Broker: Austock Securities
Analyst: Andrew Chambers
Company: Asciano Limited
Stock code: AIO
Asciano (AIO) can boast that it is Australia’s leading transport infrastructure company, with the combination of the Pacific National rail operations and the Patrick ports and stevedoring businesses. Via these two businesses AIO owns and operates a large range of infrastructure assets including ports and rail throughout Australia.
According to Asciano, Pacific National is Australia’s leading provider of bulk haulage services for coal, grain and bulk industrial products. “We are also the leading provider of intermodal services – providing interstate rail freight services to freight forwarders and steel manufacturers.” it says.
Through Patrick’s ports and stevedoring business, Asciano operates container terminals with operations in Australia’s four largest container ports. “We provide a network of ports-related freight services and logistics to importers and exporters…we are Australia’s leading operator of private ports and bulk cargo terminals, and the country’s largest provider of bulk and general stevedoring services.” it says. Through Patrick’s, AIO also provides a supply chain solution to the motor vehicle industry via its Patrick Autocare business.
Although AIO shares had been on the slide over recent months – tumbling 16% in the six weeks to May 24th to a 12-month low of $1.49 – two large contract wins has seen a reversal of fortunes for shareholders. Just last week the freight rail company renewed an existing coal haulage contract with Coal & Allied Industries, majority owned by resources giant Rio Tinto. The contract is for the movement of up to 30 million tonnes of coal per year from July 1.
And two weeks earlier saw the signed of another deal, when it secured a “long-term” contract with BHP Mitsui Coal Pty Ltd to haul 4.2 million tonnes of coal per year in Queensland. Asciano says it will haul the coal from next January via the northern missing link, which will connect the Newlands and Goonyella coal systems when the project is completed in early 2012. Chief executive John Mullen said the contract win supported Asciano’s plans for growth into the expansion of the Port of Abbot Point, near Bowen in north Queensland. “A key objective was to maximise the opportunity for tonnage through the newly expanded port of Abbot Point,” Mr Mullen said. “The result is an innovative operational solution and contract that drives the efficient behaviour of both rail and coal operator.
Austock’s Andrew Chambers has reviewed the key assumptions for AIO and has subsequently made a number of changes to forecasts. Although there is a 5% to 6% decline in future year EPS forecasts, Austock has upgraded AIO to a buy with a medium risk rating, saying that the recent contract wins and debt feedback help to take some risk out of the business.
“We have had AIO in a holding pattern for nearly 3 years due to our below consensus view on both EPS and valuation,” says Chambers. “Whilst we do still see some consensus EPS risks, we are now comfortable with AIO on absolute and relative valuation grounds.”
Austock’s lower earnings forecast comes from a downgrade in 2012 intermodal rail growth forecasts from +3% to flat, the high Aussie dollar and carbon tax uncertainty, a downgrade to container port industry lifts from high single digit to mid single digit, and a small increase in real labour costs.
On the flipside, Austock’s DCF valuation rises due to a reduction in its equity beta by 5 basis points due to AIO de-risking from major coal contract renewals on better terms, positive debt refinancing, and valuation roll forward from June 11 to June 12. “The net impact is our DCF rises 13cps to $2.02/security,” says Austock. “With port peers on FY’12f EV/EBITDA of 11.0 times and rail on 7.5 times (or blended average of approximately 9.0 times versus AIO on 7.9 times) we now see good relative value…AIO would need to trade at $1.85 to currently match its global peers.”
Rewind a few months and Nicholas Brooks, RBS Morgans, had a hold on AIO in March 2011. “Despite bad weather…AIO still managed to post better than expected port and container figures,” said Brooks. “In an improving global recovery, AIO is well positioned to add to these volumes with a cleaner and leaner business since emerging from the global financial crisis.”
Based on Thomson Reuters data, it seems that analysts have recently become bullish on AIO. Five analysts currently have a buy on AIO, three have an outperform and three have a hold. This is a leap from three months ago, when there was only one buy, two outperforms and eight holds.
Chart: Share price over the year to 06/07/2011 versus ASX200 (XJO)
Stock code: AIO
Charts: Asciano Limited
More news: Asciano Limited
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