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Australian Financial Review : October 17th 2006
FBA 021 The Australian Financial Review www.afr.com Tuesday 17 October 2006 21 MARKET WRAP Investors catching up on ConnectEast BULLS and BEARS ROADWORKS Toll roads' average cost per km for full length trip Cars Cross City Tunnel Sydney Harbour Tunnel M1 Motorway Lane Cove Tunnel M4 Motorway M2 Motorway M5 Motorway M7 Motorway Melbourne City Link EastLink $ ConnectEast Share price, daily $ 1.35 1.30 1.25 1.20 1.15 Jan06 Mar May Jul Sep 0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 Henry Byrne Shares in Greenfields toll-road operator ConnectEast have surged to a record high amid speculation that industry leader Transurban will make a takeover bid. While most market watchers now dismiss the prospect of a bid any time soon, they remain comfortable recommending the stock despite the heady levels it has reached. Securities in ConnectEast surged 17 per cent to a record high of $1.33 a week ago as speculation mounted that multiple toll-road operator Transurban was considering adding ConnectEast's EastLink Mitcham- Frankston project into its portfolio. When funds management group Portfolio Partners, rather than Transurban, revealed it had built a substantial 5.12 per cent in ConnectEast on October 2, the takeover speculation abated. Despite falling about 2 per cent since the substantial shareholder notice was filed, ConnectEast's share price has remained near historical highs. The stock closed up 0.5¢ to $1.30 yesterday. Earlier this year the stock traded as low as $1.10. Some analysts say the market has finally begun to factor in some of its good news around EastLink's construction. ''The share-price rally obviously reflects the fact that the share price hasn't gone anywhere for quite some time but the fundamentals have improved,'' said Investors Mutual portfolio manager Jason Teh, whose firm owns 8 per cent of the shares in the group. ''It's a matter of catch-up.'' The EastLink toll road is considered to be ahead of schedule, which is a factor offering upside potential in the stock valuations of sharemarket analysts. Goldman Sachs JBWere analyst Alison Booth said that if EastLink opens six months ahead of schedule her valuation increases by 4 per cent to $1.60, and if it opens a year early this figure goes up to $1.66. Reiterating her short-term ''market perform'' and long-term ''buy'' recommendations, Ms Booth said despite the recent share-price increase ConnectEast was still trading about 17 per cent below her valuation of $1.54 for the stock. But the lacklustre performance of the stock before the recent bout of takeover speculation also highlights a broader difficulty that greenfields toll-road offerings like ConnectEast have in gaining traction on the sharemarket. This largely relates to construction risks. For instance, Equity Trustees analyst Zia Rahman said he had generally focused on other offerings in the sector because of the higher risks of a greenfields project. ''We generally have a greater interest in the groups operating existing toll roads with established traffic profiles rather than projects still in the construction phase,'' he said. So far ConnectEast has delivered on the right side of this risk equation, and the project has run essentially without a hitch since it was listed on the Australia Stock Exchange in November 2004. With the opening expected in November 2008, the firm is now two years into the project and the risk has reduced. This is a factor that investors such as Mr Teh say the market is gradually coming to grips with. Industrial development along the corridor of the road is also a factor enhancing the outlook, because it bodes well for the initial traffic numbers on the road. ''You've seen a lot of development around the Mitcham- Frankston area . . . it's a bit like the Western Sydney Orbital, which is owned by Transurban and MIG. There was a lot of industrial growth that sprang up around the road as it was being built,'' Mr Teh said. Also helping is the fact that EastLink is set to offer road users the cheapest journey on a per kilometre basis of any privately owned toll road in Australia once it opens. Another factor which could also offer upside for the stock is the possibility of an early debt refinancing to unlock funds which could be distributed to security holders. Ms Booth said there was a reasonable likelihood that ConnectEast would refinance its debt either leading up to or shortly after the road opening. ''If we assume that ConnectEast is able to drop its interest rate to 7.2 per cent [in line with Westlink's prevailing rate], then this could increase ConnectEast's distributions by [about] 6 per cent,'' she said. The prospect of a takeover is expected to continue to shadow the stock. ''Speculation regarding Transurban's intention to take over ConnectEast has probably been around since day one,'' Mr Teh said. Ms Booth said that while Transurban was the most likely acquirer of the group, it was difficult to imagine it making a takeover play so soon after missing out on the initial bid for the road. ''We believe Transurban [and any other potential acquirers] will be more interested in ConnectEast post-road opening and once an initial traffic pattern has been established.'' Axa funds load up on QBE, Zinifex and PaperlinX BUYERS AND SELLERS Major changes in holdings by substantial shareholders Source: Bloomberg INCREASES Shareholder ING Real Estate Ent Fund Reckson New York Prpty Trust ING Real