The tolling system is being implemented by SICE of Spain. They have experience in implementing such systems in other areas of the world. Still dont understand (other than price no doubt) why the citylink system was not used. Surely easier to integrate and already a known quantity on Australian soil.
Other risk is also the tunnel fitout.
The contractors are however a proven outfit and are undoubtly working towards finishing the road as soon as possible. Let's wait and see.
Interesting article from Shaw stockbroking...
ConnectEast Group (CEU) is a single purpose entity created to build, own and operate the 39km Mitcham-Frankston Freeway (“MFP”) east of Melbourne until 2043. The vehicle was created in 2004, with construction of the road expected to be completed at the end of CY2008 at a cost of $2.5 billion.
The road is situated in Melbourne’s most populous eastern region and will intersect and lead onto some of Melbourne’s major arterial roads and freeways.
After Transurban’s CityLink, the MFP will be Melbourne’s only other toll road. With Hills Motorway under the Transurban umbrella and Sydney Roads expected to follow, ConnectEast now becomes the only listed small to medium tier toll road player.
Now potentially only 1.5yrs away from opening, the market should continue to rerate ConnectEast given its appealing traffic dynamics and the shortage of listed toll road stocks.
Key Points
• The MFP will be a 39km, electronic, multi-lane, free flow toll road from the Eastern Freeway in the eastern suburbs of Melbourne to the Frankston Freeway in Melbourne’s south-east. The Project will be designed and constructed by Thiess and John Holland under a fixed time fixed price contract.
• The road will have 17 interchanges, over 80 bridges and a twin three lane 1.6km tunnel under the Mullum Mullum Creek at the northern end of the road. Construction commenced in early 2005 and is expected to be completed at the end of 2008, although recent refinancing should see the road open earlier than expected.
Revenue Drivers – Traffic & Tolling
• Approximately half of Melbourne’s peak hour trips occur wholly or partly within the MFP corridor. Average Annual Daily Trips (“AADT”) within the MFP corridor in 2003 were 450,000 and are expected to grow to 494,000 by 2008 and 527,000 by 2011. Traffic modelling undertaken by Hyder consulting forecast AADT of 258,000 trips in 2008, 299,000 in 2011, 366,000 in 2021 and 388,000 in 2031.Tolls will be indexed with CPI .The road is split into a number of sections with differential tolling for each section, noting the tolling is skewed toward the entrance/exit to the eastern freeway where the majority of the trips are expected to occur. A trip from beginning to end will be capped at $4.43 in 2004 dollars. • The region contains 43% of Melbourne’s population with 1.5m people and accounts for 35% of Melbourne’s employment. The corridor also boosts limited public transport routes particularly for the outer suburbs, with only 2 main train lines leading into the CBD. Offsetting this is an extensive tram network, however this does not reach out to the outer eastern suburbs, travel times are also extensive. Furthermore, 85% of trips to work are made by car in the region.
• The major competing routes running adjacent to the MFP are Springvale Rd and Stud Rd. Both roads are congested in peak hour with each road containing 47 and 36 sets of traffic lights respectively. Springvale Rd also has two major railway crossings with both roads also being a very high accident zone. A trip from the north to south along the road is estimated to save 30mins.
• Traffic is largely expected to be commuter traffic during peak hour and commercial vehicles bypassing the congested adjacent Springvale & Stud Rd routes. Weekend and holiday traffic is also expected to be strong at the southern end of the road for those drivers heading to the Mornington Peninsula.
Construction & Tolling Technology & Operational Costs
• Construction will be under a fixed time/fixed price contract undertaken by John Holland & Thiess, both subsidiaries of Leighton Holdings. Construction is relatively low risk given the simple design characteristics and absence of any deep tunnelling work and the experience of the contractors having worked on many similar projects. The construction contractor under the design & contract agreement will subcontract the services of SICE, an experienced Spanish toll road technology provider, to provide an electronic free flow toll collection system.
• Operational costs consist of; road operations and maintenance, administration costs and tolling and customer service. Road operations and maintenance would be carried out by Transfield Services under an initial five-year contract, which is expected to be renewed. The contract cost will escalate with CPI. These costs will amount to approx $16 million upon road opening in 2009. Administration costs will largely entail costs associated with managing the MFP and increase with CPI and are expected to be $22.5 million in 2009. Tolling & customer service costs will include costs associated with collecting tolls, tag costs and IT costs. ConnectEast forecast tolling & customer service costs will be $25 million in 2009. ConnectEast is also forecasting a decline in tolling & customer service costs by 2014 and beyond.
Capital Structure
• Interest costs will be fully hedged until 2014, thereafter interest costs are forecast to be 80% hedged, we expect rates will be 100% hedged as is the ‘norm’ with other toll road operators. Distributions will be split into two phases, fixed distribution period ending 31 March 2010 and post fixed distribution period. During the fixed distribution period ConnectEast will pay semi annual distributions of 3.25c per staple unit. The first two distributions will be funded via equity raised in the offer, the rest being underwritten by a DRP. Following the end of the fixed distribution period in March 2010, distributions will be paid quarterly from available cashflows and DRP.
Recent Developments
• With 80-90% of bulk earthworks now complete, a substantial amount of risk has been mitigated during construction phase. Much work still needs to be completed, however, even if El Nino breaks in Autumn, rain should not affect project timetables, worst case scenarios would see project delivered to original timetable of November 2008.
• Traffic forecast group Hyder Consulting assume initial traffic to be 72% of steady state traffic with a 15 month ramp up profile.
CEU Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
