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Buy CEU - Impressive initial traffic (albeit lower toll) [CEU]


CEU; INFRASTRUCTURE & UTILITIES; Buy CEU - Impressive initial traffic (albeit lower toll)


CEU has reported traffic numbers for the first week of untolled traffic on EastLink.


ADT was 275,364, whilst the average toll was $2.61 (including GST).



Key message is that traffic appears to be very solid, whilst the average toll is fairly disappointing. However taking both into account, the likely revenue outcome should please the market and drive a re-rating of the stock. However it should be noted that there is a myriad of variables contributing to this view.


Whilst the ADT figure is clearly inflated given the road is currently free and also has a novelty element to it in week one, even if we adjust for this the normalised figure is likely to be above prospectus (and GSJBW) estimates. This assumes that traffic increases by 15% once schools resume, but equally decreases by 40% once tolls are introduced in month 1.


Most importantly, we believe that ADT will be significantly stronger than the expected result implied by the market.


Conversely, the average toll was well below prospectus estimates of $3.10.


Hence our estimates would suggest that CEU's revenue will be ~8% below prospectus estimates. We believe the current share price implies that the market is expecting initial revenue to be ~20 - 25% below prospectus estimates.


As a result, we expect the stock to bounce strongly as the market digests this positive news and the discount for the risk of a traffic disaster is removed from the share price.


Further Detail


ADT was 275,364, whilst the average toll was $2.61 (including GST).


The difficulty now is predicting the elasticity of traffic levels to the introduction of tolls later this month. By way of comparison, traffic on WestLink (M7) declined by ~42% during the first month of tolling whilst traffic on the Lane Cove Tunnel declined by ~33%.


However we believe the superior value proposition (ie tolls vs time savings) of EastLink positions it well for the bulk of traffic (>70%) to absorb the impact of tolls.


Taking a conservative approach, if we assume a ~40% decline in traffic following the introduction of tolls (but this is after boosting traffic by 15% post school holidays, so net decline is ~25%), based on week one untolled traffic we expect month one tolled ADT to be ~199k (vs ~185k implied in the prospectus) ie ~8% above prospectus.


However offsetting this is that the average toll of $2.61 is ~16% below the average toll of $3.10 assumed in the prospectus.


Hence the net revenue outcome appears likely to be ~8% below prospectus (assuming the average toll remains the same once tolling is introduced).


If we hold all other assumptions constant (eg school holidays normalisation, elasticity to tolling, ramp up profile), this revenue figure reduces our CEU valuation to between $1.50 and $1.60 (was $1.83).


Given we believe CEU is likely to trade at a 10 - 20% discount to DCF (vs TCL ~24%), we expect CEU to trade somewhere between ~$1.20 and ~$1.45 /security following the recommencement of trading.

12 Month Target Price: $1.40

Recommendation: Buy
Share price: $1.07