citigroup, page-3

re: smith barney citigroup Australasian Investment Review
Lower Bond Rates Support Upside For Infrastructure, Utilities
Monday September 12, 2005, 10:06 am

Smith Barney Citigroup has lowered its forecast for the Australian 10-year bond rate to 5.5% from 6.0%, the change having positive implications for infrastructure and utilities stocks.

The broker sees upside in the sector as the prevailing long bond yield is closer to 5%, while updates to its risk-free rate assumptions for overseas assets and changes to currency forecasts have provided further cause for a positive view.

As a result the broker has compiled its ‘pecking order’ for stocks in the sector, with its top five stocks in order being Macquarie Airports (ASX: MAP.ax) , Macquarie Infrastructure Group (ASX: MIG.ax) , ConnectEast (CEUCA), Transurban (ASX: TCL.ax) and Australian Infrastructure Fund (ASX: AIX.ax) .

Citigroup rates all five stocks as Buy except Transurban, which it rates a Hold, while it has downgraded Alinta (ASX: ALN.ax) to Hold from Buy following a review.

The change to its bond rate forecast has had a positive impact on earnings for MAP, MIG and AIX, while the target prices on stocks across the sector have increased.

The broker’s valuation on Macquarie Airports is $3.90, but it notes there is upside to $5.45 when blue sky from property development potential is included.

For Macquarie Infrastructure the near-term catalyst would be a toll road acquisition in France, and while the broker notes additional equity would be required it expects the market would focus on the company’s growth pipeline going forward.

The broker suggests the attraction of ConnectEast is there is no acquisition risk in the investment given it is a single purpose company, while for Transurban the broker notes an important feature is the lack of any leakage in management fees.

In the broker’s view Australian Infrastructure offers the potential for higher distributions given operating cash flows are increasing and it still has potential to re-gear a number of its assets.

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