017 2022 2027

CityLink Outer north Inner Outer west Outer south

Source: BITRE (Mar 2012) Source: BITRE Melbourne population growth The maps below illustrates the anticipated areas of fastest population and employment growth over 2006–2031. The fastest growing north-west and south-east regions of Melbourne are serviced by the CityLink motorway. Population growth is expected to be greatest in the inner and outer regions of Melbourne, particularly in Whittlesea, Pakenham, Craigieburn, Cranbourne and Wyndham. Employment growth is projected to be highest in the CBD and outer regions, particularly in Dandenong, Monash and Wyndham. While rail is likely to accommodate some of the increased traffic to the CBD, the increase in shorter commutes within regions is likely to require use of road. Further, as long distance commutes increase, it is also expected that average commuting distance will rise. Congestion delay cost is expected to increase in all areas, but most significantly within 15km of the CBD, particularly in the western suburbs and Casey and Dandenong in the outer south. Freeways are expected to account for an increasing proportion of delay costs. Thus, we expect support for marginal shift to toll roads.

Transurban (TCL.AX) 31 09 September 2015

Figure 45: Projected population growth – Melbourne Figure 46: Projected employment growth – Melbourne

Source: BITRE Source: BITRE

Figure 47: Transurban's Melbourne roads

Source: Company data

Transurban (TCL.AX) 32 09 September 2015 Brisbane roads Transurban holds interests in five toll roads in Brisbane, Queensland, as part of a consortium (Transurban 62.5%, AustralianSuper 25%, Abu Dhabi Investment Authority 12.5%). The assets were acquired from QIC in Apr 2014 for $7.1bn enterprise value. The Gateway and Logan Motorways provide ~85% of EBITDA from Brisbane and ~80% of value.

Figure 48: Brisbane roads – revenue, EBITDA & EV (FY16) Figure 49: Fastest population growth within Brisbane 100% 1800 2.6% CAGR 90% 1600 80% 1400 70% 1200 60% 1000 50% 0.9% CAGR 40% 800 30%

Population ('000) Population 600 20% 400 10% 2.3% CAGR 200 0% Porportional revenue Proportional EBITDA Proportional EV 0 2006 2011 2016 2021 2026 2031 Gateway Motorway Logan Motorway Clem7 Go Between Bridge Legacy way Inner Middle Outer

Source: BITRE (Mar 2012) Source: BITRE (Mar 2012) Brisbane traffic growth The chart below shows our traffic growth estimates for Transurban's larger Brisbane toll road assets. We forecast ~3% traffic growth until traffic on each road reaches our estimate of capacity. We estimate the Gateway Motorway hits capacity in the early 2030s and the Logan Motorway in the late 2030s. BITRE expects traffic in Brisbane to recover from the effects of the GFC and resume its long-term trend. VKT per person per year is expected to grow at 1.1% CAGR to ~10,583 km in 2020 from ~9,695 km in 2012. Combined with forecasted population growth of ~1.9% leads to growth in total VKT of ~3% CAGR over 2012–2020. We think this is too bullish and expect underlying traffic demand closer to population growth ~1.9%, however the traffic growth on Transurban's toll roads is likely to be higher.

Figure 50: Transurban – Brisbane traffic growth 15%

10%

5% Traffic growth Traffic

0%

-5% FY15 FY18 FY21 FY24 FY27 FY30 FY33 FY36 FY39 FY42 FY45 FY48 FY51

Gateway Motorway Logan Motorway Clem7 Legacy way

Source: Company data, Credit Suisse estimates

Transurban (TCL.AX) 33 09 September 2015

Brisbane population growth The ABS projects population growth in Brisbane to be higher than the Australian average. Brisbane is expected to grow at 1.9% CAGR up to 2027. The maps below illustrate the anticipated areas of fastest population and employment growth over 2006–2031. The fastest growing south-west regions of Brisbane are serviced by the Gateway motorway. Transurban's toll road network is expected to link the outer regions, and also link the outer regions with the CBD. More than 50% of population growth is expected to occur in the outer regions, particularly in the outer west (e.g., Ipswich, Beaudesert) then outer north. Employment growth is expected to be highest in the outer west, inner and middle north, particularly in Ipswich. Thus, a large proportion of the traffic growth is likely to be within the outer region as cross- region commutes start to decline due to housing and employment becoming located in the same region. The shift away from inward commutes, which accounts for ~75% of public transport use, is likely to benefit road over public transport. The transport system in the outer west is not suited to access outer suburban and regional workplaces or short distance within region trips. Average commuting distance is also expected to increase slightly.

Figure 51: Projected population growth – Brisbane Figure 52: Projected employment growth – Brisbane

Source: BITRE Source: BITRE

Transurban (TCL.AX) 34 09 September 2015

Figure 53: Transurban's Brisbane assets

Source: Company data

Transurban (TCL.AX) 35 09 September 2015 USA – 495 & 95 express lanes Transurban's 495 and 95 express lanes in Northern Virginia, USA have a different revenue structure than the Australian toll roads. The express lanes (2+2 on I-495 & 2/3 reversible on I-95) run beside free-lanes on the I-495 and I-95. Transurban is required to maintain minimum average speeds of 45MPH on I-495 and 55MPH on I-95, simply by flexing the toll price minute by minute through the day. There is no price regulation, only speed regulation. The concessions expire in 2087 and provide a quarter of the enterprise value of Transurban, by our estimates. Revenue growth Population forecasts released by the University of Virginia in Nov 2012 expect population in Virginia to grow at 4.1% CAGR to reach 10.5mn by 2040 from 8.3mn in 2014. 59% of Express Lane users are from Virginia, and the 495 and 95 service the fast growing north to central regions of Virginia. The chart below shows our estimates for revenue growth for the express lanes. We expect a strong ramp up of revenue as both assets have opened only recently.

