Sydney Roads Group

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.

Sydney Roads Group (SRG) have a Buy 1 shares recommendation and a share price target of $1.28 from stock analyst UBS. There could be a potential bid for SRG by TCL and both companies in trading halts pending material statements. UBS values SRG at $1.28 (based on 12-month DCF) and UBS estimates that TCL could extract about $10-15m pa in synergies (10-15c /per SRG security). TCL could pay up to $1.38 for SRG (assuming $250m debt + ~$10m pa synergies) resulting in accretion of ~35% to OpCF (FY07e 32cps) and about 1% to FY 07E DPS (54cps). The reasons that the analyst sees why TCL may bid are: (1) SRG's mature portfolio provides higher OpCF coverage for TCL. OpCF coverage would move to about 80% (from about 60%). (2) Better Sydney footprint with more exposure to LCT opening. (3) Strong position to drive tolling back office consolidation. However it isn'all blue skies, there are risks that the analyst foresees in any takeover move: (1) TCL may not have full control of the 3 roads (given minorities) and find it difficult to extract synergies. We believe TCL would be in a position to extract the most synergies from SRG; (2) Competing bid from CKI & Industry Funds Management, who we regard as potential interested parties; (3) Bid may be a distraction from US strategy. A previous stock recommendation for Sydney Roads Group (SRG).

Macquarie Research Equities (MRE) has released their recommended portfolio which is largely defensive and underweight resources. They noted that the US yield curve has turned strongly inverse with US labour costs accelerating – which should "tie the hands of the Fed until well into 2007". Because of this macroeconomic insight, MRE believes that it is " necessary to cut the resources exposure in the recommended portfolio to an underweight position via the removal of Rio Tinto.

Sydney Roads Group (SRG) is a listed fund that allows investors some exposure to an income from toll roads, a business that was once monopolised by the Government. The company is a spin off from Macquarie Infrastructure Group (MIG). The company's assets are as follows: a 71.4% interest in the Eastern Distributor, 50.0% in the M5 and 50.6% in the M4. As part of the deal - the Public-Private Partnership (PPP) model, the roads will eventually end up in public hands, with the M4 contract reaching maturity in 2010.

Sydney Roads Group (SRG) Broker Recommendations Summary

3/8/2006 Sydney Roads Group (SRG) Shares Recommendation

20/8/2006 Sydney Roads Group

Deutsche Bank have upgraded their rating for the SRG stock to Hold from Sell and the share price target has been lifted by ten cents to $1.05. The bank is not attracted to the company and sees better opportunities in the sector elsewhere. The upgrade in rating comes as a result of recent share price weakness.

Sydney Roads Group Limited is listed on the Australian Stock Exchange (ASX) under stock code SRG. The group owns and operates Sydney motorways. Check your charts!