ConnectEast (CEU) reported its first week of traffic. The news was mixed with tolled traffic down around 50% on the first month traffic. The positive element in the news was truck traffic was above expectation with light commercial vehicles (LCV) and heavy commercial vehicles (HCV) double forecast, that is, at prospectus levels. Trip length appeared to in line with prospectus once adjusted for the mix change.
Impact
The numbers were below our expectation. We had hoped for 30-40% off initial opening numbers instead it appears to have coming in at 50% down with 133,722 trips during the week. The step down is consistent with M7 when it opened. From that base the M7 traffic grew 15% in first year and is averaging 9-10% in the second. Moreover, the M2 highlighted traffic can miss by 35% and still exceed the 10-year forecast.
We have modified our expectation for similar growth. Traffic following the forecast ramp up, ie year two traffic will be 17-20% higher. Over 2010 and 2011 we expect growth of around 5-10% across different sections, with longer term traffic numbers consistent with past. Offsetting the traffic decline is the strength of LCV and HCV. We have upgraded our expectations in this area that they remain at around 9.5% of the longer-term volume.
Based on these numbers we see only the business will use little of the $198m in reserves. We have factored around $24m of the $90m ramp up reserve being utilised, and possibly only one year of dividend lock up in 2011, albeit as they may also refinance then this may not occur. The current dividend of 10.5c is intact. 6.5c is supported by an underwriting program; the residual 4.0c is supported by $65m of unencumbered cash.
Earnings revision
We have revised our revenue expectation down 19% in 2009 and 27% in 2010 to reflect the new assumptions. earnings before interest, tax, depreciation and amortisation movements are greater. Longer run assumptions have not moved materially, the truck mix has actually added to the tail revenue.
Price catalyst
12-month price target: $1.03.
Catalyst: Ongoing traffic numbers growing at the ramp up rate.
Action and recommendation
We have further modified our target price from yesterday to reflect some changes in traffic and financing numbers. The impact is our target price range has increased to $0.98-1.08 per share reflecting a risk premium of 100-150 basis points, implying an Internal Rate of Return range of 11.5-12.5%, which is set at a risk premium of 100-200 basis points above the mature toll road company Transurban (TCL). Our net present value is approximately $1.35 per share.
We maintain our Outperform recommendation. Just as Hills Motorway (HLY) and TCL showed many moons ago, these stocks grow into their forecasts: CEU is unlikely to be any different.
CEU Price at posting:
0.0¢ Sentiment: Hold Disclosure: Held