Figure 54: 495 & 95 express lanes revenue growth 50%

45%

40%

35%

30%

25%

20%

Revenue growth Revenue 15%

10%

5%

0% FY15 FY17 FY19 FY21 FY23 FY25 FY27 FY29 FY31 FY33 FY35 FY37 FY39 FY41 FY43 FY45

495 Express Lanes (USD) 95 Express Lanes (USD)

Source: Company data, Credit Suisse estimates

Transurban (TCL.AX) 36 09 September 2015

Figure 55: Transurban's Virginia, USA, assets

Source: Company data

Transurban (TCL.AX) 37 09 September 2015 Valuation – fair value at $11ps We estimate fair value for Transurban shares at $11 per share based on a DCF based SOTP approach and forward dividend yield. Our target price implies a dividend yield of 4.0% for FY16, rising to 4.4% for FY17 and 5.1% for FY18. A share price of $11 would give EV/EBITDA multiples of 23.5x for FY16, falling to 21.2x in FY17 and 19.1x in FY18. DCF based SOTP valuation – $12.3 per share Based on our DCF based SOTP valuation we estimate fair value at $11.4 per share, using an 8% WACC for the US assets and 7% for the others (Figure 5). Our traffic growth and toll price growth assumptions are presented below. Traffic growth assumptions Our traffic growth assumptions are driven by an analysis of available capacity and likely demand conditions. We estimate maximum capacity based on the features of the toll road and assume effective maximum daily capacity is equivalent to 11–13 hours of peak hourly capacity. After traffic reaches these levels we assume no further volume growth is possible.

Figure 56: Traffic growth assumptions Traffic Growth FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21-25 FY26-30 FY31-35 FY36-40 FY41-45 FY46-50 NSW Hills M2 -5% 1% 14% 11% 5% 4% 3% 3% 10% 4% 2% 0% 0% 0% Lane Cove Tunnel -1% 2% 9% 6% 3% 3% 3% 3% 5% 3% 3% 2% 0% 0% Cross City Tunnel 0% 0% 0% 3% 4% 3% 3% 3% 3% 3% 3% 3% M1 Eastern Distributor 1% 0% 2% 2% 2% 2% 2% 2% 2% 1% 0% 0% 0% 0% 0% M5 0% -1% -1% 8% 7% 4% 3% 3% 3% 3% M7 1% 3% 8% 7% 5% 3% 3% 3% 10% 4% 3% 2% 2% 1% 1% NorthConnex 0% 0% 0% 0% 0% 0% 0% 0% 0% 27% 5% 2% 2% 1% 1% VIC CityLink 3% 2% 2% 3% -1% 1% 4% 8% 7% 3% 0% 2% 0% 1% 0% QLD Gateway Motorway 0% 0% 0% 4% 3% 3% 3% 3% 3% 3% 3% 2% 0% 0% 0% Logan Motorway 0% 0% 0% 2% 3% 3% 3% 3% 3% 3% 3% 3% 2% 0% 0% Clem7 0% 0% 0% 0% 4% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% Go Between Bridge 0% 0% 0% 5% 7% 5% 3% 3% 3% 3% 3% 3% 3% 3% 3% Legacy way 0% 0% 0% 0% 0% 57% 10% 10% 10% 3% 3% 3% 3% 3% 3% USA 495 Express Lanes 0% 0% 43% 16% 14% 14% 10% 5% 5% 3% 1% -19% 1% 1% 1% 95 Express Lanes 0% 0% 0% 0% 46% 10% 10% 10% 5% 2% 2% 1% 0% 0% 0% Source: Company data, Credit Suisse estimates Toll growth assumptions – CPI+ Toll price growth on Transurban's Australia roads are regulated at CPI or the maximum of CPI and a fixed amount. We assume CPI at 2% in the long term.

Transurban (TCL.AX) 38 09 September 2015

Figure 57: Toll growth assumptions Toll Growth FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21-25 FY26-30 FY31-35 FY36-40 FY41-45 FY46-50 NSW Hills M2 2% 0% 18% 3% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% Lane Cove Tunnel 17% 1% 3% 3% 2% 4% 2% 2% 2% 2% 2% 2% 2% 2% Cross City Tunnel 0% 0% 0% 7795% 3% 3% 3% 2% 2% 2% 2% 2% M1 Eastern Distributor 0% 9% 2% 5% 5% 4% 4% 4% 4% 4% 4% 4% 4% 4% M5 8% 6% 0% 1% 4% 4% 2% 2% 2% 2% M7 3% 1% 2% 6% 9% 7% 2% 2% 2% 2% 2% 2% 2% 2% VIC CityLink 5% 4% 6% 5% 4% 6% 2% 2% 2% 2% 2% QLD Gateway Motorway 0% 0% 0% 3% 3% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% Logan Motorway 0% 0% 0% 4% 3% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% Clem7 0% 0% 0% 114% 4% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% Go Between Bridge 0% 0% 0% 94% 6% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% Legacy way 0% 0% 0% 0% 0% 0% 2% 2% 2% 2% 2% 2% 2% 2% 2% USA 495 Express Lanes 0% 0% 133% 34% 27% 25% 10% 5% 5% 5% 5% 5% 5% 5% 5% 95 Express Lanes 0% 0% 0% 0% 154% 30% 10% 5% 5% 5% 5% 5% 5% 5% 5% Source: Company data, Credit Suisse estimates Cost of capital – WACC 7.0% We estimate Transurban's cost of capital at 7.0%. Our 8.3% cost of equity is based on a risk free rate of 5%, a 5% market risk premium and an equity beta of 0.65. We estimate the equity beta based on the maximum value from a set of regression analysis's at different intervals and frequencies of the Transurban share price versus the ASX200. We assume a long-term cost of debt of 5.5% and target gearing of 38 %. For the US toll road assets we assume a higher WACC at 8% to reflect the higher risk profile for less mature assets that are in a revenue ramp up phase. Dividend yield spread Transurban shares traded at within a forward dividend yield range of 4%–6%, in the seven years since the start of the financial crisis. The dividend spread over ten-year Aussie government bonds has widened from a discount to a range of 100–300bps for the past four years. We expect dividend growth to improve the yield to ~6% by FY18. Based on current bond yields this would give a yield spread of ~300bps, at the attractive end of the recent trading range. The discontinuity in the dividend chart is when previous management slashed the dividend by over 60% due to weakening cash generation and an over levered balance sheet (Figure 58).