Estate Service Stream Photon Group Zinifex QBE Insurance PaperlinX Mortgage Choice AMP Capital UBS Global Asset Management Macquarie Bank Thorney Capital Orion Asset Management Axa Asia Pacific/AllianceBernstein Axa Asia Pacific/AllianceBernstein Axa Asia Pacific/AllianceBernstein CBA/Colonial First State Previous % < 5.00 17.14 < 5.00 < 5.00 < 5.00 5.03 6.43 < 5.00 < 5.00 Holding % 5.15 21.33 5.61 5.28 5.26 6.39 7.53 5.16 6.52 Date Oct 12 Oct 10 Oct 11 Oct 10 Oct 12 Oct 06 Oct 06 Oct 06 Oct 11 Metcash Ansell Promina Downer EDI Ballarat Goldfields Mirvac Sonic Healthcare IOOF/Perennial Value IOOF/Perennial Value MIR Investment Management The Capital Group Credit Suisse Macquarie Bank Concord Capital 11.41 7.17 > 5.00 > 5.00 7.13 9.82 > 5.00 10.23 5.885 < 5.00 < 5.00 6.02 6.15 < 5.00 Oct 12 Oct 12 Oct 13 Oct 12 Oct 11 Oct 11 Oct 11 DECREASES Substantial notices Richard Hemming ''QBE has an enviable track record.'' A xa Asia Pacific funds have been among the most active buyers in the past month, increasing their stakes in QBE Insurance, Zinifex and PaperlinX. The purchase by Axa's fund manager, AllianceBernstein, of about 1.1 per cent of QBE Insurance, was worth about $200 million and raised the insurance group's stake to 7.5 per cent. At $24.20, QBE shares have risen 35.6 per cent in the past 12 months, driven by upgrades to analysts' forecasts. Most recently, the company has benefited from the absence of hurricanes off the coast of America. ABN Amro's Graeme Petroni said QBE's result for the six months to June indicated it was continuing to benefit from premium rate increases, which were ahead of its global peers. ''[These premium rate increases are] possibly due to the company's decision to maintain its participation in the retrocession market. While this may increase the risk profile, QBE has an enviable track record for risk management,'' he said. Axa Asia Pacific also announced on Friday that it had increased its stake in zinc producer Zinifex to 6.4 per cent, from 5 per cent, by buying stock worth about $80 million. At $13.10, Zinifex's shares have more than doubled in the past 12 months, benefiting from a zinc price that has performed similarly over the same period. In early September, Citigroup upgraded its earnings estimate for the zinc miner by 9 per cent in financial year 2007 due to higher zinc price forecasts, which are partially offset by higher Australian dollar forecasts. The broker said the major driver for Zinifex's profits for the next 12 to 18 months would be results from the stepped-up exploration program. In its purchase of PaperlinX, Axa has taken advantage of a share price that remains just over 25 per cent down over the past two years. Axa Asia Pacific announced it had accumulated a 5.2 per cent stake in the paper manufacturing company. At $3.77, PaperlinX's share price has increased 24.4 per cent since mid-August. Investors are betting the company's operations are turning around after management cut costs over the past two years. Following Suncorp's $7.8 billion bid for insurance group Promina, MIR Investment Management has taken profits. The fund manager said on Friday that it ceased to be a substantial holder, having sold about $13 million worth of shares a day after Suncorp announced its bid. At $6.95, Promina's share price has risen 17 per in the past week. JPMorgan analyst Shane Fitzgerald said that his $6.81 price target reflected a 25 per cent probability that the takeover would not proceed due either to a rejection from the Australian Competition and Consumer Commission or Suncorp itself being the subject of a takeover and the Promina share price falling back to pre-bid levels. Another notable substantial notice in the past week was Perennial Value Management's sale of Metcash. On Friday the fund manager reduced its stake to 10.2 per cent, from 11.4 per cent. The retailer's share price has risen 17 per cent since late June. At $4.37, Metcash's shares are trading on a one-year forward price- earnings multiple of almost 18 times, a premium to the average multiple for industrial companies of about 15 times. Deal frenzy puts index's May record in sight From page 19 its May lows to a record 2259.3 last Wednesday. But it has shed 2.6 per cent in the three sessions since then. Elsewhere, brokers noted that some money was flowing out of the financial sector yesterday to fund the purchase of resource stocks. QBE Insurance fell 39¢ to $24.20. Westpac was down 10¢ at $23.11. National Australia Bank fell 10¢ to $37.85. ANZ Banking Group was off 1¢ at $27.80. But Commonwealth Bank of Australia shrugged off early losses to finish 10¢ higher at $47. St George Bank also managed to buck the trend, rising 27¢ to a record $32.45. In the agriculture sector, GrainCorp fell 9¢ to $7.22 after it said it would incur a loss of $20 million to $30 million in 2006-07. Drought concerns continued to affect AWB, which closed 19¢, or 6.8 per cent, lower at $2.59 to become the worst performer on the benchmark index. Fertiliser producer Incitec Pivot finished 67¢ lower at $24.30. Coles Myer shed the right to a 22.5¢ dividend and was down 9¢ at $14.17. Woolworths rose 9¢ to $20.84 while Foster's Group rose 15¢ to $6.46. Golden Tiger Mining jumped 25 per cent to 10¢ following a drilling update on the Weilong gold prospect in China. Verus Investments soared 33 per cent to 14¢. The company announced in the previous session that it had entered a conditional agreement to acquire 74 per cent of the Vanamin vanadium project in South Africa.