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Will QR National be a Value.able company?

Companies, Investing Education | Comments (85)

Will QR National be a Value.able company?

Pretty soon, the QR National prospectus will hit your mailboxes. Its the biggest float since Telstra’s 2006 offering and the second largest in Australia’s history, so the PR companies and the communication consultants will be out in force doing their job for the vendors. But who will represent the buyers? We will! Value.able Graduates, sharpen your pencils! If you have any thoughts to share right now, go ahead. We already have received a number of comments:

Lloyd says:

“Your summary of the pending QR National IPO at the start of Your Money Your Call and the parallel discussion in the Eureka Report are on target, with one exception, that of Business Leadership which is the dead elephant in the room that no one seems willing to discuss. So I’ll raise the topic here. Management at QR National are some of the same people that arguably ran BHP onto the rocks in 1998. The problem that led to the disaster was that of the arrogant culture of the “Big Australian”. The culture led to massive errors in capital allocation in a capital intensive industry with disastrous consequences for shareholders that continued for a long time. Fast forward to the QR National IPO advertising campaign. Notice the parallels in the advertising for the for the float with the “Big Australian” ethos of the nineties? And QR National is a very capital intensive business with massive structural and business cultural deficiencies that are the result of its existence to date as a Government owned sheltered workshop.  The leadership ethos appears to be such that the “planets are aligned” for shareholder value destruction on yet another grand scale. Regards, Lloyd”

Lloyd’s observation that some people who ran “the big Australian” during arguably, its dark days, are those involved now with the campaign to “be involved in something BIG” at QR National is well worth thinking about and speaking to your advisor about before subscribing.

At a dinner party on the weekend the subject of QR National came up and what is interesting is that the campaign is leveraging the well-known ‘China-needs-our-coal’ theme. But outside of the financial markets sentiment towards coal is not inspiring. Many retail investors believe coal is dirty, the cause of global warming and on its way out. CEO Lance Hockridge has previously rejected invitations to discuss climate change and as Paddy Manning of The Sydney Morning Herald noted on Saturday: “In 2007 a NASA climate scientist, James Hansen, likened coal trains to ”death trains – no less gruesome than if they were boxcars headed to crematoria, loaded with uncountable irreplaceable species’‘.

While diesel trains may be better for the environment than trucks, the 200 million tonnes of coal QR National carries per annum (2/3rds of the nations export volume) is not. Perhaps the retail component of the offering may not be as easy as previously expected. Paddy Manning again:

“Last week Professor Ross Garnaut, author of Australia’s 2008 Climate Change Review, told ABC Radio he thought world coal demand would peak before 2020 unless carbon capture and storage (CCS) – or some other use for massive carbon dioxide emissions – succeeds.

Garnaut is not pessimistic about CCS being commercially viable at scale in the right locations. But the Chinese want their demand for coal to peak before 2020, and while he admits that’s ”not a certainty”, Garnaut thinks there are ”reasonable prospects of China achieving objectives along these lines”.

”China over recent years and in the years immediately ahead represents a large majority of the global growth in coal use, and with other developed countries seeking to reduce total emissions absolutely by substantial amounts, such a change in trajectory in China would be likely to be associated with a peaking over the next decade in global coal use.”

Investors want a growth story. If the idea gets about that coal demand might peak within a decade, it could seriously weaken demand for QR shares.”

On the other hand, it is noted by many that Australian coal tends to produce lower emissions per unit of energy and steel production in the case of coking coal (our coal is a higher quality). With climate change on the agenda, demand for Australian coal could increase even when coal demand globally is falling.

The marketing machine has its work cut out but if hype can get even the biggest floats over the line, our job here will be to cut through it and answer a simple question.

Should you invest in QR National long term?

Lets get the conversation going with a couple of simple bullet points:

  1. 1. Strongly supportive themes; privatisation, commodity demand, and a monopoly (monopolies are great businesses to own and QR National owns 2300kms of track on which it will deliver 160 million tonnes of coal annually)
  2. 2. ABARE says coal volumes will rise more than 9% next year
  3. 3. Chinese demand to peak before 2020
  4. 4. Private interests have already tried to buy the below rail assets for $4.85 billion and the above rail assets for $2 billion
  5. 5. 2011-2012 EBITDA forecast by float promoters of $1.1 billion (never ask the barber whether you need a haircut)
  6. 6. EBITDA for a capital intensive business is NOT what the investor owns! The company will have plenty of interest to pay on $2 billion of debt then, lots of equipment to maintain and replace and a not shortage of tax
  7. 7. Capital intensive business
  8. 8. Low return on equity forecast for 2012 – after a two year turnaround program
  9. 9. Moving from government ownership to private ownership should make the company more efficient
  10. 10. Old contracts signed on uncommercial terms will roll off and new contracts will immediately boost revenue and profits (some newspapers suggest 22% increase in profits to $1.1 billion)
  11. 11. Tens of thousands of job cuts have already been made – perhaps the low hanging ‘cost cutting’ fruit has already been picked?
  12. 12. Chinese demand for coal will always be strong?
  13. 13. Coal prices will always be high?
  14. 14. Unions campaigning against the sale of state assets note that Telstra and Brisconnections were bad floats for investors

Brokers have estimated an enterprise value of between six and a half and nine and half billion dollars. I am not sure however what debt figures they have used (whether it is the $500 million QR National will start with or the $2 billion its expected to draw down in the next couple of years). Assuming $500 million, the promoters therefore may be reckoning on a market cap of around $7 billion. Of course never ask a barber whether you need a haircut!