Transurban (TCL.AX) 39 09 September 2015

Figure 58: Transurban dividend yield and spread on 10y Aussie Gov's 10

9

8

7

6

5

4

3

Yield spread & Yield (%)Yield& spreadYield 2

1

0

-1

-2 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

TCL fwd yield spread on Aussie Gov 10y TCL fwd div yield Aussie Gov 10y

Source: IBES, Credit Suisse estimates Transurban's revenue is mostly inflation linked. The dividend yield spread over ten-year Aussie government inflation linked bonds has mostly been between 3%–4% during the past five years.

Figure 59: Transurban dividend yield and spread on 10y Aussie Gov linkers 10

9

8

7

6

5

4 Yield Spread & Yield (%)Yield& SpreadYield 3

2

1

0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

TCL fwd div yield TCL fwd yield spread on Aussie Indexed Gov Bond Aussie Indexed Govt Bond

Source: Company data, Credit Suisse estimates

Transurban (TCL.AX) 40 09 September 2015

Price multiples valuation Price multiple valuation approaches tend not to be useful for valuing toll roads, due to the very high multiple levels that they trade at and the unique cashflow profiles generated from toll road assets. However, we include EV/EBITDA and PER multiple charts below. The EV / EBITDA 12-month forward multiple has traded in a range of 18x–23x during the past five years. The forward PER for Transurban has traded at 3x–5x the level of the PER for the ASX100.

Figure 60: Historical EV / EBITDA multiples (consensus) Figure 61: Historical relative PE (consensus) 40 8 100 7 35 90

30 80 6 70 25 5

PER PER 60 EV/ EV/ EBITDA

4 Relative PER 20 50 3 15 40

30 2 10 2010 2011 2012 2013 2014 2015 2001 2003 2005 2007 2009 2011 2013 PER 12 months fwd PER relative to ASX200 12 month fwd 24 month fwd

Source: IBES, Credit Suisse estimates Source: IBES, Credit Suisse estimates Peer comparison Transurban exhibits comparable dividend yields as Australian infrastructure peer Sydney Airport but lower free cash flow yields due to higher capex to support its growth strategy. Like regulated utilities, Transurban generates defensive stable earnings and cash flows using higher Net Debt / EBITDA levels but demands higher EV / EBITDA multiples. Compared to fellow high yield plays A-REITs, Transurban demands similar EV / EBITDA multiples despite using higher Net Debt / EBTIDA and offering similar dividend yields. Despite being the only other toll road operator listed in Australia, we view Macquarie Atlas Roads as less comparable due to all assets being located offshore, whilst Transurban's portfolio is predominately exposed to the Australian economy. Macquarie Atlas Roads' significantly higher debt also makes it more leveraged to changes in bond yield. We also compare Transurban to other listed toll roads globally. These are predominately in China, which tends to have much smaller assets and hold fewer assets, and Europe, which are more comparable to Transurban in size. Compared to Transurban, the Chinese toll roads offer higher yields whilst requiring lower Net Debt / EBITDA and demanding much lower EV / EBITDA. The European toll roads are trading at similar EV / EBITDA multiples as the Chinese roads but offer lower dividends yields as Transurban.

Transurban (TCL.AX) 41

(TCL.AX) Transurban Figure 62: Global listed peer multiples based on consensus forecasts Market Cap P / E Dividend yield EV / EBITDA FCF yield Net Debt / EBITDA P / BV

Stock Listing (A$mn) Fwd 12m Fwd 24m Fwd 36m Fwd 12m Fwd 24m Fwd 36m Fwd 12m Fwd 24m Fwd 36m Fwd 12m Fwd 24m Fwd 36m Fwd 12m Fwd 24m Fwd 36m Fwd 12m Fwd 24m Fwd 36m

Transurban AU 18,259 62.2 50.4 36.2 4.8% 5.2% 5.8% 22.9 21.3 19.4 5.0% 5.6% 6.2% 7.8 7.4 6.9 6.3 7.0 5.0 Aurizon AU 10,610 16.1 14.6 13.4 5.3% 5.9% 6.4% 8.7 8.0 7.5 6.5% 7.8% 9.5% 1.8 1.7 1.6 1.6 1.6 1.6 Macquarie Atlas AU 1,736 19.7 14.7 11.8 5.6% 5.8% 6.9% 67.2 -194.0 -86.5 203.1 -268.4 3.4 1.8 Sydney Airport AU 12,608 49.4 42.6 39.3 4.9% 5.3% 5.6% 18.5 17.5 16.7 5.2% 7.0% 7.5% 7.0 6.7 6.4 12.9 17.7 36.4 Australian infrastructure average 26.8 22.2 18.8 5.3% 5.7% 6.3% 17.6 17.9 17.2 5.8% 7.4% 8.5% 70.6 -86.7 4.0 5.9 7.0 19.0

