Now is the time to examine whether to invest in the much-hyped QR National float, touted as the biggest since Telstra 3 hit the boards in 2006.
Several analysts last week offered their insights into the multi-billion dollar float prior to seeing the numbers, projections and fine print contained in the prospectus.
QR National is the biggest rail freight haulage business in Australia, and, according to the company, it transported more than 198 million tonnes of coal in 2009/10. In Queensland, it has a track network spanning more than 2300 kilometres, servicing coal ports at Gladstone, Mackay and Bowen.
Analysts say the float and subsequent listing should initially appeal to investors if the numbers stack up and the shares are attractively priced. Beyond that, there are other considerations, particularly for longer term investors, prior to buying into this Queensland-owned asset.
For Morningstar analyst James Cooper, a critical point investors should consider is the outlook for Asian economies. “Are investors comfortable that Asia is going to remain strong because this float is predicated on the strength of their economies, particularly China and India,” he says.
Cooper says there’s no substitute for coking coal used in the steelmaking process and Queensland moves a lot of coking coal to meet insatiable Asian demand. Continuing strong Asian demand paints a bright outlook for the profitable QR National business. “QR National has a strong market position and there’s plenty of visible growth in the business,” he says.
However, Cooper says this should be balanced against a huge capital expenditure program that could, on one hand, generate efficiencies and support the buying of shares, but, equally, may also be seen as a negative if investor doubts emerge over demand projections for coal. He says QR National plans to spend more than $2 billion on expanding its rail network and associated infrastructure, buying new locomotives and wagons and upgrading existing rolling stock. Therefore, a lot is hinging on future demand for coal remaining strong and any hint of softening is likely to have a negative impact on the share price after the company lists, keeping in mind investors look ahead.
Analyst Peter Russell, of Intersuisse, shares Cooper’s concerns about capital expenditure and maintenance. Owning the track can generate leasing fees, but it can be costly to maintain, so returns to shareholders may be sacrificed amid big capital expenditure programs. As a listed company, QR National will have to balance competing interests and that may mean cutting jobs from its 9000 strong workforce. “There’s going to be initial pressure on keeping the share price up so that’s one thing going in favour of QR investors,” Russell says. “That’s most likely to mean cutting costs and generating efficiencies. There is going to be a restructure at QR National – there always is when a company goes into the commercial sphere.”
Russell says transporting coal is another bonus for QR National, as strong overseas demand for the fossil fuel will keep the freight trains rolling despite widespread concerns about global warming, carbon taxes and global emissions schemes. “Coal is the basic raw material for industrialisation and China will be using heaps of it for the next 50 years or more,” Russell says.
QR National claims freight tonnages (all products) have increased from 175 million tonnes in 2004/05 to 260 million tonnes in 2009/10. It has an existing fleet of 700 locomotives and 16,000 wagons. On September 27, 2010, QR National announced it had signed an extended contract with coal producer Peabody Energy to initially haul up to 9 million tonnes a year.
At the QR National pre-registration stage, retail investors were offered a package of incentives, including share price discounts on what institutions pay, loyalty bonus shares, a guaranteed allocation and no brokerage fees.
Michael Heffernan, of Austock, says before participating in the float, investors should satisfy themselves that QR National is likely provide an adequate return. After all, investors can get 6 per cent returns from bank term deposits, which carry far less risk than a sharemarket investment. Investors should decide whether they are buying for the short or long term and stick to their objectives. Some investors will buy into the float in the hope of crystallising a profit on the first day of trading. Others may see long term capital growth opportunities.
Heffernan says if history is any guide, QR National should get off to a solid start as the share prices of previous government privatisations performed well for a time after listing. Even Telstra shareholders were big winners for a considerable time after a third of the company listed in 1997. Commonwealth Bank has been a standout since floating at $5.40 a share in 1991 and CSL shareholders have also been well rewarded. Heffernan also notes that Tabcorp, Bankwest and Qantas were government floats that performed well soon after becoming listed entities.
Heffernan says governments have a vested interest in ensuring a successful float and listing because investors vote. Like any new float, Heffernan says the potential risks and rewards will be in the prospectus and he suggests investors examine forecasts relating to earnings, return on equity, dividend yield and growth prospects.
Heffernan also suggests undecided potential investors seek professional advice to ascertain whether QR National is suitable. He says inexperienced investors need to understand how the float is structured and the potential risks associated with buying shares.