Macquarie Infrastructure Group (MIG AU) is an Australian-based investment fund focused on toll road investments in developed countries. Listed on the Australian Stock Exchange (ASX) and capitalized at c.A$3.3 billion (c.US$3 billion), it is one of the world’s largest private developers and operators of toll roads, with a portfolio of nine toll road investments in six countries based on long-life concession agreements – four in the US and one each in Canada, the UK, France, Germany, and Australia. Prompted by persistent underperformance of the MIG share price, notably since the start of 2006 (as shown in Exhibit 1), the company, backed by its shareholders, will split into two separately listed entities – Intoll (ITO AU) and Macquarie Atlas Roads (MQA AU). Completion of the process is scheduled for February 9, 2010, when both entities will commence trading on the ASX.

Intoll, which will comprise the more stable assets, has a more predictable basis for valuation than MQA, which will contain the riskier but potentially higher-growth asset portfolio. Based on peer comparisons, we believe the Intoll stock should at least initially trade in the A$1.20-A$1.40per share range, representing a discount to pro forma NAV in the 20%-30% range, lower than the current discount of c.40% at which MIG is trading. There is potential for share price upside from continuing enhancement of NAV, which has grown at an annual rate of c.12% since fiscal year 2003. Moreover, Intoll could qualify as potential takeover target if the discount to NAV is deemed too wide.

While there are arguments to justify the suggestion that MQA deserves to trade at a steeper discount to its NAV than Intoll, the degree of the appropriate discount remains a highly subjective judgment. Based on our valuation range for Intoll, and taking into account the A$0.10 per share special dividend to be paid out by MIG as part of the restructuring, the MIG share price (A$1.48 as of January 22, 2010) appears to be valuing MQA at no more than A$0.18 per MIG share range (A$0.90 per MQA share). This would represent a discount in excess of 70% relative to the pro forma valuation for the company as of December 31, 2009. We would anticipate an overhang of MQA stock from risk-averse MIG shareholders and funds restricted by MQA’s market capitalization limitations (less than A$1 billion). However, should the share price trade at the levels that we estimate are implied by the prevailing MIG share price, we would regard this as a strong entry point for investors with a high risk tolerance, as it would, in our opinion, represent a relatively cheap option on improving global credit market conditions and a bet on the successful refinancing of MQA’s assets.

CSR Limited (CSR AU), capitalized at c.A$3 billion (c.US$2.8 billion), is a leading diversified manufacturing company based in Australia, with exposure to sugar, renewable energy, building materials, aluminum, and property. Preparations for the separation of its sugar and renewable energy operations (Sucrogen) from its Australasian building products, aluminum, and property businesses, in the form of a pro-rata tax-free share distribution to its shareholders, are at an advanced stage. Although the Australian Securities and Investments Commission (ASIC) has delayed a court hearing to approve CSR’s de-merger proposals originally scheduled for mid-December 2009 until mid-January 2010, requesting more time to review the information concerning liability claims related to CSR’s legacy asbestos business, the company’s management remains confident that ASIC approval will be granted and that the de-merger of Sucrogen can be expedited by the end of March 2010.

The de-merger of Sucrogen, should it proceed according to schedule, appears to be conveniently timed. Indeed, preparations for the de-merger are occurring at a time when sugar prices are trading at multi-decade highs amid a backdrop of weather-induced supply tightness in the key sugar-producing areas of Brazil and India. At the same time, the unbundled parent, with its principal focus on building products, stands to benefit from encouraging lead indicators pointing to a recovery in Australia’s housing market.

CSR’s share price has recovered by c.20% since mid-December 2009, doubling the gains seen in the broader Australian market. This follows a period of share price weakness in the wake of a rights issue executed to facilitate the proposed de-merger. Our valuation analysis for both Sucrogen and the unbundled parent company arrives at a fair value for bundled CSR of A$1.87-A$2.00 per share. In light of the recent strength in the share price, we believe the current valuation (A$1.965 per share as of January 11, 2010) fully reflects the de-merger. Given this, we rate CSR NEUTRAL ahead of the planned de-merger and would consider buying the stock if the share price were to return to below A$1.65 per share, for a potential return in excess of 20%.