CEU 0.00% 54.5¢ connecteast group

ubs price target

  1. 2,382 Posts.
    i got this from a UBS e-mail.


    CEU.AX - PRICE TARGET: $1.60

    Traffic to come into the headlights

    1H08 result reported NPAT $0m in-line with expectations:

    Given the road is in construction phase, the 1H08 P&L is not meaningful (no revenues & construction costs capitalised). Cash flows (previously reported) were in line with accelerated construction progress. As previously advised, distributions have been increased to 10.5c (5.25c for the half 1 Oct 07 - 31 Mar 08) until 2010.

    Early road opening (mid 08) reiterated, construction de-risking:

    Management have reiterated that they expect the road to open in mid 08, ahead of the Nov 08 target date. We are forecasting traffic commencing in Jul 08 (5 months ahead of schedule). With construction well advanced, project risk is all but diminished (assuming tolling system operability) and focus will turn to traffic. We assume 90% of PDS traffic forecasts over 15 month ramp-up period.

    Early opening incentive and Macquarie put/call option on balance sheet:

    Given construction progress is well ahead of schedule, CEU have made a provision for an incentive payment (early completion bonus) of ~$53m (UBSe $55m) to be paid to Leighton Holdings (~70% of post ramp-up EBITDA, for early completion period). We note this is capitalised rather than expensed. CEU has also provided for a $50m payment to Macquarie for the put/call option instated at IPO. We currently model this as an equity issue to Macquarie of ~31m securities in FY10.

    Valuation: $1.47 (spot DCF) / PT $1.60 (12-month roll forward)

    Our current DCF valuation is $1.47 (assumes a risk-free rate of 6.5% & an equity risk premium of 3.5%) & 12-month PT is $1.60 (12-month roll-forward & equity risk premium of 3.25%). We retain our Neutral rating.

    Note how they only assume 90% of the traffic forecast in their valuation!!!

    So if traffic is within the 1% of forecast as suggested recently by management then it would have 10% more income and the DCF would be $1.63 and the price target would be $1.81.

    If they then use a lower discount rate, rather than 10% the valuation would be even higher.
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