Atlantia IT 32,453 20.2 18.6 17.1 3.9% 4.2% 5.2% 9.0 8.6 1.4% 1.9% 3.1 2.9 2.7 2.9 2.8 CCR BR 9,777 19.7 14.9 12.2 4.6% 5.4% 7.9% 7.7 6.7 2.6 2.3 1.7 7.0 6.4 Gr Eurotunnel FR 10,991 45.9 34.7 28.3 2.2% 3.0% 18.1 16.5 3.8% 4.7% 6.3 5.5 4.8 3.9 3.8 Hopewell Infr HK 2,069 14.8 12.9 7.0% 9.5% 8.1 7.3 2.9 2.5 1.4 1.4 Jiangsu Exwy HK 2,019 13.1 12.6 5.9% 5.7% 8.3 7.5 1.3 1.2 1.7 1.7 OHL ES 2,052 5.1 4.7 4.7% 5.2% 6.1% 6.2 6.0 5.5 -37.2% -5.2% 5.1 4.9 4.4 0.5 0.5 SIAS IT 3,744 14.4 13.9 15.6 3.4% 3.4% 3.1% 363.6% 742.0% 2.5 1.2 1.2 1.2 Yuexiu Transport HK 1,422 9.0 9.1 6.6% 6.6% 6.5 5.9 3.3 2.8 0.7 0.7 Zhejiang Express HK 6,279 10.4 10.0 5.6% 5.8% 5.3 4.6 -1.0 -1.3 1.4 1.4 Global toll roads average 12.2 11.2 20.8 4.9% 5.4% 5.6% 7.7 6.9 -10.7% 91.3% 742.0% 2.9 2.6 3.4 2.3 2.2 1.2

AGL Energy AU 10,843 15.0 13.6 12.7 4.5% 4.9% 5.2% 8.3 7.7 7.2 6.4% 6.8% 7.3% 1.8 1.5 1.1 1.2 1.1 1.1 APA Group AU 9,260 33.7 29.3 27.3 5.0% 5.4% 5.6% 13.6 12.9 12.0 6.8% 96.4% 6.7 6.3 6.1 2.3 2.4 2.5 AusNet Services AU 4,579 17.4 20.0 22.5 6.6% 6.7% 7.0% 11.7 12.1 13.1 2.4% 4.2% 3.5% 6.4 6.7 6.8 2.3 2.2 3.4 DUET Group AU 5,002 29.4 28.8 29.3 8.2% 8.6% 8.6% 5.2% 4.8% 6.0 1.6 1.7 1.9 Origin Energy AU 8,511 10.8 7.5 6.3 6.8% 7.9% 9.9% 9.2 6.3 5.2 -16.9% 4.9% 5.2 3.5 2.9 0.7 0.7 0.6 Spark Infrastructure Group AU 2,716 18.4 20.1 19.3 7.0% 7.0% 7.2% 10.0 10.4 12.1 7.8% 22.5% 15.4% 2.8 3.0 2.6 1.3 1.3 1.4 Regulated utilities average 17.9 16.0 14.8 6.4% 6.7% 7.2% 10.3 9.2 8.0 1.9% 23.3% 8.7% 4.8 4.2 3.9 1.3 1.3 1.4

BWP Trust AU 1,934 17.9 17.4 16.8 5.6% 5.8% 5.9% 6.5% 4.3% 4.6% 1.4 1.5 1.5 Scentre Group AU 19,727 16.2 15.7 15.1 5.7% 5.9% 6.1% 16.6 16.4 16.0 3.4% 1.9% 1.6% 5.9 5.9 5.9 1.1 1.1 1.0 Stockland Group AU 8,987 13.4 12.6 12.0 6.5% 6.8% 7.0% -4.0% 1.6% 3.0% 4.6 4.8 0.9 0.9 0.9 Charter Hall Retail REIT AU 1,533 12.7 12.4 12.1 7.2% 7.4% 7.6% 4.8% 6.0% 6.7% 1.1 1.0 1.0 Novion Property AU 7,508 Federation Centres AU 10,768 14.3 13.6 13.0 6.5% 6.8% 7.1% 15.1 14.5 15.3 4.8 4.8 4.2 1.0 1.0 0.9 Westfield Corporation AU 19,877 17.7 16.9 15.1 4.0% 4.1% 4.3% 20.2 20.4 20.7 -1.5% -3.5% -3.9% 5.8 6.0 6.3 1.6 1.4 1.3 Charter Hall Group AU 1,735 14.2 13.6 13.0 6.2% 6.5% 6.9% 5.8% 6.4% 1.5 1.4 1.4 Retail A-REIT average 15.0 14.4 13.7 5.8% 6.0% 6.2% 17.1 16.8 17.1 2.5% 2.8% 2.4% 5.3 5.4 5.5 1.2 1.1 1.1

ASX 200 AU 14.2 12.9 11.8 5.4% 5.7% 6.2% 6.5 5.9 5.5 3.0% 2.4% 2.3% 1.3 1.1 0.9 1.7 1.6 1.5

September09 2015

Source: IBES, Credit Suisse estimates

42

09 September 2015 Market price drivers The security has tracked the broad trend of the Australian equity market over the past ~5 years, but exhibited very low beta with greater proportion of large idiosyncratic moves. ~5% of three-day cumulative excess returns were greater than 3 standard deviations of the mean (-5.2% to +5.4%), compared to ~1% for other Australian infrastructure and transport companies. This is partly due to idiosyncratic moves persisting for longer, with longer persistence the larger the price move, e.g. up to three or five days of significant excess returns compared to one to two days post announcements. Positive idiosyncratic moves relate to takeover offers, management change and traffic as a whole rather than in regards to any particular asset, while negative moves on distribution cuts and borrowing difficulties reflects its high leverage model and use as a yield play. The outperformance over the past year mirrors that of other securities considered as bond proxies, e.g. airports, A-REITs.

