Australia | Nov 12 2008
By Chris Shaw
For months the debt obligations of ports and infrastructure group Asciano ((AIO)) have been of concern to investors and analysts, but it took a downgrade from Buy to Sell from Citi yesterday to prompt a near panic in the market. The stock fell around 60% yesterday before its shares were suspended from trading.
Trading has recommenced today and the stock has soared by more than 40%, a re-analysis suggesting the panic selling may have been an over-reaction given the company is not yet in any breach of its lending covenants and there are no covenants related to the group’s share price.
Regardless, Citi has reiterated its view the stock is a Sell, as it expects the share price to remain volatile until there is a clear resolution of the group’s balance sheet issues. As well, the broker notes there are signs the company’s operating performance is starting to be impacted by the economic slowdown, as EBITDA (earnings before interest, tax, depreciation and amortisation) growth for the four months to the end of October was 6%. This is below the company’s guidance for 10% growth for the full year and well under the 18% growth generated in the first half of FY08 compared to the same period in FY07.
The broker expects the company to follow a monetisation program, with the first step to be the partial sale of the Pacific National coal haulage operations. On its numbers, the sale of a 50% stake would generate around $1 billion in funds or around $600 million in equity, which would then be used to start addressing the group’s debt situation.
As well, Citi notes the first half distribution will be deferred and the company will pay out only one distribution of 24-30c for FY09 on its numbers. The broker sees the need for further cuts to distributions in coming years as well. Overall, these factors suggest outperformance is unlikely and as with its report yesterday, the broker suggests investors cut their losses and re-invest elsewhere.
Deutsche Bank agrees the deferral of the first half distribution is a negative, but unlike Citi, Deutsche Bank continues to see value in the stock well above that implied by the current share price. The stockbroker agrees the company needs to raise money to address its debt position and is in favour of an asset monetarisation program, particularly given the current environment means any first bid is likely to be the best one as buyers are not exactly bidding aggressively for assets at present.
Deutsche had been forecasting a 13.9% increase in EBITDA for the year, but on the back of the update from management, it has lowered this to 5.4%. The new numbers now assume a recession in Australia. Macquarie is also cautious on container volumes for the company, suggesting signs of a downturn are likely to become increasingly evident after Christmas.
Deusche Bank notes the latest comments from management indicate they are well advanced in plans to bring in a financial partner at the asset level of the business, which the broker suggests would give the market some confidence in that it would demonstrate the value of the company’s assets.
On the back of its changes to estimates, Deutsche has dropped its price target to $3.80 from $4.65, which is well above Citi’s $0.82 target. The FNArena database shows an average price target of $3.73, which is down from $5.00 prior to Citi’s downgrade yesterday. It must be noted a number of brokers are yet to update their ratings or targets for the stock, so there is scope for the average target price to change further.
The database shows a total of four Buy ratings, four Holds and two Sells, with GSJB Were reiterating its Buy rating today and Merrill Lynch responsible for the other negative view, as it sees buyers as being in no hurry to make offers for the group’s assets. The broker suggests this limits the potential for any share price outperformance, as a re-rating is only likely to occur once the company’s debt situation has been addressed.
Today, shares in Asciano have been extremely volatile, but as at 1.30pm the stock was 30c or 43% higher at $0.99, which compares to a trading range over the past year of 49.5c to $8.87.