Sentiment Improving At Last For Asciano

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This story features BRAMBLES LIMITED.
For more info SHARE ANALYSIS: BXB
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

After months of dealing with poor sentiment given a disappointing investment in Brambles ((BXB)) and high debt levels in the middle of a credit crunch Toll Holdings offshoot Asciano ((AIO)) has finally received some news to cheer investors as a consortium it is involved in has won a US$7 billion contract to build a land bridge in Saudi Arabia.

JP Morgan estimates the deal implies a capital requirement of around US$100 million for Asciano, which the broker suggests may prove a bit of headache given the group’s already stretched balance sheet.

Any positive earnings impact from the deal is unlikely prior to FY11 according to the broker as it expects the company to generate more from the management and maintenance of the network than from the construction side of the deal, though it does see the contract win as an overall positive for the group.

Merrill Lynch is similarly positive and estimates the company could generate a return on equity of as much as 20% on its US$100 million investment, which would be a solid rate of return. The deal may also act as a spark for future contracts in the region as the broker notes Asciano is the only member of the consortium with rail experience.

This latest contract and the disposal of the Brambles stake have been positive for sentiment in the broker’s view but it is looking for even more on this front in coming months, noting coal haulage contracts in Queensland appear close to being signed and this would signal entry into a new market, while new take-or-pay contracts are also being negotiated with two grain export customers.

Similarly ABN Amro suggests this latest deal and these likely deals in coming weeks are a sign sentiment is slowly turning for the company as management delivers on its promises, so like Merrill Lynch the broker has retained its Buy rating on the stock. JP Morgan remains at Neutral, while the FNArena database shows overall the stock is rated as Buy five times, Accumulate once and Hold three times.

Most of the positive ratings are valuation-based, as evidenced by the average share price target of $6.29, which is well above the current share price. Thomson One Analytics shows a median price target of $6.63.

Shares in Asciano today are weaker in line with the overall market and as at 1.10pm were down 9c at $4.01, which compares to a trading range over the past year of $3.33 to $11.64.

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