QR National expects to boost pre-tax profits from $204 million to $427 million this financial year, and by 35 per cent to $578 million in 2011-12. But this could at least partly be attributable to a reduction in interest from the repayment of loans. In any case, investors own post tax profits which would reasonably be estimated to be about $390 million – a 5.5% return on contributed equity?

You should ignore the comparisons of P/E that will inevitably be seen. Comparing the P/E of QR National to, for example, Asciano, may be as useful as comparing the P/E of Myer to the P/E of David Jones at the time of the float – both fell precipitously after the money was in the vendor’s pockets.

Another thing to be careful of looking at are the stats available on other large Australian Commonwealth privatisations. Bank West, CSL, CBA, GIO, SGIO, Tabcorp and Unitab were all outstandingly successful examples, generating double digit returns annually for investors and Bank West GIO, SGIO, NSW TAB and Unitab were all taken over. But Qants and Telstra have been duds and the annual return from NSW TAB was not so crash hot, despite its takeover. The message is that yes, there are profts to be made from privatisations but only from those where economic value has been added.

The prospectus for QR National will invariably focus on growth – growth in revenues, growth in profits, improvements in efficiencies.

The price to pay however will be determined by the equity and the return that equity can generate. That is something we’ll focus on here.

For now we all await your thoughts. When the prospectus is released we’ll have a good look.

In the meantime, please contribute your thoughts, valuation estimates and any other insights you have.

If you are considering an investment in QR National, be sure to seek and take personal professional advice and you can come here for insights that will generate the questions to ask your adviser.

Posted by Roger Montgomery, 27 September 2010.

UPDATE – The Sydney Morning Herald (Passengers sought for latest float) and The Sunday Age (Board QR National float with caution) have published my insights in the past week.

INVEST WITH MONTGOMERY

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.

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85 Comments

  2. Brendan
    :

    I was ambivalent about the QRN float before I found this site. The insights in this blog certainly crystallised my position not to buy. Underplaying exposure to ongoing debt commitments throws doubt on the overall integrity of the IPO. From other comments it could be more TLS rather than CBA due to monopoly, regulation and time for a commercial diet to work.
    As suggested by other correspondents there are better ways to gain exposure to resources.

  3. Mike Kendrick
    :

    A very interesting Blog. I don’t know of Adam Schwab but people and yourself seem to be impressed with his writing so would be interested to purchase a copy. You and your Bloggers are helping me and many others make informed decisions on the QRN float. Thanks to you all.

  4. David on the Gold Coast
    :

    Hi there Roger, from David on the Gold Coast …

    considering with the size of the float and the large number of brokers selling it, would it pre prudent and informative for the readers to do an analysis of it now that the prospectus is out?
    Oh … may I add … with a focus on it’s short term and long term prospects for the retail investor.

    … yep, I’m a punter trying to make a decision.

    thanks in advance

  5. Rod
    :

    Hi Roger

    It has been suggested to me by others that, even if I’m not interested in being a long term investor in QR National (which I am not for many of the reasons espoused by your other contributors) then I should still get in for the “stag profit”. I first politely point out to them that even this is always risky with any IPO and that, if it is lucky (and that’s pretty much what it is) enough to come off for you then after you have settled with the taxman you have lost a sizable proportion of your profit anyway.

    I then tell them about your book and suggest they get a copy.

    Lastly, please put me down for a copy of Adam’s book as well if this is still possible.

  6. Gerard
    :

    I have looked at the QR prospectus and consider that the return on equity is far too low for the risk of owning the shares. There are many other considerations but if the ROE does not stack up in the short term then I will not waste my time studying the blue sky. There are many better investments around.

  7. Tony
    :

    Hi Roger,

    I crunched the QR numbers this morning (as best as I could given most of them are forecasts). I’ll bid 84 cents a share.

    I might take another look in 3 years when the staff numbers can be touched. I suspect there will be some excellent savings to be had then.

    I wonder what the mining companies will do after the float given they were keen to purchase the assets in a trade sale? They must be busy crunching numbers given all the price rises that the QR management expect when contracts roll over.

