Potential In Qube But Down The Track

This story features QUBE HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: QUB

Qube Holdings is developing a solution to the complex and inefficient NSW logistics industry and several brokers point out the company's longer term potential.

-Ord Minnett values the investment in the Moorebank hub at 90c a share
-Several brokers looking for better entry points to the stock
-Diesel trends needs to stabilise before Morgan Stanley is more constructive
 

By Eva Brocklehurst

Finding a solution to the inefficient and complex logistics industry in NSW is difficult but Qube Holdings ((QUB)) appears to be heading down that track. That's the view Ord Minnett takes in initiating coverage on the stock. The going may not be easy but in the longer run, if the Moorebank intermodal terminal is successful, it will be rewarding. The Moorebank intermodal will include a large freight hub and a rail shuttle to Port Botany.

Sydney's largest integrated intermodal terminal will realign stevedores – the port operators – with inland logistics and ultimately should lead to a greater acceptance of rail as an alternative to road freight in the state. Ord Minnett foresees efficiency gains and lower freight costs for customers as a key benefit. By 2026 the broker expects Moorebank could contribute up to a third of Qube's earnings and values the investment in the hub at 90c a share.

Meanwhile, in the company's ports and bulks division the reliance on iron ore and mineral concentrates has fallen to 20% of revenue from 47%. Moreover, the cash cost of key iron ore customers has reduced to US$50-55/t and given a forecast for iron ore prices to be US$55-65/t, the broker suspects the worst may be over in this division.

On first glance, Ord Minnett concedes the stock may appear relatively expensive, trading on a FY17 price/earnings ratio of 26x, but believes this fails to capture the likely long-term contribution from both the Patrick stake and Moorebank. The broker takes up coverage with a Buy rating and $2.85 target.

Shaw & Partners, over a five-10 year perspective, envisages potential for value creation with the unique investment opportunity at Moorebank. Nevertheless, Shaw is unconvinced the stock will outperform in the next 12 months given its high multiple. It is expected to take three years for earnings per share to return to FY15 levels.

Downgrades from the market after the interim result in February are also considered probable. The broker, not one of the eight stockbrokers monitored daily on the FNArena database, has also recently initiated coverage on the stock with a Hold rating and $2.30 target. Shaw would be a buyer of the stock closer to the $2.00 level.

Positive catalysts may be forthcoming with the announcement of anchor tenants at Moorebank, post financial close, and Credit Suisse concurs that the strategy to vertically integrate supply chains will deliver attractive returns in the medium to long term. A final decision from the Commonwealth government on the environmental impacts of the Moorebank site has been overdue since August.

The broker agrees also that mineral resource exposure may mean FY17 revenue falls and the earnings contribution from Patrick may be lower than expected. Patrick will face greater competition when the third terminal operator (VICT) opens in Melbourne next year. Market share may decline and price competition could affect margins. The broker concludes that the market is over-estimating the revenue growth potential and earnings contribution from Patrick and believes a more attractive entry point to the stock could eventuate, retaining a Neutral rating.

Credit Suisse estimates the reduction in trucking from the co-location of rail terminals, import/export and warehousing could provide 20-25% efficiency gains and, while the company will likely share these gains to entice customers to Moorebank, it could still capture a fair slice.

Qube acquired Patrick Container Terminals, along with JV partner Brookfield Infrastructure, for $2.9bn in August, and while this has strategically aligned its supply chain, Credit Suisse believes the price paid was very full. Qube now owns the Moorebank location, after acquiring Aurizon's ((AZJ)) stake, which gives it full control of the site.

The volume and price cycle needs to stabilise before Morgan Stanley becomes more constructive on the stock. Diesel fuel data suggests first half volume challenges are both widespread and growing. Monthly diesel fuel sales are considered a rough proxy for industrial demand in logistics and bulk shipping. Morgan Stanley finds the data sobering.

July diesel volumes fell 7%, representing the weakest monthly growth rate in the data set which goes back to July 2010. In addition, growth has been negative for three consecutive months which suggests the decline in diesel demand is more than a one off.

Morgan Stanley has also analysed data which indicate that both volumes and prices are weak in the company's container-driven business, which affects, either directly or indirectly, 65% of earnings. The broker also believes valuation is full and looks for better entry points to the stock, with the first half results offering the first opportunity to assess the severity of the unwinding in volumes and pricing.

The database has four Buy ratings and four Hold for Qube Holdings. The consensus target is $2.63, suggesting 16.1% upside to the last share price. Targets range from $2.30 (Credit Suisse) to $2.90 (UBS).

See also, Qube Facing Complex Outlook on September 26 2016.
 

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