Asciano Strategy Update Generates Mixed Reviews

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This story features BRAMBLES LIMITED.
For more info SHARE ANALYSIS: BXB
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

It has been a tough time since listing earlier this year for Asciano ((AIO)) as the ports and rail group has seen its share price fall from more than $11.00 in July to close to $7.00 last month as the market speculated the company intended to make a takeover offer for Brambles ((BXB)), which would require a significant capital raising.

In an attempt to increase the market’s level of confidence in the group’s strategy the company yesterday held an update and for ABN Amro the briefing was a good one as it should mark the beginning of a positive news cycle.

The broker rates the stock as a Buy, suggesting clarification the group doesn’t intend to bid for Brambles and will sell its underperforming grain operations will allow the market to again focus on the company’s growth prospects, which the broker sees as good.

ABN Amro’s forecasts suggest management’s goal of 20% annual total shareholder returns are achievable given both the organic growth apparent in the port and rail operations, and with potential for acquisitions to add to earnings both domestically and in international markets, particularly in the Middle East.

Deutsche Bank was similarly positive after the update, upgrading its rating to Buy from Hold given the solid outlook it sees for the group’s core operations as well as the potential from expansion into new markets.

Macquarie agrees and came away happy that the Brambles stake should be sold for no loss and the earnings guidance provided by management was a little higher than it had been expecting. On UBS’s numbers the earnings guidance matched its own forecasts.

Citi had a similar reaction to the briefing, maintaining its Buy rating while lifting its earnings estimates slightly to account for the group’s growth prospects. Despite the changes the broker remains at the lower end of management’s earnings guidance range.

It was Merrill Lynch that came away with a different view, downgrading the stock to Hold from Buy given what it sees as increased uncertainty rather than greater clarity with respect to the group’s direction.

The broker points out while management indicated the Brambles stake is no longer a core asset it also said the company fits all its acquisition criteria, so there is still no guarantee there will not be a bid at some point in the future, the broker argues.

Merrill Lynch also suggests the market may be a little disappointed in the fact there was not an announcement of any rail contract in Queensland, where the company intends to compete with Queensland Rail in the coal freight market.

While acknowledging there is value in the stock at current levels the broker suggests the lack of a clearly defined strategy offsets this, which is the basis for the broker’s decision to downgrade its rating.

Following the strategy update the FNArena database shows the company as rated Buy six times and Hold three times, with an average price target of $9.55, down from $9.77 prior to the briefing. By way of comparison Thomson One Analytics showed a pre-briefing median price target of $9.75.

Shares in Asciano today are weaker and as at 1.10pm were down 23c or 2.9% at $7.70.

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