Australia | Jun 16 2009
By Chris Shaw
Since splitting from Toll ((TOL)) a couple of years ago the knock on Asciano ((AIO)) has been the debt on the group’s balance sheet and after a lengthy process of reviewing options the company has settled on a series of capital raisings totalling $2 billion that will leave it in a far stronger financial position.
The first raising involves a one-for-one share issue and placement at $1.10 to raise $1.0 billion, to be followed by a second raising requiring shareholder approval. What the capital raising achieves in the view of Deutsche Bank is it allows the company to avoid having to sell any of its major assets at what are currently the low points in the cycle, which would have been a less attractive long-term outcome for the group.
Post the raising the broker estimates group debt in FY10 will be down to $2.9 billion, a level it suggests addresses the market’s debt and balance sheet concerns as it will bring gearing down from around seven times to a more reasonable 4.2 times and so should allow market focus to return to the company’s earnings outlook.
Here the position appears reasonable as management has indicated EBITDA(earnings before interest, tax, depreciation and amortisation) will be $655 million this year, rising to something between $665-$700 million in FY10. The broker suggests the outlook shows how resilient the company’s pricing and cost outlook is, while also highlighting the volume growth on offer in the group’s key rail and port operations.
The share issue is dilutive to earnings and this is causing revisions to market forecasts and Deutsche Bank is no exception, as in earnings per share terms the broker is forecasting outcomes of 6.0c this year and 8.0c in both FY10 and FY11. This leaves it slightly above market consensus of 6c in FY10 and Merrill Lynch at 6.6c for that year and 6.0c in FY11. By way of comparison JP Morgan is in line with Deutsche Bank in forecasting FY10 EPS of 8.0c.
Despite the dilution to earnings, JP Morgan takes the view the opportunity to buy shares at the issue price of $1.10 represents very good value for investors, especially as in its view management’s earnings guidance for FY10 appears to be conservative.
Using mid-cycle EBITDA multiples it values the stock at $1.87, so it would be comfortable buying the stock on the secondary market at levels up to around $1.50, which is in line with its $1.47 price target. If the stock were to trade up to its valuation level the broker would look to lower its exposure.
According to Bank of America Merrill Lynch the theoretical ex-rights price for the stock is $1.30 and it considers it possible the stock could trade above this level when trading resumes. The stock would be expensive at this level, in its view, given the dilution to be experienced by the capital raisings, meaning no change to its Underperform rating and $0.50 price target.
This makes the broker the odd one out in terms of price targets as no other broker in the FNArena database has a target below $1.40. As an example, Macquarie has a price target of $1.60 to go with its Outperform rating as it expects improved confidence with respect to the company’s outlook as coal contracts in Queensland and New South Wales are completed and port contracts are renewed. GS JB Were is even more optimistic with a $2.00 target to support its Buy rating.
Deutsche Bank is the only broker to change its rating following details of the capital raising proposal, downgrading the stock to Hold from Buy. Overall the database shows the stock is rated as Buy four times, Hold four times and Sell once, with an average price target of $1.64, down from $1.72 prior to the issue. It is worth noting a few brokers in the database have not yet updated for the details of the issue, so there could be additional changes to estimates and price targets on coming days.
Currently Asciano shares are in a trading halt until tomorrow, having last traded at $1.83. This compares to a trading range over the past 12 months of $0.40 to $5.39.