the winner, page-3

whether the divie is coming the current valuation is fantastic according to the fol broker report:

Mezz debt cost may put distribution at risk
���� Financing all but in place & Stage 3 expansion very likely to proceed
Epic has received credit approval from the majority of its banking syndicate for
financing of SWQP’s Stage 3 expansion (~A$560m). Meanwhile, HDF has also
received credit approval for a subordinated note issue of up to ~A$230m to be
invested in Stage 3. As it stands now, Stage 3 will be ~40% equity-funded by HDF,
but HDF’s contribution will only be ~20% equity-funded, ranked under a new
layer of subordinated debt.
���� Average weighted cost of debt to be ~9.5%?
We estimate a weighted average interest rate of ~9.5% when all debt is fully
drawn. That means that the net interest and equity distributions absorb virtually
100% of cash flow. On our estimates we anticipate that distribution growth will
have to slow, more equity will need to be raised, or once construction is complete
debt will have to be refinanced. Estimates are reduced for higher interest cost.
���� Cutting the distribution to zero may have been better
Essentially, UBSe HDF with a distribution of ~$70 m per year, taking on a heavy
capex spend, which will require $230m of subordinated debt at an estimated cost of
~15% per year. The interest payment does carry a tax shield but cutting the
distribution by 50% or even 100% may have meant a lower sub-debt requirement.
����
Valuation & price target increased to $1.20 share. Buy.

We change our methodology to an average of 11X 2013e EBITDA discounted at
~12% back to 2010 and an NPV valuation. Maintain Buy rating.

Highlights (A$m) 12/07 12/08 12/09E 12/10E 12/11E
Revenues 122 119 119 127 132
EBIT (UBS) 65 47 57 58 60
Net Income (UBS) 16 6 35 43 47
EPS (UBS, A$) 0.084 0.030 0.099 0.089 0.092
Net DPS (UBS, A$) 0.269 0.280 0.120 0.124 0.120
Profitability & Valuation 5-yr hist av. 12/08 12/09E 12/10E 12/11E
EBIT margin % - 39.0 47.7 45.4 45.7
ROIC (EBIT) % - 10.4 7.9 5.1 4.2
EV/EBITDA (core) x - 12.8 2.5 -0.3 -3.5
PE (UBS) x - 73.1 10.8 12.0 11.5
Net dividend yield % - 12.8 11.3 11.6 11.3