    All the best,

    Tony

  8. Lloyd Taylor
    :

    Roger,

    Over the last few days I read in the press that the QR National has agreed with the Queensland Government that there will be no staff reductions for at least three years after the IPO. In return QR National will receive a $150 million/annum no strings attached grant (subsidy) from the Queensland Government!

    Now the EBITDA growth figures you quote look a little less stellar when this annual grant is thrown into the mix.

    I cannot help but think that if this arrangement is being reported correctly, then we are not dealing with planetary alignment for shareholder value destruction but rather galactic alignment.

    Do you have any insight on the deal struck between QR national and the State Government on restructuring limitations?

    Regards
    Lloyd

    • Roger Montgomery
      :

      Hi Lloyd,

      The only additional insights I might have are because I know some of the brokers involved. But then the research I have read did not discuss a grant in much detail. Much of the staff cuts have already been made. ‘Sheltered workshop’ is one description I have heard and may be appropriate when government featherbedding is in evidence but that may be unjustifiably harsh. Still waiting on my prospectus.

  9. Scott
    :

    HI Roger,
    Whilst I am not so excited about a signed copy of Adam’s book, I am most certainly interested about you signing the three copies of your book i am so very very very lucky to have acquired (and i really mean that). I have no doubt that your work will stand the test of time so much so that i purchased three copies with a view to pass on one to each of my three daughters (aged 4, 2, 0) in years to come. If i can teach them just two things in regards to finance it will be to master the managing of the money they earn (as i am a firm believer that 3/4 of the battle is managing what you have, not simply acquiring more income) and to take on board not only the valuation technique you espouse, but more just as importantly the analysis and understanding framework that is so so important in the investing decision.
    I sincerely thank you so much Roger for not only changing my life, but hopefully for changing the lives of generations of my descendents to come…I just hope I am half the man you are and can at least spark an interest in my children and lead them on the right path, something you have been so sucessful at with such a defining piece of work.
    The kindest of regards
    Scott

  10. Stuart
    :

    Hi All,

    I have recently looked at the figures of QR and some of the underlying fundamentals of the business and I believe that I am getting better value investing in the construction, maintenance companies servicing the mines in WA.

    Companies such as MRM & particularly FGE have very strong prospects for growth and are producing good returns.

    Roger, I would like to purchase your value.able book. I have been to a couple of your investor seminars and I got alot of greats tips from them.

    Would also be keen to get a copy of Adam’s book as it been highly recommended. Please email me the details. If they can please be signed that would be an added bonus.

    Many Thanks.

  11. Es
    :

    Hi guys
    Have anyone calculated the IV for BHP as per Roger’s IV method using the tables. I get a ridiculously high value of about 100.5. I used the figures from E trade and a RR of 10. I used ROE of 35 %, eps next year 3.574, dps 0.965 and book value for next year 12.719. With these values its the second tablet result that blows it out, because BHP retains so much of its earnings.

  12. Scott
    :

    Thanks for the insights both Lloyd and roger, have read value.able and loved it, in process of getting my head around it. This might be off topic a little but Lloyds comments on management and culture brought it to the fore again for me. Being dealt a somewhat analytical “Black and White” brain, it wasnt until I became self employed, having to hire, fire and motivate staff that I began to look at investing differently. For most businesses the biggest competitive advantage is their people but I struggle to be able to identify this, I know its there I just cant measure it! The numbers do tell a story but with good people and culture companies can really excel. I read with great interest the Jim Collins books “Good to Great” etc but still have trouble identifying potential investments with the right “culture” from just crunching numbers. I understand over the longer term ROE etc will paint a picture of managements ability but I still cant get my head around how to quantify culture and how to spot opportunities from the cheap seats. How would you have identified Michael Luscombe at WOW a decade ago as being as Stronger leader as he has been. A Company like MND seems to have the “culture” but again this is my gut feel assessment from their announcements, websites and other media commentary as a result of the language used and the tone or “feel”. But not working in the industry, and not having access to company briefings using “gut feel” to gauge the culture and quality of the people still feels a little like witchcraft to me and has always rested a little uneasy.

    Would be interested in your thoughts

    • Roger Montgomery
      :

      Hi Scott,

      Good to great is a fantastic book indeed. Here’s an excerpt from an article Jim wrote in 2001:

      “Here are the facts of life about these and other change myths. Companies that make the change from good to great have no name for their transformation—and absolutely no program. They neither rant nor rave about a crisis—and they don’t manufacture one where none exists. They don’t “motivate” people—their people are self-motivated. There’s no evidence of a connection between money and change mastery. And fear doesn’t drive change—but it does perpetuate mediocrity. Nor can acquisitions provide a stimulus for greatness: Two mediocrities never make one great company. Technology is certainly important—but it comes into play only after change has already begun. And as for the final myth, dramatic results do not come from dramatic process—not if you want them to last, anyway. A serious revolution, one that feels like a revolution to those going through it, is highly unlikely to bring about a sustainable leap from being good to being great.”

      and this

      “Picture an egg. Day after day, it sits there. No one pays attention to it. No one notices it. Certainly no one takes a picture of it or puts it on the cover of a celebrity-focused business magazine. Then one day, the shell cracks and out jumps a chicken.
      All of a sudden, the major magazines and newspapers jump on the story: “Stunning Turnaround at Egg!” and “The Chick Who Led the Breakthrough at Egg!” From the outside, the story always reads like an overnight sensation—as if the egg had suddenly and radically altered itself into a chicken.

