The synergy of the toll road for TCL’s portfolio is apparent, with either 100% ownership or in strong joint ventures in the Hills Motorway M2, Lane Cove Tunnel, Eastern Distributor, the M5 and M7 it does make TCL a very likely buyer of the chequered infrastructure projects.
It is this chequered history that may stay the hand of board and has led to shareholders expressing concern, having significantly underperformed since inception and having never reached the original traffic flow targets and has seen four investors go by the waist side.
Current investors in the Royal Bank of Scotland (RBS), Leighton Holdings (LEI) and Eiser Infrastructure Partners bought the road out of receivership at the height of the market in 2007. This investment looks to have evaporated completely seeing the three investors losing their $300 million investment. RBS effectively double invested providing the loans for the road and is seeking to recoup $600 million loan through the sale of City Cross.
Macquarie believes TCL could pay up to the loan amount funded through a possible capital raising and the cash on the balance sheet. Macquarie estimate that City Cross could generate $35 million in EBITDA in FY14 and $43 million in FY15, and the fact TCL could send flows to City Cross off the congested Eastern Distributor would be mutually beneficial to customers and company alike as traffic numbers synergise.
The other future options TCL management would be considering are the new federal government proposals to upgrade road infrastructure in Sydney and TCL’s part in this development. If it can see synergies between the proposed government infrastructure projects and the City Cross the EBIT multiples may warrant the acquisition despite the history. So far the market has reacted mildly positively to the news.
Technically TCL has managed to hold above the 62% retracement level seeing the $6.58 mark become a solid support level. Near term resistance looks to be $7.54 with long term resistance the complete retracement of the 2007 high compared to the 2009 low at $8.49.
Fundamentally TCL does have a solid balance sheet and projects in Melbourne and Sydney are ramping up while US projects are gaining traction. We suggest buying dips or at market with a stop at $6.54 looking to be stopped out at 7.50 if the news is taken positively.