I still expect ab equity raising within six months as they...

I still expect ab equity raising within six months as they really need to restructure their debt.

"No Imminent Move on ConnectEast Likely
FNArena News - July 08 2009

By Chris Shaw

As toll roads go ConnectEast (CEU) has had a somewhat disappointing beginning as traffic numbers have consistently fallen short of expectations, a trend that continued in June as headline traffic of 153,800 ADT fell short of market expectations. Stockbroker Austock, for instance, had a forecast of 159,000 ADT prior to this week's release.

As a result earnings expectations have been adjusted down slightly across the market. Though investors have to take into consideration that the road remains in ramp-up phase and is not actually generating positive income, thus the actual earnings implications are minimal at this stage.

What remains as an issue is the pace of traffic ramp-up as it pertains to the group's debt levels. Macquarie analysts note the revenues being generated are still not enough to cover the group's interest expense. This leads to a likelihood further equity will need be raised, the broker estimating anything from $200-$350 million could be required depending on what revenue assumptions are used.

Austock disagrees however, taking the view the company may not need to raise equity or at worst may look to raise around $300 million, though much will depend on whether or not it can get traffic levels up to breakeven of around 172,000 ADT before it needs to refinance around $800 million in debt by late 2010.

The debt issue means there is also scope for distributions to be suspended, GSJB Were suggesting such a change could come in FY11 and may continue through to FY15 as the company attempts to get its balance sheet and debt issues in better order than is currently the case.

Another issue for Macquarie is the group cannot begin repaying its debt early given a dispute with Leighton Holdings ((LEI)) over early completion clauses in its construction contract and with this issue seemingly not near a resolution at present the broker suggests any share price re-rating remains unlikely.

What could prompt a re-rating is speculation of a takeover for the stock by Transurban ((TCL)) given significant expected synergies from combining the two groups, synergies Austock estimates could total $25-$30 million annually. As well, Macquarie suggests at current levels there is some relative value in Connect East that Transurban may find appealing.

Austock agrees, estimating Transurban currently trades on an equity internal rate of return (IRR) of 13.4% against Connect East at 17.9%, which suggests significant value accretion if Transurban could acquire ConnectEast at 31c per share. Given this is unlikely the broker has done a similar comparison based on Asset IRR and estimates a similar Asset IRR for the two groups would imply a ConnectEast price of around 54c.

As such an analysis doesn't factor in synergy benefits, the broker estimates Transurban could pay up to an additional 14c per share at a stretch, giving a price somewhere around the 65c level. Such a price would see Transurban shareholders lose much of the synergy benefits though and so the broker argues a price closer to 55c is more likely, particularly given TCL's CEO, Chris Lynch, is unlikely to pay top dollar..

It notes any such offer from Transurban would be a scrip-based one given the group's balance sheet only has around $300 million available for acquisitions at present, GSJB Were arguing such a move remains unlikely given even a scrip offer would not address the potential need for an equity raising to reduce the debt levels within Eastlink and would be yield and potentially value dilutive for Transurban shareholders.

Given GSJBW views a takeover as unlikely, the broker persists with its Sell rating, while Macquarie is at Neutral and Austock rates the stock as a Buy. Overall the FNArena database shows five Buys, three Holds and only GSJB Were with a Sell rating. Austock is not included in this tally. The average price target on the stock is $0.476, down from $0.511 prior to the release of the June traffic numbers.

Shares in ConnectEast today are unchanged at 31.5c as at 12.40pm and have traded over the past year in a range of 25.5c to $1.10. "