Figure 63: Large share price moves Date Return Announcement 20-Jun-08 -16.5% $659mn placement at 7% premium and reduction of distributions 10-Jul-08 11.9% FY08 revenue up 9.2% with growth across all assets 05-Aug-08 10.5% 5 executives appointed and 3 executives resigned including the CFO 26-Nov-08 -14.6% FY08 AGM reiterates higher debt costs and difficulty of borrowing to part fund distributions 03-Apr-09 -9.6% 3Q09 traffic up 7.3% 05-Nov-09 19.5% 2 Canadian pension funds makes joint takeover offer for 100% of securities at 20% premium 13-Aug-10 8.3% FY10 EBITDA up 13% and FCF up 32% Source: Reuters, company data, Credit Suisse

Figure 64: Share price vs. ASX200 since listing 12

10

8

6 Price (A$) Price

4

2

0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 S&P/ASX 200 price index (rebased) Transurban

Source: Reuters, Credit Suisse

Transurban (TCL.AX) 43 09 September 2015 Shareholder base According to regulatory filings, the securities are held across a wider range of investment styles compared to other Australian transportation and infrastructure companies – across broad-based global, developed markets, Asian, Australian, index, infrastructure, growth, high yield and sustainability funds. The notable exception is the lack of holding within value portfolios. Although there is a wide breadth of managers internationally, Australian- and US-based managers appear to account for the greatest proportion of securities, holding at least ~46% of outstanding shares. ~85% of securities are held in large blocks among 269 investors, but the register is not top-heavy, with many similar sized interests of <1%. Free float is very high at 99.96%. The identified holdings by top 10 investors Vanguard and Blackrock are all part of index funds. There are only two substantial securityholders (>5% interest) – UniSuper (~11%) and CBA (~6%). UniSuper has doubled its holding since 2012 to become the largest substantial securityholder currently. Over the same period, RARE Infrastructure Fund, Future Fund and BlackRock sold down their former substantial holdings.

Figure 65: 10 largest shareholders Shareholder % interest UniSuper 11.02 CBA 6.37 Vanguard Group Inc 2.15 Bank Of New York Mellon Corp 2.09 Fidelity Management & Research 1.52 Blackrock Fund Advisors 1.39 CI Global Holdings Inc 1.11 Australian Foundation Investment Co 0.96 Colonial First State Investments 0.70 Amp Life 0.67 Total 27.98 Source: Bloomberg

Transurban (TCL.AX) 44 09 September 2015 ESG We see reasonable management of ESG risks but note the risk of workplace safety may heighten as operations and maintenance are brought in-house. Transurban's roads provide significant social benefits due to quicker travel times and higher road safety compared to the congested alternatives, in our view. Transurban's roads support and benefit from growing traffic levels, which generate higher per capita carbon emission footprint relative to alternative transport. However, the greater efficiency of its toll roads compared to the congested alternative urban roads (less stop/start of traffic) potentially results in lower emissions. The Board appears to have high external workloads. Disclosures are detailed and ESG governance appears more established with sustainability reporting for the past nine years, there is scope for greater disclosure on qualitative hurdles and outcomes. Environmental Carbon emissions Although it does not generate many carbon emissions itself, Transurban's sole reliance on volume-based revenue from road usage indirectly supports greater use of road vehicles, mainly passenger cars and trucks, which leaves a higher per capita carbon emission footprint compared to alternative transport such as public transport or rail. Rising temperatures and intense heat, rainfall and wind on climate change also increases the rate that roads deteriorate and can cause accidents. The roads have not been tested by extreme weather, and legacy assets may not have been designed to be climate-resilient. However, on a smaller scale, Transurban has taken some initiatives to reduce internal energy consumption with the use of energy efficient highway lightings. Further, there has been an increase in consumers shifting towards electric vehicles that reduce carbon emissions. Yet, with the lack of government subsidisation, it is still years before we would see significant penetration of electric cars into the Australian market and a considerable reduction in carbon emissions as a result. Land use Transurban has recently been active in working with local communities and government agencies to rejuvenate land affected by construction and upgrade work or surrounding land. There are two current initiatives in Australia – in Melbourne, to rehabilitate a site in the CityLink corridor with tree replantation and art installations, and in Sydney, to improve walking and cycling paths around the Hills M2 motorway. In the US, Transurban is planting 1,000 trees along the I-95 corridor to recover trees lost on construction, and has completed geological restoration including erosion, sediment controls and replantation to improve water quality near the 95 Express Lanes.

Transurban (TCL.AX) 45 09 September 2015

Figure 66: Carbon emissions by revenue Figure 67: Injury crashes 800 700

700 600 600 500 500 400 400 300

300 CO2 emissions CO2 (kt) emissions

200 $m CO2 perrevenue 200

100 100

0 0 FY09 FY10 FY11 FY12 FY13 FY14 kt of CO2 (LHS) tn CO2 per $m revenue (RHS)

Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research Social Community investment A total of $480k was invested in local communities during the year on causes that helped connect people (e.g. supporting Melbourne’s Asylum Seeker Resource Centre to establish a driving school for recent refugees) or address social needs for communities supporting our roads (e.g. the Roads To Work program in inner Sydney which aims to enhance the employability of residents that live in supported housing). Customer/road safety The geographical concentration to Australia and the US, which has relatively high compliance with road rules and low accident rates, contribute to minimise accidents that can lead to lane closures, traffic and volume loss. Most accidents involve merging and rear end crashes where drivers have to make a decision or there is an abrupt change in speed. Transurban has adopted technology-based in lieu of manual prevention, and monitoring systems such as electronic speed and lane control, specialist tunnel safety systems and automatic detection of incidents for a rapid response. As discussed earlier, the development of new technologies such as driverless cars could increase the level of road/customer safety, as it would eliminate the 90% of crashes that are currently caused by human errors. Labour relations and workplace safety Transurban maintains a small workforce of ~700 employees mostly in office or management functions, and the proportion of employees covered by collective bargaining agreements has trended down to 18% in FY14 (FY12: 30%). Whilst we have not identified any labour disputes, contractors for maintenance and blue collar operations are brought in-house as part of its longer-term strategy, and we expect the risk of reportable workplace incidents to increase. Diversity In FY14, 28% of the Board, 44% of key executives, and 47% of employees were women, but women still dominate lower level customer service and administrative functions (~80%) with the proportion of women decreasing to ~25% in higher management. Transurban partners with Ability Works Australia, Small, Women- and Minority-owned Business, Disadvantaged Business Enterprise, and Virginia Values Veterans to support employment of minorities, veterans and people with disabilities.

