Wednesday, July 8, 2009

CEU - price strength in the face of poor traffic

CEU's latest instalment of traffic for the month of June was hardly heartening. A 2% decline for the month, notwithstanding seasonal factors is not a good result for a road that s'posed to be 'ramping up' (a Macquarie inspired oxymoron to be sure).

Still the unit price has held firm. What is happening? Transurban ready to take the leap perhaps. There are circa $25m pa of synergies to be had. And TCL is trading at a premium to CEU - so a deal could be structured. Ultimately, it must happen. But it's anyone's guess as to timing.

Macquarie and GSJBWere have been talking their books again - suggesting that CEU will need to raise around $300m of equity to support the refinancing coming up in 2010. Their analysis is fair in that at ~155,000 ADT, CEU is unable to carry its debt burden. The question becomes will traffic ramp up through the second half to the breakeven level of around 175,000. And on the rough numbers we worked through previously, CEU needs to make it to 200,000 just to sustain the current 2c distribution. Food for thought indeed...

On the positive side, for a infrastructure investor the current unit price looks cheap. For a long term, deep pocketed investor (an industry fund looking to match its liability profile for example) - a brand new concession in a long term growth corridor with inflation indexed revenues is simply an attractive proposition. These types of investors are less concerned with near term cashflow distributions and more interested in asset IRR's. Austock has an IRR for the business (ie. before synergies for a trade buyer) of ~18% - caveat here, don't know what their assumptions are. In any event, you get the picture, CEU is a relatively attractive proposition for a long term institutional investor.

My relative interest in toll roads (and defensives generally) arises from their price action over the last six months. As prices have tracked lower, momentum has come out of the move. CEU and TCL appear to be trying to find a bottom. Consider the following chart of CEU.

The recent lows have held with rising volume - suggesting to me that buyers have been accumulating the stock. There is a momentum divergence from the March lows (as opposed to financials etc) that can be tracked back to the move through 70c in June 08. RSI similarly trending up while stochastics are turning but yet to break back through 80. And now we have prices stepping higher.

In all, there are the signs of a change in trend. For these reasons, I'm happy to continue to hold CEU.

As for TCL...have a look at its chart - it's displaying a few of the same traits. I've been hoping for a retest of its March lows...then it could get interesting.

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