Australia | Apr 22 2015
-Efficiency benefits continue
-Scale gains from rail integration
-Port Botany activity to ramp up
By Eva Brocklehurst
Rail, terminal and port contractor Asciano ((AIO)) revealed some positive trends in its March quarter update while brokers welcomed an affirmation of FY15 guidance. The company continues to expect free cash flow to improve and drive dividend growth.
Guidance was reiterated for underlying earnings growth to be higher in FY15 than FY14, supported by the efficiency benefits from the integration of PN rail, along with modest volume improvements. Coal tonnage increased 3.1% on the prior corresponding quarter although volumes did slow heading into March. Management has signalled automation of Port Botany is complete and activity is ramping up. Container lifts increased 3.7% year to date. Deutsche Bank anticipates increased regional footprint and scale emanating from the joint venture between Patrick and ACFS, as this is integrated with the existing logistics capabilities.
The Terminals & Logistics performance was better than Citi expected. Coal tonnage was down by 6.8% in NSW but up 12.1% in Queensland. Coal export terminals recorded growth of 3.9% in NSW and 6.3% in Queensland. Citi continues to envisage strong free cash flow for Asciano, which should drive higher pay-outs ahead of any acceleration in economic volumes. As the company has strong market positions in each of its core business its re-rating is linked to an increase in economic activity. Despite some recent re-rating of the stock, Citi considers the current share price still offers attractive upside on a 12-month view.
UBS is pleased the automation of the Sydney container terminal will provide support for productivity targets in FY15 and FY16. Containerised divisions grew 2-4% in the quarter, despite the disruptions from the redevelopment of Port Botany. Despite the drop in utilisation, coal railings grew around 5.0%, reflecting a more sustainable growth rate after a period of strong contract momentum. UBS has maintained its forecasts and expects 7.0% earnings growth and 19.0% dividend growth going forward. The broker believes this stock is good value and retains a Buy rating.
Coal volumes were soft but freight was in line with Macquarie’s expectations. NSW coal volumes were affected by a 5-day derailment in the Gunnedah Basin and other maintenance works which caused lower utilisation in the quarter. The highlight For the broker is that the terminals business and activity at Port Botany is expected to ramp up in coming months. The recent JV established with ACFS is expected to provide a growth platform, as the broker notes the company continues to experience low activity levels in metro areas. Macquarie expects the integration of the rail business will also continue to provide a positive input, with the market still likely underestimating the benefits.
With capex declining, JP Morgan estimates a free cash flow yield of 8.6% in FY16, up from 6.6% in FY15. The broker upgrades estimates to account for higher coal and bulk haulage and higher container lifts, as well as increased vehicle movements. While the company’s cyclical exposures face near-term headwinds, a focus on reducing costs and improving operational efficiencies continues so JP Morgan believes the company will be well placed to leverage improved economic activity when it eventuates.
There are seven Buy ratings and one Hold on FNArena’s database. The consensus target is $7.09, suggesting 8.0% upside to the last share price. The dividend yield on FY15 consensus forecasts is 2.9% and 4.1% on FY16.
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