Transurban (TCL.AX) 46 09 September 2015

Figure 68: Workforce size and turnover rates Figure 69: Safety record in Australia 800 20% 8 700 18% 7 16% 600 6 14% 500 12% 5 400 10% 4

8% Turnover 300 3 6% Average Average headcount 200 4% 2 100 2% Events per million Events million hours per worked 1 0 0% FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 0 Average headcount (LHS) Voluntary turnover (RHS) RIFR LTIFR Involuntary turnover (RHS) Source: Company data Source: Company data Governance Board structure We view the Board and all Committees as comprising of a majority of independent directors and drawing on a breadth of financial, infrastructure, and large cap governance experience. Members also exhibit high external workloads compared to other boards of ASX 100 companies. The inclusion of members with legal experience, particularly in dealing with government agencies in Australia, would be beneficial to support its development strategy. In the past three years, we note that the CEO has attended all but two of the board meetings and sub-committee meetings.

Figure 70: Board skills analysis Member Position Gender Tenure Acct / Legal Infra. ASX100 Indep. (yrs) Finance Exp. Exp Exp. Lindsay Maxsted Chair & Non-Executive Director M 7.5 Y Y Y Neil Chatfield Non-Executive Director M 6.5 Y Y Y Robert Edgar Non-Executive Director M 6.1 Y Y Y Sam Mostyn Non-Executive Director F 4.7 Y Y Rodney Slater Non-Executive Director M 6.2 Y Y Y * Y Christine O'Reilly Non-Executive Director F 3.4 Y Y Y Y Scott Charlton CEO M 3.1 Y Y Y Average tenure 5.4 * Equivalent large cap experience in USA Source: Company data, Credit Suisse research

Figure 71: Membership of board committees and external workload Member Position Audit & Remun. & Nomin. Other current Other current Other current Risk HR Chairmanships Directorships Memberships Lindsay Maxsted Chair & Non-Executive Director Yes Chair 1 2 1 Neil Chatfield Non-Executive Director Chair Yes Yes 2 1 1 Robert Edgar Non-Executive Director Yes Chair Yes 1 3 1 Sam Mostyn Non-Executive Director Yes Yes 3 10 Rodney Slater Non-Executive Director Yes 4 2 Christine O'Reilly Non-Executive Director Yes Yes 3 2 Source: Company data, Credit Suisse research

Transurban (TCL.AX) 47 09 September 2015

Remuneration We believe the ~72% of remuneration at-risk and tied to high quality growth and total shareholder return is a reasonable proportion compared to ASX companies. However, we prefer greater weighting be given to LTI and less to STI as this rewards and incentivises longer-term performance, cost reduction targets set on a margin not absolute basis, and disclosures provided of objectives and outcomes for individual KPI hurdle in light of its high 50% weighting. We also believe LTI total return hurdles should be adjusted to reward top quartile performance by vesting straight line over the 75th –100th percentile rather than the currently vesting 100% once it has reached the 75th percentile; but this is an issue affecting ASX companies generally. We note the FCF per security hurdle was lowered from 12%–15% for the period FY. Our ESG analyst Sandra McCullagh has conducted a detailed review of Transurban's remuneration structure.

Figure 72: Structure of FY15 remuneration for CEO Type Portion Remuneration Fixed 40% $2.04mn base salary and superannuation STI 30% 0 - 150% of base salary and superannuation; 50% as cash and 50% as share awards deferred for 2 yrs LTI 30% 100% of base and superannuation as shares or an equivalent cash payment granted at end of performance period Source: Company data

Figure 73: LTI hurdles Objective Weight Performance period Measure % vest Total return relative to 50% 3 yrs from 1 July 2014 ≤ 50th percentile 0% median of 37 transport, through to 30 June 2017 50 - 75th percentile Pro rata straight line utilities, real estate, telecom and construction ≥ 75th percentile or higher 100% companies in ASX 150

FCF per security 50% 3 yrs from 1 July 2014 < 10% 0% through to 30 June 2017 10 - 13% Pro rata straight line ≥ 13% 100% Source: Company data

Transurban (TCL.AX) 48 09 September 2015

Figure 74: STI hurdles Objective CEO weight Measures % vest EBITDA growth YoY 20% < 1.7% 0% (excl. 495 Express 1.7% 50% Lane) Budget EBITDA $1239.4mn 100% ≥ 1.8% 150% Net cost decreases 20% > $267.5mn 0% (excl. 495 Express FY15 Target + $9.1mn 50% Lane) FY15 Target ($258.4mn) 100% FY15 Target - $9.1mn 150% Safety 10% Recordable injury More than FY14 rate 0% frequency rate (RIFR) Maintain FY14 rate 50% 25% Reduction on FY14 rate 75% Zero RIFR 150% Serious Injury More than FY14 rate 0% Collisions Frequency Maintain FY14 rate 50% Rate 3% reduction on FY14 rate 100% 5% reduction on FY14 rate 150% High potential events Failure to meet 50% target 0% and near misses Where Transurban has control, all incidents are reported, investigated with lessons 50% learnt and shared across the Group 50% target and zero overdue actions resulting from investigations and lessons learnt 100% 50% target , 100% target, and actions verified post 3 months after lesson learned 150% distribution Individual KPI 50% Operational excellence, strategy, people and leadership, financial discipline, customer satisfaction, project outcomes, succession planning, employee capability and diversity. Straight line vesting between 50 – 100% and 100 – 150% Source: Company data MSCI ESG Rating MSCI ESG Research awarded Transurban its highest rating of "AAA" (25 Sep 2014) and ranked it second highest among "Transportation Infrastructure" peers globally. We agree that Transurban presents lower ESG risks fitting of a high rating. Transurban benefited by top scores in all aspects except for corporate governance, for which it received an average score due to concerns of ineffective accounting in light of the high valuation multiples. There are no indications that Transurban is not in compliance with accounting standards, and we believe Transurban's corporate governance score should not be penalised for a shortcoming of accounting information generally as distinct from poor governance.

