rbs report - $2.30 target

Goodwill hacking
AIO is taking a A$1.11bn non-cash writedown in 2H, mostly relating to goodwill in
the Container Ports business. It appears to be an effort lay bare any potential
nasty surprises in the lead up to the May 2012 debt refinancing. Other than the
non-cash writedown, we make no earnings changes. Buy maintained.

A$1.1bn goodwill writedown
AIO has announced a A$1.11bn non-cash writedown relating mostly to goodwill, to be taken
in 2H10. The writedown stems from managements decision to take a worst-case view of
the outlook for the businesses, indicating part of the decision was to remove the last of the
legacy balance sheet issues prior to the debt refinancing due in May 2012. In our view, it also
reflects the growing culture of conservatism under new chairman Malcolm Broomhead.
Container Ports takes most of the writedown
Container Ports absorbed A$760m in goodwill writedowns, with 75% relating to adjustments
to the terminal value calculation. Mostly this related to managements more aggressive
assumptions around the impacts of the third terminal operator. If we factored managements
worst-case long-term container port assumptions into our model, our DCF valuation would
fall by 4.1% to A$2.10 (from A$2.19).
Writedowns drive higher gearing, higher return metrics
There is no impact to Net Debt/EBITDA (FY10F of 3.5x), which remains just inside the
boards 3.25-3.5x range. However, FY10F ND/ND+E increases from 37.5% to 45.1%. The
writedowns also provide a positive boost to return metrics, improving FY11F ROIC from 6.2%
to 7.4% and ROE from 6.5% to 8.7%. With managements ongoing focus on returns on
capital, we forecast ROIC rising to 10.3% and ROE to 11.6% by FY14.
AIO has a positive outlook, Buy maintained
In our view, AIO is well leveraged to a broad economic recovery, has a strong growth profile
in its coal rail business and has some upside potential on the back of a near-term
improvement in its container ports business. While we put through the non-cash impairment
charges in FY10, we make no other earnings forecast changes. AIO remains one of our top
picks in the sector and we retain our Buy recommendation and A$2.30 target price.