      Now picture the egg from the chicken’s point of view.

      While the outside world was ignoring this seemingly dormant egg, the chicken within was evolving, growing, developing—changing. From the chicken’s point of view, the moment of breakthrough, of cracking the egg, was simply one more step in a long chain of steps that had led to that moment. Granted, it was a big step—but it was hardly the radical transformation that it looked like from the outside.

      It’s a silly analogy, but then our conventional way of looking at change is no less silly. Everyone looks for the “miracle moment” when “change happens.” But ask the good-to-great executives when change happened. They cannot pinpoint a single key event that exemplified their successful transition.”

      If its hard for the execs to know, it will be challenging for you to identify it too.

      Recently I met with the COO and CFO of Decmil. They told me about their business. Helped me understand the bonding and how the cash flowed through the business and so on. But there was little that was remarkable about this. What however was worth remarking on, was their enthusiasm and passion. Their drive and energy was on clear display as was their desire to share their excitement about the business. Of course, this alone is insufficient to make a business great but a fast and solid boat, rowed by honest, enthusiastic, passionate and intelligent oarsmen is exactly the combination you need.

      I have the same experience when I call Oroton. Whoever picks up the phone, is always telling me what a wonderful company they work for. Head office looks like a wonderful place to work too.

      You cannot bring in a ‘my-way-or-the-highway’-type person and generate this kind of passion. You can’t demand loyalty or frighten people to perform.

      Looking from the outside in, its difficult to find out what the culture is like, unless you ask the staff directly and even then, they may not divulge anything. But thats one way of finding out and a way that Phil Fisher advocates – scuttlebutt.

      Its sounds like the other simple thing you can do you are. Read the letters in the annual reports from the CEO, COO or MD. If they cannot simply communicate what the business does, how they have delivered what they promised the previous year to you, then how do you think they go trying to communicate with and motivate their staff?

      Finally from Jim again:

      “How change does happen
      Now picture a huge, heavy flywheel. It’s a massive, metal disk mounted horizontally on an axle. It’s about 100 feet in diameter, 10 feet thick, and it weighs about 25 tons. That flywheel is your company. Your job is to get that flywheel to move as fast as possible, because momentum—mass times velocity—is what will generate superior economic results over time.
      Right now, the flywheel is at a standstill. To get it moving, you make a tremendous effort. You push with all your might, and finally you get the flywheel to inch forward. After two or three days of sustained effort, you get the flywheel to complete one entire turn. You keep pushing, and the flywheel begins to move a bit faster. It takes a lot of work, but at last the flywheel makes a second rotation. You keep pushing steadily. It makes three turns, four turns, five, six. With each turn, it moves faster, and then—at some point, you can’’t say exactly when—you break through. The momentum of the heavy wheel kicks in your favor. It spins faster and faster, with its own weight propelling it. You aren’t pushing any harder, but the flywheel is accelerating, its momentum building, its speed increasing.

      This is the Flywheel Effect. It’s what it feels like when you’re inside a company that makes the transition from good to great. “

    • Lloyd Taylor
      :

      I think you underestimate the arrogance of the politicians involved. Also remember River City Motorway Group which the same politicians deny any accountability for despite their instrumental role in shaping and forming the PPP and the forecasts that underpinned its float.

  16. Harold JANUS
    :

    Hi Rodger, I have finished reading your great book and have a better understanding of the values of my investments. The calculations you have taught me are now part of my portfolio management and hence I have designed a spread sheet which does most of the calculations for a 10% return.
    Regards, Harold Janus

    • Roger Montgomery
      :

      Hi Greg,

      One copy of Adam Schwab’s book coming right up. I know you were indifferent as to whether your comment was published. But I really hoped that Adam will see it and be encouraged that there is support for his book. He’s such a great writer that if we can inspire him, he will deliver more great work.

  18. Brad
    :

    Buffet said one of the reasons he bought BNSF was it’s competetive advantage is it’s cheaper to haul freight over rail than road, esp in an era of high oil prices

    • Roger Montgomery
      :

      Hi Brad,

      Thats correct. Tonne per gallon is much higher on trains than trucks. He also was making a bet on the US economy and recently backed it up with comments that the US will not have a double dip recession.

      • Mike Deam
        :

        Personally I think those who compare Buffet experience and translate this to Australia may be erring.