Figure 75: MSCI rating 11.0 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 Environment Social Governance

Stock Local Sector Country Global Sector

Source: MSCI, Credit Suisse estimates

Transurban (TCL.AX) 49 09 September 2015

Valuation impact Rather than applying a discount for ESG risks on its own, we factor in certain ESG-related issues such as labour costs within our financials modelling, which form the basis of our valuation and thus target price. We do not model for contingent liabilities such as reputational risks on noise concerns in the community or lack of employee diversity where we consider the occurrence to be remote or quantification not reasonably separable from operating conditions holistically.

Transurban (TCL.AX) 50 09 September 2015 Risks Key downside risks to earnings forecasts and thus target price include:

■ Higher real bond yields: A long weighted average expiry of concessions in 2043 means small changes in long-term yields to have significant effect when calculating present values. Unlike airports and regulated utilities which face price reset every ~5 years, Transurban's contracts are for the life of the concession. Price escalation is generally tied to inflation but four roads provide for minimum 4% p.a. increases.

■ Lower traffic growth: Road usage and traffic growth is leveraged to economic growth and employment in Australia and the US. Although proximity of assets linking key residential catchment areas to business districts provides some defensive stability, use of toll roads and express lanes by passenger vehicles can be linked to discretionary consumer spending. Economic downturn can also lower industrial activity and freight truck volume.

■ Decreased ability to access debt markets: Transurban is dependent on debt markets to refinance maturing debt and fund capital for growth. High leverage makes it vulnerable to widening credit spreads on refinance or reversal in interest rate trends. S&P's has downgraded Transurban from A- (negative) to BBB+ (stable) recently in Apr 2015, which is in line with Moody's Baa1 (stable) rating. An increase in rates also increases the ~10% of debt servicing costs it leaves unhedged.

■ Accidents: Greater incidence of accidents on the road network on increasing use over time, weather events damaging assets, or disruption to key roads nearby that connect to or feed Transurban's roads would create short-term disruption to network volume.

■ Urban planning: Convenience of nearby toll-free roads, promotion of public transport by government and non-government bodies, increased competition amongst toll roads, development of competing and feeder roads, and movement of economic activity away from city centres and creation of jobs in local regions in the longer term changing travel patterns diverts traffic from Transurban's network.

■ Regulatory action: directly reducing benefits to Transurban (e.g. revision of concessions, adverse tax) or indirectly through increasing costs of operating a vehicle by road users (e.g. fuel excise levy, insurance, stamp duty, congestion taxes, carbon trading) or weaker enforcement of infringement notices (e.g. budget cuts).

■ Climate change: Road transport such as passenger cars and trucks generate higher per capita carbon emission footprint. Increasing community focus on climate change may encourage higher use of more environmentally-friendly alternatives such as public transport, rail or bicycles and decrease traffic volume. Rising temperatures and intense heat, rainfall and wind also increases the rate that roads deteriorate. The roads have not been tested by extreme weather, and legacy assets were not primarily designed to be climate-resilient.

■ M&A integration: A number of acquisitions made in 2014 lead to Transurban now having majority or full ownership or 14 toll road concessions. Continued acquisitions at higher multiples or difficult integration hindering extraction of synergies may prove dilutive, particularly in the short term if the transaction is not immediately earnings accretive, and create further demands on management attention.

Transurban (TCL.AX) 51 09 September 2015 PEERs

Figure 76: Transurban PEERs RIC Name Relationship Relevancy Reverse Relevancy Sales Last Updated Country Region StDev Median MQA.AX Macquarie AtlasCOMPETITOR LOW UNRATED 04-Sep-2015 Australia Other SGEF.PA VINCI COMPETITOR LOW UNRATED 04-Sep-2015 France Europe APRR.PA Ste APRR COMPETITOR UNRATED LOW France Other ITO.AX Intoll COMPETITOR UNRATED HIGH Australia Other BOUY.PA Bouygues SUPPLIER HIGH UNRATED 04-Sep-2015 France Europe LLC.AX Lend Lease SUPPLIER HIGH UNRATED 04-Sep-2015 Australia Asia Pacific LEI.AX CIMIC Group SUPPLIER LOW UNRATED 0 04-Sep-2015 Australia Asia Pacific FLR.N Fluor PARTNER UNRATED LOW United States Americas Source: Company data, Credit Suisse research

Transurban (TCL.AX) 52 09 September 2015 HOLT® Applying key Credit Suisse Research estimates through the Credit Suisse HOLT framework results in an A$8.72 valuation for Transurban. The HOLT valuation uses 10 years of key Credit Suisse estimates to drive CFROI® forecasts, before a fade of CFROI towards the long-run average CFROI (~6%). The Credit Suisse forecasts results in a very marginal CFROI accretion over the five-year forecast period driven predominately by improved asset efficiency.

