Transporting commodities should be a pretty low risk play given Australia’s resources boom. Royal Bank of Scotland likes both Asciano and QR National, saying it will benefit from the 249Mtpa increase in Australian coal exports expected by 2020. It reckons Toll Holdings should benefit from increasing logistics requirements from the new LNG projects and general resources industry growth.
Morgan Stanley is less positive on Toll, not liking the fundamentals all that much. It has an equal weighting recommendation and a modest price target of $4.92:
Limited earnings visibility or certainty: Despite the share price declining by >20% since 16 May 2012, we struggle to find compelling value at current prices. Based on consensus EPS forecasts, TOL trades on FY13e PE of 10.3x, or a 4% discount to the ASX200. However, concerns of a softening domestic economy are amassing and spilling beyond initial worries of a retail slowdown. On our forecasts, TOL trades on FY13e PE of 11.1x, or a 4% premium to the ASX200. Margin pressure remains: Cost-pressures (including rising fuel, labour and overheads) will be difficult to offset or pass on in a low-growth environment. We note EBIT margins have fallen for five consecutive years, from 7.6% in FY08 to 5.2% in FY12e, despite revenue growth of +52% during this period. Return on Capital Employed (ROCE) has also stagnated over the past 2 years, albeit it remains above cost of capital (~10%). We forecast ROCE of ~12% over the near term until a cyclical recovery eventuates.
Credit Suisse doesn’t like QR National all that much either, with an underperform rating and a price taregt of $3.60. For once, analysts salivating at the prospects of job cuts may make some sense. It is always a wonder why redundancy programs are lauded so much when they are more usually an indication of management failure. Businesses hire when they are doing well, or going to do well, not sack, though in QR’s case the privatisation process is in play:
“Efficiency improvements provide greater upside. While the first VR achieved annualised cost savings of over $50mn ($75mn cash cost) and an 11 month payback, some of these savings have been offset by an increase in staff numbers and wages since. Consequently, we believe management must also focus on delivering efficiency benefits at a lower cash cost to deliver non-capex supported reductions in the operating ratio.”
QR National is a reasonably low risk play but it looks fully priced with an estimated dividend yield of 2.4 per cent and an earnings multiple of over 20 times. Macquarie is more bullish on QR National with an outperform rating but only has a price target of $4.30:
The impact of weak 2012 coal year is already known. The question for investors now will focus on the speed of the recovery in the system. We remain optimistic the system can start to recover in FY13 however it is a second half recovery as miners get back on to mine plans and strike activity is resolved. At this stage our tonnage expectation is ~200mt for CQCC system.