Australia | Jul 02 2015
-Concerns around terms
-What about the franking credits?
-Question over use of scrip
By Eva Brocklehurst
Canada's Brookfield Infrastructure Partners has stirred the pot at Asciano ((AIO)), making an indicative bid for the rail, terminal and port contractor. The details of the approach are as yet unclear but the bid implies a price of $9.05 a share and uses a combination of cash and scrip.
The approach looks opportunistic to several brokers, given the automation of Port Botany has just been completed. This represented the last material risk in the company's cost reduction program. Deutsche Bank expects dividends to grow 35% in FY15, 46% in FY16 and 17% in FY17. The broker also notes that Toll Holdings ((TOL)) was recently acquired by Japan Post at multiples which suggest Asciano is being offered a relative discount, given its higher quality assets and cash flow.
As of June 30 2014 Asciano had $267m in its franking account and there has been no mention of how this will be dealt with. Deutsche Bank expects the amount will rise as of FY15, given the pay-out ratio is less than 100%. Hence, the broker expects the Brookfield offer will be improved by at least this amount – equating to around 27.5c a share.
Morgan Stanley observes Asciano is trading at a 16% discount to the conditional offer, which suggests the market is concerned around the terms of the deal and potential completion. Due diligence is yet to be completed and a formal proposal will remain dependent on a satisfactory outcome. Morgan Stanley is cautious, envisaging longer-term structural risks, particularly in intermodal and terminals.
Still, the broker acknowledges Asciano's free cash flow is robust and defensive. Given Asciano does not own strategic infrastructure, nor does it have anti-competitive market share, the broker does not foresee any regulatory risks arising which cannot be managed.
The main issue for Australian investors will be the scrip component, which Macquarie speculates could be $1.00, with Brookfield Infrastructure Partners, the listed infrastructure fund, taking a 40% stake in Asciano. The other issue is potential loss of the franking credits. This transaction would place Asciano into a trust and the franking benefit would be lost to Australian shareholders. As a result, a special dividend may be required to gain the support of local investors. Macquarie believes this would need to be around 80c a share.
Brookfield is a logical buyer, UBS maintains, as it holds diversified interests in global infrastructure and utility assets including a rail network in the south of Western Australia. Asciano generates strong cash flow while its high capital intensity results in barriers to entry. UBS also highlights recent reports citing competitor Hutchison is likely to reduce its presence at Australian container ports, which would result in reduced competition in that area.
The broker observe this bid ends a period of speculation regarding a potential sale of the company's ports but there are risks it may not proceed. The use of scrip by a foreign entity with low liquidity is probably going to present a challenge and there is some risk another bidder may emerge, at least for part of Asciano's business. UBS downgrades to Neutral from Buy on the news.
JP Morgan's price target of $7.86 is set at a 10% premium to valuation, to reflect the potential for corporate activity. The broker retains an Overweight rating. As capital expenditure is now reduced, the broker expects dividends will increase and forecasts a pay-out of 45% in the second half of FY15, 55% in FY16 and 60% in FY17.
Goldman Sachs also cautions that a number of steps need to be taken to progress to a formal proposal and the discussions are at a very early stage. Strong earnings growth is expected for Asciano over the next few years as it delivers on its business improvement program. The company should have headroom to reduce gearing and increase the pay-out ratio. Goldman Sachs is not offering a rating or target on Asciano at present.
There are five Buy ratings and three Hold on FNArena's database. The consensus target is $7.73, suggesting 1.3% downside to the last share price. Targets range from $6.47 (Morgan Stanley) to $9.05 (Deutsche Bank).
See also, Asciano Signals Strong Dividend Growth on April 22 2015.
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