        1: Buffet’s movement into a company will bring a positive flow on effect regardless of any other activity. He brings his own momentum to an investment. Just his track record and size.

        2: The US has been in a recession for longer than us. Just look at the currency. Politically will the US do anything in the short term that will harm their economy? Are they talking about taxing carbon and as dedicated as much to this as the Greens are? No its about creating jobs and getting the economy working again. My big concern is that their will be a tax on the coal carriers from the greens because its a perceived “Dirty Industry”. My point the US is already hurting. I can’t see either side there (US) putting more more pressure on any industry. Here I can see the ALP bending to the Greens to sacrifice Peter to retain Paul. Or in this case giving into Carbon or Dirty Industry tax to retain the Green’s vote and Government. Our PM is not in a position to stand up to anything she simply does not have the numbers. Australia has lost its political certainty.

        3: Management. As mentioned by others the management has not really set the world on fire when at BHP. It might not be a cross but it is certainly not a tick.

        4: Capital. Like others I fear that profits will be retained to fund capital requirements. Rail, cars, trains its all expensive. Government deals to keep jobs for grants won’t bring a change of culture to the entity. Rather it will cement it.

        5: Marketing. I’ve been “pre-registered” 5 times. I agree with others this is hype aimed at driving some interest. A big share register has its own set of headaches and will add to the expense of running the company.

        6: Am I already a shareholder? As and Australian Tax Payer I guess we are already in this business. Am I happy that they are selling it? Sure I think in general the capital requirements of running it are intensive and will continue. What I would be concerned about is loosing employment. And what will they do with the money!

        I think I’d rather use my hard earned on investing in some Roger Value.able’s rather than QR. Naturally if it cheap enough it might be worth a go. But for me I think I’ll duck this one.

        Thanks for a great book and website.. Cheers Mike

  19. Greg Mc
    :

    I had an interesting phone call this afternoon from a market research company. They were asking a load of questions about what aspects of the QR offer might be attractive – eg. the bonus share issue, the price cap for retail investors, the 4% discount to the institutional investor price for retail investors etc.

    With my relatively recently altered perspective on investing I was amused at the line of questioning as at no point were any of the fundamental aspects of the business performance addressed. Among other things, what occurred to me was that (as Chris noted above), a quality company doesn’t need to worry about how it sells itself. Indeed, I actually found it a little disturbing that QR (or perhaps their vendors) are doing this. Buyer beware!

      • Lloyd Taylor
        :

        They are just trying to tilt the playing field to the advantage of the vendor (and by implication to the disadvantage of the retail investor). Take what you observe and add to it this report from 22 September and you get the picture….

        Quote
        The five joint lead managers to the issue – RBS Morgans, Goldman Sachs, Credit Suisse, UBS and Merrill Lynch – have just issued pre-float research to fund managers and institutions. The reports, which are all individually numbered for security reasons, are expected to land on fund managers’ and institutions’ desks in the next week. They contain preliminary valuations and research on the QR National float and pricing and the Queensland Government also has a copy of their findings.
        Unquote

        I think any posters on this blog associated with the five joint lead managers, or those consequently engaged by them in the promotion of the float, should declare their interest so that we may be aware of the potential conflicts of interest that can and will arise.

  20. Steve Moriarty
    :

    Hi All,

    Some Fisher type scuttlebutt……

    I recently shared a holiday with a friend who works at QR. They said that there were major problems with “fiefdoms” – it seems that all managers have one or several and as such as not that willing to share information, even within the organisation. For example marketing cant get sales figures (because its a secret!!) so marketing becomes difficult. This is an obvious sign of a monopoly business where there is no competitive pressure.

    If the monopoly continues then the ROE may stay permanently low thanks to a lack of competitive pressure.

    If my memory serves me correctly, I think James Montier did a study (as others have) in his book Value Investing and showed that IPO’s are usually a losing investment for those that “get in early”. Given that the QLD State Government is making all sorts of promises to Unions and those that complain about the float, it is probably not a good time to invest.

    Given these issues, I suspect it would be better to wait until management re-arranges the company. Perhaps in 2 or 3 years when the “deadwood” is gone and the company is acting like a true profit maximiser then it may be worth some investment. But as Craig points out, there are plenty of other good investments around at the moment.

    • Roger Montgomery
      :

      Thanks for the anecdote Steve. Suggesting still lots of work to go before the government department is shaped into an efficient privately run enterprise. Where’s Sol when you need him!

      • Chris
        :

        Adam Schwab’s book “Pigs at The Trough” highlights (in no uncertain terms) his feelings towards TLS ! Roger – this is a GREAT read for anyone (and for ‘tell it straight’ people like me, placed in easy enough to understand terms !), plus has some ‘lessons’ from each case study…one of them being “when the management / CEO are too busy making themselves look good instead of the company, then you have problems”. In other words, beware the ‘rock star’ CEO.

