TCL

Transurban (TCL) has a share price target of $7.10 from Australian stockmarket analyst Macquarie Research Equities.

Transurban (TCL) The case for cutting distributions

Market already seems to be pricing the likelihood of a cut to distributions:

At $5.48, TCL is trading on an FY08E OpCF yield of ~4.4% & growth of 7.3% pa to FY20E (total return ~11.7% pa). This compares to an FY08E distribution yield of ~10.4% & growth of ~1.6% pa to FY20E (total return ~12.0%) on current profile.

Market no longer rewarding TCL for its re-gearing strategy:

Here is an update on the Australian infrastructure sector provided by Australian market analyst UBS.

Australian Infrastructure

Return to fundamentals on the horizon

Infrastructure & long-duration interest rate relationship broken...for now:

Transurban shares have a retained Hold, Medium Risk broker call and a higher price target of $7.83 from sharemarket analyst Citi Investment Research. Potential Takeover Valuation of $10.56ps, the analyst's looks at market's 'sentiment' cycle valuation of Transurban with top-cycle valuation of $9.34ps and low-cycle assessment of $7.35ps. Analyst has lifted their target price and align it with the mid-cycle valuation of $7.83ps (from $7.30ps). They believe that the takeover valuation of Transurban could be as high as $10.56ps. Nonetheless they retain a Hold/Medium Risk rating for the time being. Billions of dollars are being raised globally with dedicated mandate to invest in the infrastructure sector. With limited asset supply, the analyst's believe the attraction of an independent company with no management fee leakage, growth potential, and proven management looks obvious. Transurban fits the bill and could be vulnerable to moves by private equity investors. Transurban's balance sheet alone has the flexibility to take on additional $960m of debt. Together with observed equity betas of 0.55 and option value in the existing assets, a top-cycle valuation of $9.34ps does not look demanding. With no takeover offer on the table, the analysts see no immediate catalyst to unlock the balance sheet potential. While some of the option value and lower risk premium benefits are trickling through the share price, the analyst's are only prepared to ascribe value to what is in hand and in sight – mid cycle valuation of $7.83ps. Earnings Adjustment: As a result of successful acquisition of SRG, their earnings for Transurban have been adjusted upwards by between 5-19%.

Transurban Group (TCL) have a maintained Hold rating and a share price target of $7.30 (lifted from $6.87) from share analyst Citigroup Investment Research(CIR). The upgrade in the share price target has come after upgrades to traffic estimates, generous inclusion of synergies with Sydney Roads Group (SRG - A$1.34; 2M) and cut in the risk free rate to Citigroup's house view of 5.75% (from 6.0%). Although there may be room for profit taking in the near term they see support for the shares at current levels due to liquidity in the market and therefore maintain their Hold rating. After a shaky start in 1H06, traffic on CityLink has rebounded and expected to further grow by at least 1% pa to 4.2% pa in 2007 due to Tullmarine/ Calder Interchange upgrade. While CIR continues to remain bullish on Westlink M7, they have cut down their traffic estimates in the medium term. The tangible benefits of merger are offset by full price paid for SRG. However, Transurban's proven track record of working effectively with Governments means it may realize option value in the future. CIR estimates low option value on a risk adjusted basis. Growth in the US — Transurban's plan to launch an investment vehicle in the US to source local capital to fund growth should help it earn management fees, which could add up to 33cps to CIR's assessment – lifting their $7.30ps valuation to a blue-sky figure of $7.63ps. As a result of upgrades to traffic projections, their forecast losses for the group have been reduced by 3%-6% from FY07e to FY09e respectively. EBITDA is set to grow with CAGR of 17% pa until at least FY10e.

Transurban Group (TCL) have a Buy 1 shares recommendation and a share price target of $7.91 from stock analyser UBS. Transurban (TCL) have announced a scrip or cash offer for Sydney Roads Group (SRG). At today's $7.57 TCL close the scrip bid (1 TCL for 5.7 SRG) is worth $1.33 to SRG holders. The cash offer is $1.32 / SRG security with a $500m limit (40.6% of the offer). Neither option gets adjusted for the 1H07 SRG distribution of 3.935cps. UBS sees that by Transurban investing in SRG it provides the Australian listed company with: (1) A mature toll road portfolio and more diversification; (2) A material uplift (30-40%) in OpCF / security; (3) An improved Sydney footprint; (4) Improved positioning to participate in tolling back-office consolidation in Sydney; (5) Better scale to expand in Australia and overseas; and (6) improved interest coverage. And then there are the risks: (1) TCL mgt have not started discussions with ED / M4 / M5 minorities, but will clearly want them on side at least for a back-office overhaul, preferrably a full consolidation; (2) A competing bid, which we see as unlikley given SRG Board reccomendation, and $12m break fee. Meanwhile another stock analyst, Citigroup Investment Research (CIR) have raised their target price for Sydney Roads Group to $1.34 per share while lowering their recommendation to 2M (previously 1M). On the other hand, they have maintained their 2M rating for Transurban with a share price target of $6.87. In CIR's books they see mild value accretion for TCL, but they see further upside from potentially higher cost savings and better asset optimisation including M5 widening. TCL expects the deal to be cash flow accretive, however, its FY08e distribution guidance of 57cps (CIRe 57.2cps) does not depend on the successful completion of the merger.An exposure to TCL’s high-growth domestic portfolio and expected 22%+ distribution upside over the next 18 months are clear positives for SRG shareholders. However, involvement in TCL’s US growth strategy raises the overall risk of investment.