Australia | Jul 16 2012
– Queensland coal haulage volumes down
– Implies downside risk to QR National earnings
– Haulage contracts/pricing at risk
By Chris Shaw
In 2011 Queensland coal volumes were low as a result of mine constraints in the aftermath of the severe flooding in the state, but as Goldman Sachs notes this low volume trend has continued into 2012.
There are two reasons for this in the broker's view, weaker demand and industrial action at BMA operations. BMA is the BHP Billiton ((BHP)) -Mitsubishi Alliance, which operates seven mines in the Bowen Basin.
At the same time, BMA has gone ahead with a decision to purchase 13 locomotives to meet growth tonnage going forward. The new locomotives will service the Caval Ridge and Duania mines and operate through Hay Point Port.
While the news has no impact on existing contracts between BMA and coal haulage plays such as QR National ((QRN)), it does highlight potential downside risk to contract renewals going forward in the view of Morgan Stanley.
At present QR National and others such as Asciano ((AIO)) are in negotiations with BMA for contracts relating to 55 million tonnes of existing BMA capacity currently contracted to QR National and expiring in 2015/16. Morgan Stanley suggests the BMA decision to purchase its own locomotives will add to market concern over the ability of QR National to maintain these contracts.
The move could also reduce some of QR National's current advantage over peers, which reflects a lower cost of capital given its existing fleet base. While BMA may be making the move to strengthen its negotiating position with respect to the contacts, Morgan Stanley sees the move as shifting earnings risk for QR National to the downside.
BA Merrill Lynch agrees, seeing the move as putting QR National on notice with respect to existing contract volumes. Changes in agreements with BMA could be substantial, as BA-ML estimates current contracts with the group account for around 29% of QR National's total contracted volumes. At present BA-ML expects around two-thirds of these contracts will be retained with some re-pricing benefits.
Given the risk to volumes going forward BA-ML has factored in conservative assumptions for QR National's haulage volumes in coming years. From a currently contracted level of around 225 million tonnes in FY13, growth to just 240 million tonnes is forecast for FY16.
This outlook has BA-ML forecasting earnings per share (EPS) for QR National of 14.9c this year and 22c in FY13, which compares to consensus estimates according to the FNArena database of 14.9c and 20.5c respectively. Goldman Sachs is not in the database but has lowered its EPS expectations for QR National, to 15.9c and 22.4c respectively.
The new forecasts represent cuts of 1-6% from previous estimates and Goldman Sachs has similarly trimmed estimates for QR National competitor Asciano (AIO)). Post the changes to its forecasts, Goldman Sachs continues to rate QR National as Neutral, reflecting not only the potential for weaker volumes but scope for the Queensland government to further reduce its stake in the company.
Morgan Stanley is also not in the FNArena database and also rates QR National as Equal-weight within an In-Line industry view. This is due to the shift to downside risk to earnings from the BMA decision to purchase its own locomotives.
Among the more positive is Deutsche Bank, which has upgraded to a Buy rating on QR National from Hold previously. The change comes after the broker factored in the recent annual update of energy and mining consultant Wood Mackenzie's coal production forecasts, which imply a reduction of 9.4% to FY14 haulage volumes and a long-term fall of around 4% annually.
In Deutsche's view the current QR National share price is implying FY12 volumes will be the peak for the next decade, an outlook that is too pessimistic in the broker's view. Another potential positive for Deutsche is scope for QR National to buyback around $750 million of the Queensland government's stake in the company, a move it suggests would remove much of the overhang of this shareholding.
Deutsche has a price target for QR National of $3.85, which is right in line with the consensus target for the stock among brokers in the FNArena database. Targets range from JP Morgan at $3.62 to Macquarie at $4.30.
Overall the database shows QR National is rated as Buy three times, Hold twice and Sell twice. JP Morgan argues the Sell case within the sector by taking the view valuation is not compelling given the downside risk to earnings from changes to volumes hauled for BMA.
Shares in QR National today are stronger in a higher overall market, the stock up 13c at $3.31 as at 1.15pm. This compares to a range for the past year of $2.85 to $4.03 and implies upside of around 17% relative to the consensus price target in the FNArena database.
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