Sentiment Improving For Asciano

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    [0] => Array
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            [0] => ((TOL))
            [1] => ((AIO))
            [2] => ((BXB))
            [3] => ((GNC))
            [4] => ((AWB))
        )

    [1] => Array
        (
            [0] => TOL
            [1] => AIO
            [2] => BXB
            [3] => GNC
            [4] => AWB
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This story features BRAMBLES LIMITED, and other companies.
For more info SHARE ANALYSIS: BXB
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

With the share price falling from more than $11.00 when it was spun out of Toll Holdings ((TOL)) to below $4.00 recently it was clear investors appetite for Asciano ((AIO)) wasn’t too big. A rally of around 15% in recent trading sessions might be an indication things are now turning for the better for the rail and ports group.

Brokers have been on board all the way down in terms of carrying a positive view on the group’s future, though the credit crisis meant a number of them had failed to fully account for how the market would rate the stock given its high debt levels. With this having been better accounted for target prices fell from more than $10.00 to a little over $6.00 now, but the valuation argument still holds water for most analysts and especially now there has been some good news for the company.

The improvement in news flow of late includes being part of a consortium that won a rail bridge contract in Saudi Arabia and the disposal of the group’s stake in Brambles ((BXB)) following a failed play on the pellet company. The latest good news is a take-or-pay grain haulage contract with Graincorp ((GNC)), which significantly improves the economics of the group’s rail operations.

As Deutsche Bank notes the deal effectively de-risks the group’s grain haulage operations, as previously it was exposed to the drought via falling volumes. The contract also gives the company scope to leverage increased volumes of grain, which looks possible given significant growth in grain output has been forecast by ABARE (Australian Bureau of Agricultural & Regional Economics) in the coming year.

As the deal eliminates current losses the broker estimates it effectively underwrites forecast FY09 EBITDA (earnings before interest, tax, depreciation and amortisation) growth, which obviously improves the outlook for the company. Further upside remains possible, the broker noting there remains scope for contracts with Queensland Rail to be agreed upon in coming months.

ABN Amro agrees and also sees scope for further contracts, noting there is potential for the group to agree to a similar take-or-pay deal with AWB ((AWB)) for other trains it has in its portfolio. The broker also suggests the company may be interested in the rail operations former parent Toll Holdings is selling in New Zealand, as if a management contract could be agreed with the Kiwi government the company could consider a role.

Neither broker has made any major earnings adjustments on the news of the Graincorp deal and both continue to rate the stock as a Buy, with price targets of $7.00 for Deutsche and $6.75 for ABN Amro. JP Morgan has also left its estimates unchanged on the news but with a target of just $5.31 it continues to rate the stock as a Hold.

The broker’s view is tempered somewhat by slowing container volumes at the group’s port operations, a trend it expects may continue as both the domestic and global economies show signs of slowing down. JP Morgan also points to the group’s debt levels as an ongoing concern, suggesting there is some scope for distributions to come under pressure if the debt position cannot be improved.

Overall the FNArena database shows five Buy ratings, one Accumulate and three Holds, with an average price target of $6.29, while Thomson One Analytics shows a median price target on the stock of $6.63. Shares in Asciano today are stronger despite a weaker overall market and as at 11.05am were up 24c or more than 5% to $4.70, which compares to $4.00 a week ago.

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