Australia | Jul 09 2012
– Qube Logistics is one of Australia's largest integrated logistics companies
– Morgan Stanley initiates with an Underweight rating
– Longer-term the company is well placed to deliver solid growth
– Broker suggests the risk is too much upside is priced into the stock too early
By Chris Shaw
Qube Logistics ((QUB)) is one of Australia's largest integrated providers of import and export logistics services and has operations at all capital city ports in the country. Over the past five years Qube's market capitalisation has increased from around $200 million to about $1.5 billion, driven primarily by acquisitions.
The company has three main divisions – Ports and Bulks, making up just over half of all operating assets, Landside Logistics at around one-quarter of operating assets and Strategic Assets. Among the strategic assets are a 67% interest in a property in Moorebank and 100% of a property in Minto.
Management is led by chairman Chris Corrigan, who has extensive ports experience given his former work with Patrick Stevedores, which was taken over by Toll Holdings ((TOL)) in 2006. Much of the management team previously worked at Patrick.
Morgan Stanley has initiated coverage on Qube with an Underweight rating within an In-Line industry view. While cyclically and structurally Qube is in the sweet spot of its growth cycle and there is both quality management in place and a solid long-term strategy, Morgan Stanley remains cautious on pricing in too much upside too early.
The market is doing this to some extent with the stockbroker noting its numbers imply a 40% earnings premium to peers in FY13 and a 30% premium out as far as FY15. Morgan Stanley's earnings per share (EPS) forecasts stand at 7c this year and 9c in FY13, which compares to consensus EPS estimates in the FNArena database of 7.4c and 8.5c respectively.
With respect to its forecasts, Morgan Stanley notes Qube is likely to be a beneficiary of the migration of container movements from road to rail. Longer-term, the broker suggests rail volumes could grow by around 16% annually over more than 10 years if the New South Wales government's rail target of 28% of container movements is achieved by FY20.
One issue is the future of the Moorebank site, as the federal government has decided to proceed with developing an intermodal terminal. Further clarity around participants in the development remain as much as 12 months away, while Morgan Stanley notes there is still uncertainty as to what role Qube could play in the project.
Assuming a share of 24% by FY20 and Qube not developing the Moorebank Intermodal Terminal but redeploying the existing site at book value generates a base case valuation and price target for Qube of $1.45 per share. The base case scenario also factors in margin improvement at Landside Logistics and further accretive acquisitions in the Ports and Bulk businesses.
Factoring in more optimistic assumptions generates a bull case valuation of $1.93, which Morgan Stanley notes is above existing price targets for Qube. The broker's bear case valuation is $0.89. The FNArena database shows targets for Qube range from UBS at $1.60 to Credit Suisse at $1.90, with a consensus target of $1.71.
Peer relative valuations with respect to Qube is a stumbling block for the investment case in the view of Morgan Stanley, as the broker argues there is better value elsewhere. While offering slightly lower capitalised annual growth in earnings for FY12-FY15 both Asciano ((AIO)) and Brambles ((BXB)) are trading on lower earnings multiples and consequently offer better investment value. Supporting this view is Morgan Stanley's assessment both offer better earnings visibility in coming years.
The market seems to agree there is better value elsewhere, as while Qube is rated as Buy once and Hold three times by brokers in the FNArena database to cover the stock, its Sentiment Indicator reading of 0.3 compares to Asciano at 0.9 and Brambles at 0.7.
There are some potential positives for Qube, as Morgan Stanley suggests the market would view positively further accretive acquisitions, additional meaningful contract wins and news Qube was moving forward with the Moorebank site.
But with the market pricing in further positives despite some uncertainty with respect to delivery, Morgan Stanley feels justified in rating the stock as Underweight.
Shares in Qube today are down slightly in a weaker market and as at 12.40pm the stock was 1c lower at $1.525. This compares to a range over the past year of $1.205 to $1.79, the current share price implying upside of around 12% to the consensus price target in the FNArena database.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
