Australia | Aug 08 2008
By Andrew Nelson
Securities analysts mostly responded positively to Asciano’s ((AIO)) maiden full year result, but most agree that clear skies won’t be seen until long standing questions about a much touted capital raising have been addressed.
A number of analysts were upbeat about strong growth in the company’s ports and rail operations and the signing of new Queensland coal contracts. At an operational level, it seems the company is delivering to the conservative end of management’s plan.
Other analysts were positively neutral, taking a wait and see approach, but talking about plenty of long term upside.
Underlying earnings for the year was $652.9m, comfortably within the range of $650m to $660m that management was shooting for. In fact, the results lead Citi analysts to say that Asciano “is finally delivering”.
And let’s remember, this result was delivered in a pretty tough market.
JB Were is one of the more positive brokers on the stock, saying FY08 earnings were solid and that the analysts were comfortable with future earning prospects, given the lack of surprises in the result.
The brokerage upped its call on the stock to Buy from Hold, stating such a defensive portfolio of assets is appealing in an increasingly uncertain earnings environment. It also put a target of $6.08 on the stock.
This compares with a range of $4.22 – $6.35 in the FNArena database. The database also shows three out of seven brokers with an opinion have the stock as a Buy. The other four are at Hold, with two of those downgraded from a Buy just this week.
If you take out the anomalous $4.22 (from UBS whose analysts have the most concern about future funding), the range narrows to just $5.10 – $6.35.
Clearly, Tuesday’s $4.40 per share low ball takeover approach from a team led by TPG Capital and a General Electric-backed fund has both put the company in play and put a short term floor under the share price.
Analysts at Citi, who kept their High Risk Buy on the stock, think the consortium will definitely need to up its offer. Citi also believes the suitors will most likely wait until Asciano more clearly spells it’s funding plans.
In reality, Asciano is carrying a crippling debt of more than $4.7 billion, and in the current climate, it will be tough to reduce.
The company has addressed some of these concerns in the short term by cutting its distributions and undertaking modest equity raising through a fully underwritten distribution reinvestment plan and a $100m share purchase plan.
But that just takes us to the end of next year. Then what?
It certainly isn’t enough for UBS, who moved its call down to Hold from Buy until the funding plans are clarified. Analysts there say that with FY10 so reliant on a yet unknown transaction to raise up to $1bn (a significant chunk of change in anyone’s book), the capital outlook for the business is still too mixed.
It’s a catch-22 then; the company needs to raise money to get a better bid, but the successful raising of funds will most like get the majority of brokers behind the company, probably boosting the share price and making the likely success of any future bid less likely.
All along, management has been saying that the preferred option would be to sell part of one of its current businesses. But what will it be and where will that leave the company?
UBS says management’s comments are intended to drum up interest in the in the ports business, which would then require the sale of a 15-20% stake. Citi believes it’s more likely that a 40% stake would need to be sold.
The process is likely to take six months or more and at best and at the end of it, the current buyer’s market is likely to see Asciano receive a discounted price for what will most likely be a much needed asset.
To put it simple: Asciano is not going to raise big money from selling dross, so no matter what ends up getting flogged off in the end, it is going to compromise longer-term prospects.
This is why most analysts have maintained their recommendation on the stock, while trimming target prices. They see Asciano as being a good story, but who knows how the next few chapters are going to turn out?