        I certainly discovered things that I didn’t know beforehand about these companies, and I consider myself to be ‘fairly well read’ in the business media.

      • Roger Montgomery
        :

        Hi Chris,

        I know Adam Schwab and like him very much. We correspond and have had coffee together. He writes brilliantly and I think his book is one of the best. It should be on the must read list for all Australian investors. I am surprised it hasn’t received more critical acclaim. I will see if I can get a few signed copies for those interested.

      • Callan
        :

        Hi Roger, would be definitely interested in the book if you are able to get some signed copies. Drop me an email if you do.

    • Mick
      :

      G’day, slightly belated link re QR and 150m govt subsidy:

      http://www.theaustralian.com.au/business/opinion/state-to-compensate-qr-for-losses-on-regional-services/story-e6frg9if-1225929095085

      So as a taxpayer, I own some of QR now, and as a taxpayer will still own some after the float, and then as a taxpayer I will further contribute to ongoing subsidies for the new company? And then perhaps buy some shares and invest some more into it? Not to mention still (as a taxpayer) also owning the potentially less profitable passenger service?

      Not sure on the reliability of the figures in the article, but QR performing worse than Asciano? Anyone put Asciano through the Value.able process!?

      Steve and all, you will love Parkinson’s Law; hilarious when applied and sounds like it may apply in this case? http://en.wikipedia.org/wiki/Parkinson%27s_Law

      Still, infrastructure is necessary to grease the wheels of growth, and rail will be in the thick of it, so who knows what may happen, though it may take awhile to get any real indication. I’ll wait and see what the prospectus says…

      • Roger Montgomery
        :

        Hi Mick,

        Thanks for the links to the article and the wikipedia definition. Yes, I have run Asciano through the process. It has an MQR of C5 (as low as my MQRs go). It generates an ROE of 8.95% and despite a share price of $1.65, I get a valuation of 52 cents.

  21. Lloyd Taylor
    :

    Roger,

    Your list of Government privatizations shows another interesting dimension. The successful ones were all business built around significant intellectual property plus strong brand recognition. The two duds (QAN & TLS) had the brand recognition, but possessed no IP related competitive moat. Rather they were/are Capital Intensive (with a capital C and capital I). Now we have pending the float of QR National, which falls into the same category as the two duds, with even less public (and customer ?) brand recognition.

    Another dimension of investment risk is the near monopoly character of QR National – just like TLS at the time of its float (and look what happened there once the Government had put the monkey on the public shareholders’ backs). This will mean continuous scrutiny by the competition regulator (ACCC). It provides fertile ground for its customers to take complaints on pricing and performance to the competition regulator. Based on past performance, politicians and governments will happily jump on the competition bandwagon once ownership has been offloaded onto the private sector. In short, despite the near monopoly position in coal transport, QR National will have no pricing power power of any consequence, consigning it to a utility rate of return at best.

    Finally, the matter of “the price on carbon”. How sustainable is it for Australia (alone) to put a price on carbon domestically, while exporting more than 250 million tonnes of coal per annum, all of which goes into the global atmosphere? In short, there is a inevitable logic that means a price on carbon will have to be placed on export coal if mitigation of “global” warming is the policy target. This will make Australian coal less competitive than that of competitors unless the “price of carbon” is set and applied on an international basis. So much for coal demand growth, notwithstanding the financial sector’s enthusiasm for the dirty fuel that it is. No wonder Mr Kloopers is demanding a “price on carbon” for all but export sectors. However, on the latter point he will prove no more effective than King Canute once the debate and policy framing advances!

    Based on narrow self interest, and promotional expediency the financial sector will probably scoff at the last point. However, even in the absence of a price on carbon the demand impact driven by switching to cleaner fuels is being felt in advanced economies. For example, in Japan, the demand for LNG (a much cleaner fuel than coal) is now projected to fall 19% from 2005 levels (62 mmtpa) in the next twenty years due to due to implementation of a massive nuclear power generation program; and this in the absence of a price on carbon which will drive even greater and more rapid fuel switching.

    For those contemplating investment in QR National, I suggest that you’d better have a clear view of the global energy path for the next ten plus years as well as the fundamentals of business valuation, or you will most likely be suckered.

    Regards
    Lloyd
    last point. But

  22. Craig
    :

    My view is that Marcus Padley’s aphorism on floats may well be applicable to QR National. I’m paraphrasing off the top of my head, but it goes something like this:

    If it’s any good, you won’t be offered it. If they offer it to you, you don’t want it because it’s no good.

  24. Ashley Little
    :

    Hi roger,

    I am a bit confused about the QR National thing

    all this talk about improvements through various mean. For what it is worth i think that the new owners should not pay for the improvments that they will make, they should pay for what the business is worth now.

    like buying an unlisted business the broker will tell you the current owner is garbage and you could do so much better. This is Blue sky rubbish and the new owners should not pay for the current owners slackness.

    people probably won’t agree with me but as Buffet says Public opinion is no subsitute for thought.

