Do Asciano’s wins justify an optimistic price?
Asciano is a company I covered in detail this week in Alan Kohler’s Eureka Report. Its popped up because it seems to be winning rail haulage market share from Queensland Rail. One analyst sent me a research note today saying; “Asciano’s on a roll” Tee, hee, hee indeed.
AIO announced a coal haulage deal today with Macarthur Coal (MCC ) in Queensland for ~7mt starting in November. The company now has 100% (10.7 mt) of Macarthur Coal, a 14.0mt contract with Rio/Xstrata, 5.8mt with Anglo and 1.1mt with Isaac Plains. There are more contracts up for grabs as the coal business in Queensland continues to expand. Analysts assuming Asciano wins a decent percentage of these, are upgrading their earnings estimates for Asciano.
The company, however, offers several hurdles for the value investor. The first is the balance sheet, the second is the uncertain competitive landscape and the third the valuation.
Recently Asciano announced it has no debt due for two-and-a-years. But this will fly as any parent of young children knows, and then the debt WILL be due.
Reports of the company’s debt-free status are incorrect. A capital raising and debt refinancing has still left the company with loans of $2.9 billion and $300 million in cash. That’s like you taking out a $2.9 million mortgage to buy a $3.2 million house. Total forecast liabilities of $3.9 billion should be compared to equity of $4.2 billion, which in turn includes intangibles/goodwill of $3.9 billion.
While NPAT is expected to grow from the $71.8 million reported in 2009 to $205 million in 2010, $263 million in 2011 and $320–400 million in 2012 (subject to upgrades following today’s announcement).
The second hurdle I referred to above is the competitive landscape.
The Port of Melbourne Corporation would like a third operator to join Asciano and DP World’s P&O (also considering listing of its own later this year) on Melbourne’s wharves. In Queensland there are the proposed changes to the ownership of Queensland Rail (QR). Under new, non-government ownership QR will have the incentive to “do a Telstra” on its competitors, especially Asciano, by charging more for the use of its network so it can offer lower prices to its own rail freight customers.
Happily for those hoping for a better Asciano share price, the coal industry, with about $40 billion revenue last year and strong growth projected, has some clout and big coal companies will not be happy if their deliveries are affected in any way.
Instability around Asciano’s competitive landscape means it is imprudent to be optimistic when valuing the company. And thats the third hurdle.
Asciano will report its half-year results on February 24; most analysts, including me, expect it will show the company’s first ever December-half profit. But returns for the next three years will still average only about 7% for the next three years.
Adopting an after tax 9% discount rate – the lowest I have ever given for any company – I get a valuation of 73¢. The valuation rises for the next few years but goes nowhere the current price of $1.70 or broker target prices of about $2.
Posted by Roger Montgomery
February 4, 2010
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
