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Stock: QR National

Stock code: QRN

Share Price: $3.44 (as at close of trade 6th May 2011)

Broker Sell Recommendations:

State One Stockbroking (18th April 2011, share price was $3.44 that day)

Lincoln (2nd May 2011, share price was $3.57 that day)

Broker Hold Recommendations:

Wilson HTM (8th May 2011, share price was $3.44 that day)

Patersons (22nd March 2011, share price was $3.23 that day)

Chart

Chart: Share price over the year to 06/05/2011

QR National has defied gravity since its highly publicised float just over 6 months ago, the biggest float on the Australian stockmarket since Telstra 3 hit the boards in 2006. Initially priced at $2.55, QR National shares have since climbed to a high of $3.59 in just 6 months. As of close of trade on Friday shares were sitting at $3.44, representing a sizeable 35% gain for those who participated in the IPO. Unfortunately, what goes up must come down – tensions in the Middle East and uncertainty that global growth will continue may just be a sign that QRN investors need to lock in some profits.

Company Description

QR National is headquartered in Brisbane employing close to 9,400 people. As Australia’s largest rail freight operator QRN transports coal, iron ore, bulk mineral commodities, agricultural products, mining and industrial inputs and general and containerised freight.

Not only is QRN the largest rail freight hauler in Australia by tonnes hauled and operates in Australia’s six major coal chain systems in Queensland and New South Wales; it is also the largest coal rail transport provider. QRN operates the Central Queensland Coal Network, which is about 2,300km of heavy haul rail infrastructure for the Queensland and New South Wales’s coal industries.

With a fleet of approximately 391 locomotives and 8,993 wagons, QRN’s freight business is broken up into bulk freight, intermodal freight and regional freight. QR National has benefited from exposure to the growing coal and iron oremarkets that have grown due to demand from China and India.

Earnings

In February QR National released its half-year results, which were better than the market expected and sent the share price climbing higher. EBIT for FY 2011 was A$380-A$410 million and net profit for the six months to December 31 was A$278 million. QR National announced guidance for fiscal 2011, with expectations that EBIT would be in the range of $380 million to $410 million. These figures have been adjusted to reflect the aftermath of floods and cyclones. The adjustment for the 2011 number is approximately 11 per cent lower than what management had previously announced.

QRN management expects coal haulage volumes to fall in the fourth quarter due to flood damage and is now projecting haulage volumes to drop by 25 million tonnes lower than its target of 200 million tonnes for the 2011 financial year as a result of flood and storm damages. Management previously announced that volumes in the third quarter were anticipated to decrease by 15-20 million tonnes.

Chief executive Lance Hockridge recently commented “Updated information from customers and further analysis indicates total coal haulage reduction is now estimated to be 25 million tonnes for the financial year 2011,” with volumes likely to still be down in the June quarter. “Looking forward, it is still unclear when customers will be back at full railings.” But “softer volumes than normal are now expected for coal haulage for quarter four, with downside risk of continuing wet weather and uncertainty around final customer tonnages”.

QR National announced that more redundancies are likely as it restructures its operations. QRN anticipates the layoffs will result in a total cash outlay of $75 million and will take a $50 million hit to its pre-tax earnings this financial year. 3500 workers had been identified for possible redundancy, and about 920 expressed interest in taking the redundancy offer.

Commodities Story

When commodities run, so does QR National. QRN exposure to commodities can be seen clearly by breaking down where its revenues are derived. 85% of QRN’s revenue derived from Australian resources, with bulk mineral commodities making up 11.2%, iron ore 8.3%, mining & industrial inputs 7%, agricultural products 12.5%, other 2.5%, and coal a whopping 58.5%.

Stockmarkets across the globe have come under considerable pressure on concerns that central banks will raise interest rates and as commodities prices have dropped, the outlook for resource producers has become more opaque.

The fear that many investors have is whether commodities prices will continue to go lower, putting pressure on those companies that are exposed to the current boom. While all commodities have benefited from U.S. dollar weakness and loose US monetary policy and fundamentals do support some commodities, many have been artifically inflated and are at risk of sliding quickly. U.S investment bank Goldman Sachs’s bearish view on commodities was clear when it recommended that its clients sell commodities last month.

Analysts

James Samson an analyst for Lincoln Indicators has a SELL recommendation on QR National. Samson belives that QRN is well overpriced at current levels and investors should look to divest holdings. “The company has delivered strong gains for those who participated in the initial public offering,” he says. “Despite cost cutting measures, recent bad weather and rising labour costs draw us to conclude that QRN is over priced above $3, let alone at the recent price of $3.41.”

Analyst John Rawicki of State One Stockbroking agrees and also has a SELL in QRN. “After a strong run up since listing, QRN’s risk/reward ratio appears less favourable at today’s level,” says Rawicki. “Management guidance for underlying full-year 2011 EBIT (earnings before interest and tax) has been cut to between $380 million and $410 million. The company’s latest forecasts for full year coal haulage volumes are 25 million tonnes lower than originally budgeted. Although commodity markets are strong, some profit taking may be wise.”

Peter Day from Wilson HTM says has downgraded ARN from a BUY to a HOLD in today’s 18 Share Tips, and says that some investors may choose to take profits. Day says: “Voluntary redundancies should deliver significant cost reductions and productivity improvements over time. Given share price gains, we believe the company is fairly priced, so our rating has been reduced to a hold.

Technical Picture

Chart text: QRN daily chart showing many signs of upcoming weakness. Long term upward trend was broken in mid-April. Bearish double top pattern forming at $3.60. Break below $3.35 will confirm double top. Negative divergence on MACD indicator also predicting change in current upward trend. QRN closed below 20-day SMA. Watch for potential negative crossover for another bear signal.

A quick look at QR National’s technical picture and technical analysts may see that the price action is signalling that prices have put in a temporary top from its debut back in November. The long upward trend was broken in mid April. A bearish double top pattern is forming at 3.60. A close below 3.35 will confirm the double top. Negative divergence on MACD indicator is also signalling a change in the current direction of the trend. Further weakness is seen as QRN has closed below the 20 day SMA. Traders should also watch for a bearish cross-over of multiple MAs.

Conclusion

While those who participated in the float or got on board in the early months would be more than pleased with QRN’s share price performance over the last 6 months relative to the broader market, brokers feel that it may be time to jump off the QRN train. It has been a good run, but the overall macro-economic environment and problems that QRN is starting to experience suggest that shareholders may be better off booking some profits and re-allocating capital.