  25. Ken Milhinch
    :

    The “coal is dirty & responsible for climate change” argument doesn’t cut it as far as I am concerned, but Lloyd’s observations about the management certainly does.
    Average managers + “sheltered workshop” environment + “we are big so we must be good” arrogance all point to capital destruction, so count me out.
    Thanks to Lloyd for his insightful observations.

    Regards, Ken

    • Roger Montgomery
      :

      Hi Ken,

      There are many investors who engage in SRI (Socially Responsible Investing) too, so while the dirty coal/climate change argument is not a concern to everyone, it is a concern to some and therefore something that should be available to discuss and raised to consider. Rather than shut it down I would like to keep every angle open for debate here. It will also give everyone an insight into the pulse or the timbre of the float.

      • Ken Milhinch
        :

        Roger,

        No problem with that. Everyone is entitled to an opinion, no matter how wrong they are. (toungue planted in cheek here)

        Regards, Ken

  26. Chris
    :

    Roger; personally, I have reservations.

    One of them is called “Pacific National being the competitor”.

    Also, any float that needs to offer ‘bonus’ shares is a bit suspect, because “if something’s that good, you don’t need to offer more” – the proverbial “buy one, get one free and give to a friend” offer on the daytime home shopping channels.

    I want to see who is underwriting it and what happens if it flops, especially given the ownership provisions.

    I think that the miners will see what the issue price is, and then maybe make an off-market bid (seeing as ownership is being restricted to less than 19% if what I read is correct) over and above the offer price – if it is that important for them to have unfettered access to it, or if they are just grandstanding. You can always build your own (as FMG and BHP have shown), but that can get expensive.

    The fact that – from what I read – 80% of the revenue is linked to resources – particularly, coal – bothers me. I think that in my existing portfolio, I have enough exposure to resources anyhow.

    • Chris
      :

      Roger, it gets better.

      I come home today and there’s a letter in my mailbox for the other half, telling her that she has been pre-registered for the float.

      She says “I never registered for the float”.

      Turns out our discount broker pre-registered her, although there’s no obligation for you to buy.

      However, is this to try and drum up business for people less cynical and more unsuspecting than us ?!

      Roger, it is the principle of the whole thing that I am miffed about. I will be having strong words with them as to why they went and pre-registered her without even asking us if we wanted to be !

      • Roger Montgomery
        :

        Hi Chris, A new low in the potentially unpermitted use of private information? Your information has ben sent to a third party. I received three forms today too from a full service broker that had pre-registered on my behalf, unsolicited and without my request or approval. I preregistered myself so I can safely throw the forms in the bin but what of all the stock broking clients (Commsec has 1.5 million) who may not have pre-registered? Is it the same as handing a cup of coins to everyone entering an RSL and pointing them to the poker machines?

      • Greg Mc
        :

        No, it’s not like that, Roger, it’s worse. It’s like giving you an emply cup and pointing you in the direction of the poker machines. You provide the coins.

      • Lloyd Taylor
        :

        It will get worse. Next well be assailed with misleading statements and advertising quoting the massive registration count as indicative of the huge level of retail investor interest in the float. This spruiking will be aimed at creating a false sense of enthusiasm in the retail market based on the perception at the individual level that everyone is in on it and by implication therefore it must be good.

        Remember this float is ultimately the result of the actions and desires of politicians, who as we have seen repeatedly in recent history, will stoop to any level and peddle any untruth to achieve an end.

        Then we have the support and cheer squad for these actions (the IPO managers/investment banks), those who will pick up around 2% of the proceeds of the action.

        it is best to understand the dynamics and motivations involved when considering this, or any other float.

  27. Craig M
    :

    1 – 3 Themes help form an argument for investment and I believe that is what this will be sold on, themes not value and value is the basis for investment.
    6 – 8 and 11 give a hint towards value and it looks like it will be lower than the punters are asked to pay.
    4. Let them have it, I already know I won’t be there, not when I am distracted by the likes of ORL, JBH, MCE, ONT, WTF and the rest high ROE A grade companies.

