Transurban Group (ASX Code : TCL) - Rating : Buy 1/Current Price...

Transurban Group (ASX Code : TCL) - Rating : Buy 1/Current Price : $6.70/Price Target : $7.84
TCL has agreed with the Victorian Government on two outstanding matters:

The extinguishment of $2.9b of Concession Notes in return for a $609m payment with an implied discount rate of 9.7%. Sub-debt will be raised at 6.8% to fund this payment;
A $903m upgrade to the West Gate / CityLink / Monash Freeway corridor
The impact will be that TCL will invest $166m over 4 years (funded by DRP's). TCL expect an equity IRR of 11.1% - which is reasonable in our view. The balance of the funding will be provided by the State. We think this deal looks very sensible, but note the cautious reception by TCL's 3 major ratings agencies (S&P, Moody's and Fitch). TCL has under-performed the market by 31% over 12 months, despite a strong M7 opening, good operational peformance from CityLink and M2, and this positive deal. While bonds remain the major risk for our out-performance thesis we think TCL on a 12-month view can out-perform the market given all TCL's roads have inflation protection with-respect-to toll pricing. Our 12 month forward valuation and price target is $7.84, which implies 17% price appreciation. TCL remains one of our preferred infrastructure plays in the market on the back of an 8.1% FY07E yield (75% tax-deferred) with 5-year DPS CAGR of 8%, with further upside to be realised upon confirmation of the US strategy (potential US listing) over the next 12 months.