To access a scenario using Credit Suisse estimates for Transurban through HOLT Lens, go to: https://holtlens.credit-suisse.com/dal/T6cchsCPGoFjT6v

Figure 77: HOLT valuation

Source: Company data, Credit Suisse HOLT®

If you have any questions regarding the HOLT methodology or the scenarios contained within, please contact the Australian HOLT team:  Scott Chessum (+613 9280 1662 / [email protected]) or  Peter Jabour (+613 9280 1702 / [email protected])

Transurban (TCL.AX) 53

(TCL.AX) Transurban Figure 78: Western Distributor – unsolicited proposal to Victorian government

09 September09 2015

Source: Company data

54

09 September 2015

Companies Mentioned (Price as of 09-Sep-2015) AGL Energy (AGL.AX, A$16.71) APA Group (APA.AX, A$8.405) Atlantia (ATL.MI, €23.91) Aurizon (AZJ.AX, A$5.115) BWP Trust (BWP.AX, A$3.13) BlackRock Capital Investment (BKCC.OQ, $9.5) Bouygues (BOUY.PA, €34.7) CCR (CCRO3.SA, R$13.1) CIMIC Group (CIM.AX, A$24.32) Charter Hall Group (CHC.AX, A$4.395) Charter Hall Retail REIT (CQR.AX, A$4.055) Commonwealth Bank Australia (CBA.AX, A$76.49) DUET Group (DUE.AX, A$2.19) Federation Centres (FDC.AX, A$2.795) Fluor (FLR.N, $45.08) Groupe Eurotunnel SA (GETP.PA, €12.575) Hopewell Infr (0737.HK, HK$3.69) Intoll Group (ITO.AX^L10, A$1.51) Jiangsu Exwy (0177.HK, HK$9.31) Lend Lease (LLC.AX, A$13.645) Macquarie Atlas (MQA.AX, A$3.485) Novion Property Group (NVN.AX^F15, A$2.44) Novion Property Group (NVN.AX^F15, A$2.44) Novion Property Group (NVN.AX^F15, A$2.44) OHL (OHL.MC, €11.82) Origin Energy (ORG.AX, A$7.96) SIAS (SIS.MI, €10.18) Scentre Group (SCG.AX, A$3.855) Spark Infrastructure Group (SKI.AX, A$1.8475) Ste APRR (APRR.PA^L12, €42.63) Ste APRR (APRR.PA^L12, €42.63) Stockland Group (SGP.AX, A$3.875) Sydney Airport (SYD.AX, A$5.765) Transurban (TCL.AX, A$9.7, OUTPERFORM, TP A$11.0) VINCI (SGEF.PA, €57.74) Westfield Corporation (WFD.AX, A$9.83) Yuexiu Transport (1052.HK, HK$4.74) Zhejiang Express (0576.HK, HK$8.25)

Disclosure Appendix

Important Global Disclosures I, Paul Butler, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European rat ings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 201 2 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the rela tive attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, wh ich was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Transurban (TCL.AX) 55 09 September 2015

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cov er multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 55% (33% banking clients) Neutral/Hold* 30% (40% banking clients) Underperform/Sell* 12% (33% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform mo st closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determ ined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and- analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Price Target: (12 months) for Transurban (TCL.AX) Method: In setting our $11 target price for Transurban, we estimate fair value at $11 per share from a DCF based SOTP (WACC 7-8%) and a value cap at 4% forward dividend yield. We estimate Transurban's cost of capital at 7.0%. Our 8.3% cost of equity is based on a risk free rate of 5%, a 5% market risk premium and an equity beta of 0.65. We estimate the equity beta based on the maximum value from a set of regression analysis's at different intervals and frequencies of the Transurban share price versus the ASX200. We assume a long-term cost of debt of 5.5% and target gearing of 38 %. For the US toll road assets we assume a higher WACC at 8% to reflect the higher risk profile for less mature assets that are in a revenue ramp up phase. Risk: Risks to our view and $11 target price for Transurban include development/construction risk, debt refinancing risk, weaker traffic growth, raising equity to fund growth and higher cost escalation.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (TCL.AX). Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit- suisse.com/sites/disclaimers-ib/en/canada-research-policy.html.

Transurban (TCL.AX) 56 09 September 2015

Credit Suisse has sent extracts of this research report to the subject company (TCL.AX) prior to publication for the purpose of verifying factual accuracy. Based on information provided by the subject company, factual changes have been made as a result. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Equities (Australia) Limited ...... Paul Butler ; Gretel Janu CSEAL Analysts involved in the preparation of this report may be co-located with Credit Suisse Emerging Companies (CSEC) analysts. Important Credit Suisse HOLT Disclosures With respect to the analysis in this report based on the Credit Suisse HOLT methodology, Credit Suisse certifies that (1) the views expressed in this report accurately reflect the Credit Suisse HOLT methodology and (2) no part of the Firm’s compensation was, is, or will be directly related to the specific views disclosed in this report. The Credit Suisse HOLT methodology does not assign ratings to a security. It is an analytical tool that involves use of a set of proprietary quantitative algorithms and warranted value calculations, collectively called the Credit Suisse HOLT valuation model, that are consistently applied to all the companies included in its database. Third-party data (including consensus earnings estimates) are systematically translated into a number of default algorithms available in the Credit Suisse HOLT valuation model. The source financial statement, pricing, and earnings data provided by outside data vendors are subject to quality control and may also be adjusted to more closely measure the underlying economics of firm performance. The adjustments provide consistency when analyzing a single company across time, or analyzing multiple companies across industries or national borders. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes the baseline valuation for a security, and a user then may adjust the default variables to produce alternative scenarios, any of which could occur. Additional information about the Credit Suisse HOLT methodology is available on request. The Credit Suisse HOLT methodology does not assign a price target to a security. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes a warranted price for a security, and as the third-party data are updated, the warranted price may also change. The default variable may also be adjusted to produce alternative warranted prices, any of which could occur. CFROI®, HOLT, HOLTfolio, ValueSearch, AggreGator, Signal Flag and “Powered by HOLT” are trademarks or service marks or registered trademarks or registered service marks of Credit Suisse or its affiliates in the United States and other countries. HOLT is a corporate performance and valuation advisory service of Credit Suisse.

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Transurban (TCL.AX) 57 09 September 2015

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