Austock Still Buying MIG After Asset Tour

This story features TRANSURBAN GROUP LIMITED. For more info SHARE ANALYSIS: TCL

By Chris Shaw

Since the onset of the credit crisis last year the “Macquarie model” has come under question as to its sustainability when economic and market conditions are far less favourable and the market’s scepticism has filtered through to not only the share prices of Macquarie and its satellites but that of most infrastructure stocks on the market.

What hasn’t changed is the positive view of brokers covering a number of these stocks, with Macquarie Infrastructure Group ((MIG)) a prime example. The FNArena database shows seven brokers giving the stock a Buy rating, against just two Holds and one Avoid recommendation.

Value is apparently on offer as well as the average price target according to the database is $3.77, which compares to a current share price of closer to $2.30, while the stock is forecast to return a yield of a little over 9.0% in coming years.

With such an apparent discrepancy between the current share price and its then target of $3.80 broker Austock Securities undertook a global tour of the group’s assets to ascertain whether or not its positive view on the stock was well deserved, coming away with the conclusion this was indeed the case.

Following the tour the broker has retained its Buy recommendation, though it has factored in some impact from slower economic growth in both the US and UK and cut its price target on the shares to $3.50 from its previous $3.80.

In terms of the group’s assets the broker sees the 407 toll road in Toronto as the key given it offers a 108km highway through a highly congested area where there is ongoing population growth and urban sprawl to drive demand, while the group gets the benefit of falling real costs and some flexibility in terms of setting the road’s tolls.

The APRR in France also scored good marks from the broker’s analysis given it offers growth and cost cutting opportunities despite being a mature asset, while also delivering some taxation benefits. As well, the tour resulted in the broker making minor increases to its traffic forecasts for the asset.

On the flip side the broker has lowered its estimates for the M6 toll in the UK as it notes motorists there are fighting against any real increases in the tolls being charged. As well, Austock sees scope for increased competition as other roads in the area are upgraded, which supports the decision to cut traffic growth forecasts.

The broker is not alone in making such a move, as earlier this month Citi lowered its rating on the stock to Hold from Buy and its price target to $2.98 from $3.14 to reflect lower traffic volumes after Macquarie similarly trimmed its earnings estimates through to FY10.

Rising real tolls on both the Chicago Skyway and the Indiana Toll Road are not the problem but in Austock’s view both are located in weak growth corridors and US drivers are struggling with higher fuel costs, especially as the increases are significant in percentage terms coming off such a low base.

As a result Austock expects both roads will struggle in the shorter-term, particularly as competing roads are being upgraded at the same time. For the South Bay Expressway the biggest issue is expected to be enforcing the collection of electronic tolls as in terms of location, growth outlook and the setting of tolls the road appears a good longer-term asset in the broker’s view.

Even at the revised price target of $3.50 the stock promises an internal rate of return of a little more than 13%, which in the broker’s view supports a Buy rating. Having said that the broker prefers Transurban ((TCL)) at present given at current levels the latter is forecast to generate an internal rate of return of about 16.5%.

Shares in Macquarie Infrastructure today are slightly higher and as at 1.35pm the stock was up 6c at $2.31, which compares to a trading range over the past year of $2.16 to $3.95.

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