Wednesday, June 3, 2009

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
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)


  1. June figures were out last week. That trend is not your friend.
    I'd give you good odds on 200k by March. Even if you excuse June as a blip that'll take 3% monthly compounding. Which considering history doesn't look likely.
    1/09/2008 140
    1/10/2008 147
    1/11/2008 142
    1/12/2008 145
    1/01/2009 134
    1/02/2009 153
    1-Mar 156
    1-Apr 150
    1-May 157
    1-Jun 154

    What happens if they're at 170k or so?

    Longer term, if you're predicting inflation, then what happens at the 2012 refinancing or the 2014 when they're predicted to need to borrow more? Just asking.

  2. Cheers Dean

    No arguments from me. I reckon it's unlikely that CEU will get there.

    Refer to a post on 8 July for some further thoughts - 170k is around cashflow breakeven.

    Bottom line for me - it's an attractive long term asset. It'd be interesting to see how their register is shaping up. Odds on that the retail continues to get out and institutional investors happy to get in. My guess is that this has put a floor under the price (for the moment at least).

    As to longer term refinancing needs, sure if inflation has set in, then good chance that longer rates will be heading higher. This will be bad not just from a debt reset perspective but also a valuation perspective. I'm expecting an opportunity to exit a little sooner than 2012 - it's a trade not an investment (difference being time and entry/exit triggers).