ConnectEast - performance versus expectations

Connecteast (CEU) has struggled with the rest of the toll road world to come to terms with falling valuations for leveraged assets.  It has the additional burden of being a relative newcomer - still operating in its 'ramp up' mode.  It released traffic numbers for May today, and consistent with a road building a client base, the traffic continues to build.  But are they good value around 30cents?

For a start, let's consider their free cashflow - that as the directors have said, will determine distributions after March 2010.  The following table summarises (very roughly) the key parameters:

	Current traffic	PDS traffic	For 2c dist'n
Avg daily trips	157,000	258,000	200,000
Avg gross daily toll	486,700	799,800	642,940
Avg toll/trip	3.10	3.10	3.21
Days	360	360	360
Annualised
Revenue	175.2	287.9	231.5
Opex	63.0	63.0	65.3
EBITDA	112.2	224.9	166.1
Interest expense	149.1	119.6	119.6
Interest income	25.5	7.1	7.1
Free cashflow	-11.4	112.4	53.6
Units on issue (m)	2554	2554	2554
Distribution	0.02	0.02	0.02
Distribution	51.1	51.1	51.1
Debt assumptions
Total debt	2024	1624	1624
Interest rate	7.37%	7.37%	7.37%
Interest expense	149.1	119.6	119.6
Cash	637	177	177
Interest rate	4%	4%	4%
Interest income	25.5	7.1	7.1

The quick conclusions are:

1) at current traffic volumes - CEU is not yet breakeven in terms of cashflow

2) if the traffic volumes as forecast in the PDS were realised - CEU could pay approx. 4c p.a.

3) to cover a 2c distribution - CEU requires avg daily traffic of around 200,000

(The assumptions 

- operating expenses of $63m were taken from the PDS - CEU's current run rate is in excess of this but there should be little excuse for exceeding the original forecast as the road moves to a steady state

- avg daily toll is indexed to inflation - for simplicity have only included the scaled up number in last column

- cash is reduced by $460m - being $400m to repay debt and $60m to cover cash shortfall across fixed distribution period.  I have ignored the effects of the DRP)

A word about the traffic assumptions - the real culprit here has been the initial assumptions used in the PDS.  The forecast was for average daily traffic volume of ~185,000 for the first month then stepping up to 258,000 over a 15 month period (to Oct09).  The actual experience had traffic starting at 135,000...  On the positive side, during the free trail period the ADT was 270,000 - so there is some evidence of underlying demand volumes.

So the question becomes - do you think that Eastlink will get to ~200,000 daily trips by the first refinancing period (March 2010)?  If yes, a 6.6% tax deferred yield that will grow as a function of inflation and population over its 45 year term seems like a reasonable proposition (and that is before the debt refinancing bonanza that Macquarie assumed in the PDS)... If not, then expect the price to come under increasing pressure as March 2010 rolls round and traffic fails to materialise.

(Disclosure - Long CEU)