  28. Simon
    :

    The initial reaction to news that the Oracle from Omaha was investing 26 billion dollars in BNSF railway was positive: potentially more passenger rail lines, a higher profile for railroad transportation in general, and further investment in other rail lines from other finance big guns. Now rail Buffett bought currentely transports 1/5th of America’s coal. Is Buffett’s investment therefore a bet that coal will need to be shipped into the foreseeable future?
    Yes in fact the BNSF railway serves a lot of coal fields in the Western United States, including Wyoming’s vast Powder River Basin, and hauls enough coal on its routes to supply about 10 percent of the electricity in the United States. What has this got to do with QR ??? Well Buffett’s essentially betting (over the long term) that coal’s going to remain a major part of the U.S. energy mix for quite some time, even as the country moves to cut carbon emissions.
    A recent Greenpeace report highlights “The House climate bill actually does quite a bit to ensure that coal has a bright future. There’s $10 billion for research into capturing carbon emissions from coal-fired plants, plus billions more for deployment. And the bill … will enable utilities to keep some of their older, dirtier plants chugging along for years to come”. Buffett doesn’t think climate legislation would put a damper on one of the main economic drivers of his new railway–if and when the bill passes, it will come loaded with enough protections to ensure that coal will be around a while yet Environmentalists have been lobbying to change some of these provisions in the Senate, but Buffett seems awfully confident that won’t happen.

    So if Buffett is right then I’m assuming he would take a similar view regarding the purchase of QR as the China story (peak demand 2020) isn’t a reason not to invest in QR, in fact Buffett is quite bullish in USA need for energy in addition to India and China.

    Finally DO NOT compare QR with Telstra they are not the same company. To that end, QR isn’t BNSF railway either so don’t purchase shares trying to imitate Buffett’s investment. He may be wrong! Personally I don’t believe that QR will be able to generate the ROE I am currently getting from my investments and until they do I will sit on the sidelines and watch with interest.

    Roger if possible try to look into China’s latest forcast for steel production over next five years. I believe 2020 may be a bit soon, by 2030 we might see a peak in production been already reached.

    • Roger Montgomery
      :

      Great insights Simon,

      BNSF generated a 13 per cent return on equity prior to Buffett’s acquisition and Berkshire’s credit rating will ensure that massive interest savings on the debt will flow through to even high rates of return on equity for Burlington Northern. QR National doesn’t generate those returns on equity to begin with (won’t in 2012 either according to forecasts) and doesn’t have the benefit of a AAA-rated benevolent owner at its helm either. Your comments about China demand combined with a known fascination for train sets by European investors and Asian thematic investors wanting exposure to their own rising demand for coal will ensure solid support for the float.

      • Lloyd Taylor
        :

        It would be folly to compare QR National with Burlington Northern Sante Fe Corp (BNSF) and similarly to equate Buffet’s approach to that of potential investors in the QR National float. BNSF on every financial and performance metric is a star relative to QR National, which appears more like a dog in the comparison (unsurprising given its long history of Government ownership). Moreover, coal haulage represents only a component of BNSF business while being the massively dominant component of the QR National haulage mix.

        Most significantly, Buffet acquired BNSF at a significant discount to IV. The same opportunity for punters in QR National appears unlikely, although this remains to be seen.

      • Wing
        :

        Thanks for the insights and all the useful info in this blog!

        I agree people should not invest because of imitating Buffett’s investment. I maybe wrong but I wish to add a point that Buffett is playing a different game than the majority of people. He has to manage billions of funds and he mentioned openly that only elephant size companies would feed/ fit him.
        Compare to Buffett, Mickey mouse size companies will do for me as long as every dollar it retained can generate more than a dollar of long term market value.
        So QR maybe suitable for some people? But for me, I’d rather own other higher ROE A grade companies.

        Cheers, Wing

      • Wing
        :

        Thanks Roger! Especially saw the reply was updated at 11:42pm!
        ya, only high ROE companies can do that. So I’ll pass this QR offer and let others have it.
        I always sceptical about wealth will knock on your doors or mail to your letter box without any hard works done. Thanks for your great work.

        Time to bed :)

      • Roger Montgomery
        :

        Don’t compare the two though. As I mentioned previously and as Lloyd mentions here, one generates double digit returns ( a function of accountable managers) and now has the benefit of cheap funding. The other doesn’t.

  29. Bruce Payne
    :

    Hi Roger and Fellow bloggers
    I know I am off the subject but am trying to calculate Intrinsic value for CSL (with my training wheels on), using Required Return of 10% I come up with Intrinsic Value as 2010 $21.98 2011 $42.27 and 2012 $48.67.

    Has anyone else run some numbers on this company I can compare to, I find it hard to reconcile such a big jump in Intrinsic value between 2010 and 2011.
    Any help appreciated.
    Regards
    Bruce

  30. Kerishd
    :

    We’re not only buying shares, we are selling our votes as well. Just buy it. And then vote the government out if all it turns sour.

    • Lloyd Taylor
      :

      Remember buying shares involves real money. Voting is free, whether you subscribe to the float or not. Therefore, the cost of political vengeance, if it does not work out, might be considerable.

      I don’t think looking at it as selling a vote is a smart thing to do. How often have you been let down by politicians in the past?

      • Kerishd
        :

        True. There is no strict requirement that making money on QR equates to voting for the government. The alternate way of thinking about it is that as long as QR doesnt turn sour, the government wont have to face the additional wrath from another section of the electorate. And they shouldnt give away too much value lest they be accused of giving away the asset.

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