FYI....this stock is very very disappointing.ConnectEast Group...

FYI....this stock is very very disappointing.



ConnectEast Group (CEU.AX)
Hard Road
ƒæ Investment Opinion ¡X We think EastLink is a great asset and are optimistically
forecasting traffic growth of 21% by Dec 08 and 30% by Aug 09. Unfortunately
due to starting traffic figure coming 7% below our estimate, our whole traffic
ramp-up profile has been rebased down again. Consequently, our valuation has
been cut by 22% to 68cps (from 87cps). Note, there will be time to include the
blue-sky in the asset and buy the stock, but that time is not now. With default
risk looming, we retain SELL rating with lower TP of 58cps (from 70cps).
ƒæ Credit Risk Rising ¡X As CEU agrees, the company is already in distribution
lock-up for the next two years. However, our concerns are more serious on the
balance sheet side. With tolled traffic for the first month coming 27% below
PDS est (136K v/s 186K vpd) and average toll charges in-line with our est
($3.11 v/s CIRe $3.12ps), the credit profile of the asset is not encouraging.
ƒæ Okay For Now, But... ¡X CEU has sufficient cash to supplement shortfall in debt
service in the next couple of years, however, ICR on the stock is expected to
fall below 1.0x once that cash is used up. We are forecasting 16%, 10% and
8% pa growth in traffic over FY10e¡VFY12e respectively.
ƒæ Result was Non-Event ¡X FY08 loss of $13.6m (CIRe loss of $11.9m) was a
non-event. Although CEU is re-affirming DPS of 10.5cps until at least March
2010, we see pressure mounting on the Board to review it, especially if the
volumes do not pick-up.
ƒæ Earnings Change ¡X Please see Figure 3 for earnings change.

ConnectEast Group
Company description
ConnectEast is the concession holder of the 40km $3.8b EastLink toll road
currently under construction in Melbourne, Victoria. ConnectEast holds the
concession for a period of 39 years.


Investment strategy
We rate CEU Sell/High Risk (3H) with a target price of $0.58ps. The gradual
de-risking of the project as it progresses through the various stages of traffic
ramp-up should result in a lower risk premium on the stock.
Valuation
Our DCF valuation of CEU is $0.68ps using a risk-free rate of 6.0%. Our
valuation is based on traffic assumptions c27% less than that forecast by the
consortium, and a more conservative estimate on inflation (2.5% vs. 2.65%).
However, our target price of $0.58ps has been computed after ascribing a 15%
discount for high level of gearing and distribution quality.
Risks
We rate CEU High Risk, referencing a number of quantitative and fundamental
screens. Aside from interest rate risk which may impact our valuation, inflation
will impact both earnings and valuation given that toll charges on the road are
set to increase in line with CPI. Other risks include traffic risk, and risks
associated with changes by the State government to terms of the Concession
Deed.
Should the impact of these factors be greater than anticipated, the stock may
have difficulty achieving our target price. Likewise, if any of these factors
proves less of an effect than we expect, the stock could materially outperform
our target.