Australia | Feb 18 2013
-BA-ML initiates on Qube
-Brokers see solid growth
-Share price rally reduces upside
-Needs to show efficiencies
By Eva Brocklehurst
Two brokers have recently initiated coverage on container logistics company, Qube Holdings ((QUB)). The coverage is not wildly enthusiastic, more just a recognition of the work the company is doing to establish itself at the cornerstone of moving bulky goods. BA-Merrill Lynch has initiated with a Hold rating, noting Qube has potential to become a major player in Australian logistics. Strong container and automotive volume growth, strengthening bulk demand and a sharp improvement in operating efficiency are factors that would make BA-ML even more positive on the stock.
Citi also opened with a Hold rating and it's the uncertainty over the Moorebank site development that keeps the broker cautious. Citi notes there is potential for an earlier development of the Department of Defence's site. Defence recently indicated it will stay for another five years, but it's subject to the vagaries of federal politics and there's an election in September. Despite not factoring in Moorebank, Citi thinks the strong balance sheet and an improving rail share of port movements in Sydney mean Qube is well positioned for growth.
On the FNArena database there are three other Hold ratings (JP Morgan, UBS and CIMB). JP Morgan finds the stock fully valued while CIMB downgraded its recommendation to Hold from Buy when the stock traded through the broker's 12-month target price two months after it initiated coverage. The outlook remains positive but, because of the share price rally, the broker sees less upside potential for Qube compared with others the broker covers in the transport sector. Likewise for Citi, which initiated on Aurizon ((AZJ)) and Asciano ((AIO)) at the same time. Citi prefers Asciano, seeing it having greatest upside on a 12-month view.
Qube has three Buy ratings. Deutsche Bank initiated coverage back in October, impressed with the mine-to-ship solutions the company offered. It retains a Buy rating along with Macquarie and Credit Suisse, which are happy with the strong performance of the balance sheet.
For BA-ML, Qube operates a unique portfolio of key logistics assets along most points of the import/export supply chain and can benefit from an upturn in domestic trading conditions and it has the scale to also deliver value accretive acquisitions. Current softness in the domestic economy and uncertainty around global demand for bulk commodities drives the cautious recommendation. The strategic focus is on vertical integration, by stripping out the inefficiencies along the import/export logistics supply chain.
Current gearing is fairly conservative and suggests that Qube has sufficient funding capacity to capitalise on potential growth opportunities or acquisitions. The company has successfully transformed from an externally managed investment vehicle, with minority interests in assets, to an internalised operating business. One of the competitive advantages is the management and board, many of whom are former Patrick directors. The strategic investments from The Carlyle Group and Carlyle Infrastructure Partners (CIP) represent an endorsement in the strategic direction and management, according to BA-ML. Kawasaki and Wilhelmsen have also been awarded board seats and this will enable Qube to draw on their expertise in the global transport and logistics sector, aligning Qube with its two key customers.
The problem is Qube's multiples look expensive. At the share price of $1.72, it is trading on FY13 estimated price/earnings of 18.8 times, well above its peers such as Asciano which is 15.6 times. Forecasts for earnings growth, in the absence of acquisitions, is described by BA-ML as "solid but not spectacular". Risk also comes from any domestic economic slowdown or reduction in demand for Australia's bulk exports but, if management can drive cost cutting and improve asset utilisation, such that margin expansion is greater than forecast, then it will prompt BA-ML to conduct a re-rating.
The FNArena database shows a consensus target price for Qube of $1.82, or about 3% below today's trading price.
See also Qube A Logistical Choice on October 16 2012.
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