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Qube Holdings Thrown An Opportunity

Australia | Mar 14 2017

This story features QUBE HOLDINGS LIMITED. For more info SHARE ANALYSIS: QUB

DP World Australia has raised some of its port levies and flagged an opportunity for Qube Holdings to follow suit.

-Unlikely DP World Australia will face meaningful loss of market share
-Opportunity for Patrick to relieve margin pressures
-Sign of a more rational stevedoring industry?


By Eva Brocklehurst

Port and logistics operator Qube Holdings ((QUB)) has been thrown an opportunity. Competitor DP World Australia intends to raise the levy it applies to the truck and rail operators picking up or delivering full containers to and from its Port Botany (Sydney) and Melbourne terminals. DP World Australia competes with Qube's Patrick operations.

This price increase is reflecting substantial cost increases, DP World Australia stated, and the increased charges will apply to the land-side logistics operators, not the shipping lines (customers) that it charges for lifting containers on/off vessels.

Qube appears to have the option of either following DP World's lead and increase its own levies, or hold levies constant with the aim of gaining market share. Morgans suggests the former is more likely, urging caution, as it is unlikely DP World will face meaningful market share losses from the decision given charges for customers are not being increased.

The broker suspects cost increases have not fully flowed through to Patrick's cost base. Patrick is yet to complete its market rent review for the Melbourne terminal.

Morgans assumes Qube will lift its levies by $20 per container. The broker also assesses that full containers comprise around 80% of total containers that are moved, while those moved through Port Botany and Melbourne comprise 70% of the total across the four ports where Patrick operates.

With all else being constant, such a levy increase would add around 6-8% to the broker's profit forecasts. The broker also highlights the profit increase does not translate into an equivalent valuation increase because of the value diversification provided by Qube's various operating divisions and the Moorebank project. Hence, the announcement may be positive for Patrick but has less meaningful valuation impact for Qube as a whole.

There is material upside potential for Patrick, UBS believes. The broker estimates a surcharge could raise an additional $25m in revenue for Patrick, while the costs that the surcharge would seek to recover have already been incurred. The broker estimates this would produce a 20% boost to the $40m after-tax contribution to Qube's profits in FY18. It is hard for UBS to envisage a scenario whereby Patrick does not follow DP World's lead.

Logically, the increased charge will ultimately be passed on to the underlying importer or exporter, and is unlikely to be material in the context of a total land-side logistics cost. Hence, UBS agrees there is unlikely to be much gained in terms of market share if Patrick chose not to follow suit.

Citi believes Patrick should be pleased now that DP World is introducing a new infrastructure surcharge as this provides an opportunity to relieve margin pressure. Citi assumes Patrick will follow suit.

Is Patrick facing A More Rational Competitor?

Ord Minnett suspects DP World is now concentrating on its bottom line and returns, while Patrick and Hutchison, the other main operators at these ports, now have commercial decisions to make. Ord Minnett believes it makes most sense to raise charges, thus gaining a certain bottom-line benefit sooner, rather than waiting for the possibility of market share gains later on.

The broker believes the announcement by DP World could help allay those concerns regarding Patrick's performance, as it signals a tentative step towards a more rational, disciplined Australian stevedoring industry.

Surcharge Detail

Morgans understands Port of Melbourne Corp increased the company's rent in the order of 275% between 2016 and 2023. From April 3, DP World Australia will levy a $21.16 per container charge on full containers at Sydney and increase its existing surcharge to $32.50 at Melbourne. There has been a similar surcharge in place in Brisbane for a number of years.

The company has justified the move by highlighting a 60% increase in occupancy costs at Melbourne and 35% at Sydney. The surcharge will be collected from road movements through the one-stop vehicle booking system that is owned by DP World and Patrick.

Several brokers are yet to comment on the impact of DP World's new surcharges. The general view for those with Hold ratings is that the competitive outlook for ports and bulk handling is tough for Patrick and the shares of Qube appear fully valued. Credit Suisse awaits the signing up of tenants for Moorebank before it becomes more positive on the stock.

Morgans continues to like the stock, retaining an Add rating, for its medium to long-term growth prospects. The main drivers of growth are extracting the benefits of the Patrick acquisition and developing the Moorebank intermodal and industrial property complex.

FNArena's database shows five Buy ratings and three Hold. The consensus target is $2.61, suggesting 6.0% upside to the last share price. Targets range from $2.20 (Morgan Stanley) to $3.01 (Citi).

Disclaimer: the writer has shares in Qube Holdings.

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