Australia | May 05 2014
-Competitive advantages lie with Asciano
-Fragmentation of third port operators
-No concerns re Asciano earnings
By Eva Brocklehurst
The third international Melbourne container terminal operating licence, at Webb Dock, has been awarded to a consortium which surprised the market. The winners are Philippines-based International Container Terminal Services Inc (ICTS) with 90% and former P&O Ports management-backed Anglo Ports with 10%. Brokers had expected Asciano's ((AIO)) upcoming competitor, Hutchison, and Qube Logistics ((QUB)) could be the winners. While additional competition will provide a challenge for Asciano, most brokers believe the decision supports the stock, resulting in the fragmentation of the third operator across the Australian stevedoring industry.
Work on the new terminal is expected to be completed by late 2016, although UBS thinks mid 2017 is more realistic for start-up, given natural project delays. ICTS is a global port operator with terminal operations in a number of emerging markets. Hutchison has a presence in Brisbane and Sydney and an alliance may be possible between the two, but it will not be the same as being the sole operator. UBS thinks Asciano is in the strongest position of the port operators, with an estimated 30% of eventual industry capital employed versus 40% of capacity. UBS believes Qube will have been disappointed to miss out, and still thinks container stevedoring is a logical industry for that company to enter, given 35% of earnings relate to land logistics of import/export containers. The broker also thinks this announcement makes an operational or equity alliance for Qube with DP World Australia, or Hutchison, as more likely.
To CIMB, Asciano's competitive advantages lie in providing services across four major ports. The broker believes stock is attractively priced for a company with solid earnings growth and a significant step-up in free cash flow that's coming over the next couple of years, providing capital management opportunities. CIMB is also of the opinion that the fragmentation of the third operator helps Asciano. Any significant discounting that comes from the others should have minor risk to earnings. Asciano's management has indicated that 80% of contracted volumes are secured through to FY17/18, implying risk to only 20% of the volumes until that time. CIMB expects 1.5% industry container volume growth for FY14, 3% for FY15 and 4.5% from FY16 onwards. As containerisation has run its course and a substantial portion of manufacturing is already offshore, CIMB thinks container growth rates are more likely to reflect GDP and population growth.
CIMB thinks Hutchison's ramp-up will eventually pick off market share evenly from both Asciano and DP World. With Asciano's improved service focus, the balance of risks is seen more for DP World, which has more contracts expiring in the next couple of years. Hence, CIMB does not think investors should be concerned about any decline in earnings for Asciano. Aggressive pricing from ICTS/Anglo may be a risk but CIMB thinks, from recent surveys, that shipping lines see risks in untried terminal operators and this could act as an impediment to the consortium securing meaningful volumes for some time.
The winners surprised CLSA but now the decision is done and dusted the broker thinks Asciano can return to a more balanced risk/reward analysis. CLSA had maintained there was excessive focus on the risks from Hutchison entering the market and this ignored the opportunity for Asciano that's been created by the Sydney redevelopment. The broker also notes Hutchison's Sydney terminal is clearly still in ramp-up mode, while Asciano has locked away more than 80% of customers until 2017. Moreover, CLSA believes Asciano's customer service is now up to 50% better than DP World in terms of berth movements. Another positive for Asciano is that it can increase market share prior to Hutchison gaining real traction. Along the lines of CIMB this broker also thinks, while Hutchison can align with ICTS for Melbourne services, the fact that it doesn't control a terminal in Melbourne makes it more difficult to compete.
Moreover, Hutchison is expected to avoid an aggressive price war as the company is aware that turnaround times are more important to shipping company profitability. At this stage, Asciano will not be pressured by global giants at a national level and won't face competition from Qube across integrated supply chains. CLSA has fielded queries from investors regarding gearing at Asciano but does not think it's too high. The broker is comfortable that the quality of the asset base, and the capital expenditure on upgrading assets, means there's now ample scope to absorb increases in interest rates or shocks to volumes over the next two years, even with increased dividends. CLSA finds Asciano compelling value and rates it a Buy.
On FNArena's database there are seven Buy ratings and one Hold (Macquarie). The consensus target is $6.30, suggesting 12.9% upside to the last share price. Price targets range from $6.00 to $6.80.
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