All aboard Asciano

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Glancing through the broker reports, which are steadily turning bullish, a more positive attitude towards Asciano is notable. A ports business should be doing well in the midst of Australia’s resourecs boom, although of course the company has had its travails. But Macquarie is sensing that the business is becoming boring with its EBIT of $295 million. Such predictability is just the kind of thing to get investors excited:

Delivering a clean and on-the-whole predictable result. This is something AIO has not done since listing. The disclosure was materially higher and lends itself to the view that the performance is sustainable and not from one off items. The BIP appears to be delivering to management’s expectation and the negative drags that have hit coal and rail are starting to unwind.

With net debt to equity down below 85%, the company is beginning to look less risky. The dividend yield is low, but is predicted to increase. Most important, according to Macquarie is the restoration of the balance sheet:

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Balance sheet has been restored, with internal cashflow and balance sheet capacity being able to fund organic growth. The capex outlook is unchanged in FY12 and FY13 at $850-900m and $700m, along with the expectation they will self fund by FY13. The benefit of much of this spend should start to appear in FY13 earnings with new crane installation, Nebo and Greta maintenance facilities and full-year benefit of new coal train sets. Outlook for coal growth is strong with numerous incremental growth tonnage opportunities, which may add to the program.

Macquarie has a buy and a price target of $6.25. Deutsche also ha a buy and a price target of $6.30. Deutsche is also feeling comfortable about the debt levels:

While AIO carries more debt than its immediate peer we believe that 3.1x net debt/EBITDA is not excessive and we would expect this to naturally decline through the remainder of the year. Going forward we expect the reliance on debt funding to somewhat reduce as existing coal contracts commence during 2012 and 2013 and capex should be supported by the cash flows of the business for the obvious potential new contract wins.

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Merrill has amuch lower price objective of $5, and a neutral recommendation, saying the gearing is still cause for concern:

“Cash generation was strong with operating cash flow up 34% to $423m. Whilst AIO was free cash flow negative, this was driven by $400m of capex primarily to drive growth at PN Coal. Gearing remains high at 44%, but we estimate this will trend down to 38% by FY15 as capex normalises. We assume total capex of $898m in FY12 and $647m in FY13, which means a cash flow positive position from FY13.”

Merrill (5)

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