Australia | Feb 20 2012
– QR National interim a little below expectations
– Messy result with bad weather also impacting
– Outlook remains for growth in coming years
– Value the question as this growth appears priced in
By Chris Shaw
Interim earnings for QR National ((QRN)) were a little below market forecasts, the company delivering a messy result given some redundancy expenses, changes in depreciation methodology and mixed divisional performance.
Wet weather also played a part, Deutsche Bank noting this was responsible for reduced tonnages in Queensland. JP Morgan agrees, noting the conditions during the half are making it difficult to assess progress being made in delivering on productivity improvements in the coal haulage operations.
A positive out of the result was management at QR National has retained full year EBIT (earnings before interest and tax) guidance of $578 million. This has kept changes to broker earnings estimates for the full year to a minimum, adjustments to numbers largely reflecting some accounting and volume assumption changes.
Consensus earnings per share (EPS) estimates for QR National according to the FNArena database now stand at 219.8c this year and 228.2c in FY13. Adjustments to earnings forecasts have seen some changes to price targets, the consensus target according to the database rising to $3.73 from $3.56 prior to the interim result.
Among the brokers to revise their models post the interim result, targets range from Credit Suisse at $3.60 to BA Merrill Lynch at $4.45.
Longer-term, management has reiterated the view there are strong growth opportunities for QR National, while improvements in revenue quality can also be expected in coming years. While Credit Suisse agrees, the broker remains of the view there are corresponding risks to the growth potential on offer.
One area Credit Suisse wants to see improvement is in productivity, as delivery in this regard would leave the broker more confident in assuming a stronger earnings outlook given future increases to earnings are likely to reflect both growth and increased efficiency.
Deutsche Bank expects some evidence of cost reductions will become apparent over the next 12 months, while lower capex assumptions are also being factored into the broker's model. This supports the expectation of solid earnings growth in coming years.
The key issue discussed in the market in respect of QR National is valuation. As Credit Suisse and Deutsche both point out, there is little valuation upside from current share price levels relative to revised valuations for QR National, though Deutsche does suggest buying the stock on any pullback in the share price.
BA-ML is more positive, taking the view an extension of asset lives among QR National's fleet and a positive outlook on coal haulage margins should continue to deliver value. On this basis, BA-ML retains a Buy rating, which is matched by RBS Australia.
At the other end of the spectrum is JP Morgan, which retains an Underweight recommendation given the view potential good news on margins and lower capex is well and truly priced into the stock at current levels. This is a similar argument to that offered by Credit Suisse.
The only change in rating for QR National post the interim result came courtesy of Macquarie, who downgraded to Neutral from Outperform on the view the stock is simply too expensive from a shorter-term perspective. Overall, the FNArena database shows QR National is rated as Buy twice, Hold three times and Sell three times.
Shares in QR National today are slightly higher and as at 12.45pm the stock was up 3.5c at $3.715. This compares to a trading range over the past year of $2.85 to $3.89. The current share price is broadly in line with the consensus price target in the FNArena database.
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