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AIO; Industrials; March Quarter Operating Update - Generally Disappointing
Asciano (AIO) has released its operating results for the 3 months ended 31 March 2010.
Patrick Container Ports
435k containers were lifted in the March quarter, up 1% on pcp (YTD -2.6% vs GSJBW est FY10 -5%).
This is a disappointing outcome when you consider that DP World has recently reported that growth in its Australian ports business exceeded 15% in the March Qtr. Furthermore, the ports themselves have reported growth in TEUs of >10% for the March Qtr.
As such, it appears that either the impact of the OVSA contract loss has been greater than anticipated by AIO (ie it was suggested the volume impact would be ~5%) or it has lost further market share since that announcement.
Nevertheless, this disappointing outcome will not have a material impact on our forecasts as we were already assuming a weak scenario (ie volume declines of ~5% in FY10) based on AIO's EBITDA guidance, albeit with a view to upgrading at some point.
Hopefully AIO can regain some market share over the next 6 months as existing contracts with DP World come up for renewal. We are currently forecasting growth of 10% in FY11.
Patrick Auto, Bulk & General
Autocare vehicle movements of 275k, up 25% on pcp (+0.5% YTD) reflecting continuing improvement in motor vehicle sales. However conversely, vehicle storage days remain very weak, declining to 2,031k, down 56% on pcp (-47% YTD) reflecting lower inventory levels post the Global Financial Crisis.
Bulk & General port tonnes carried was 3,590k, down 49% on pcp (-32% YTD) adversely impacted by a WA grain company's decision to bring stevedoring of exports in-house. Excluding grain, AIO's bulk and general volumes increased by 14%.
Bulk Rail Net Tonne Kilometres (NTK) were down 18% on pcp (-1.7% YTD) reflecting lower grain exports due to the strong A$. However, non export volumes improved due to strength in the construction and minerals sectors.
Given the mixed results within this business and no detail on costs, it is difficult to determine how earnings performed in the March Qtr (particularly when we don't get earnings details by division at its results and hence can't model them separately).
We are forecasting revenue to decline by 4% and EBITDA to decline by 10% in FY10 (note EBITDA was down 11.9% in 1H10), which may be a little optimistic based on these results.
Pacific National Intermodal
Tracking ahead of our expectations, with NTK travelled up 10% to 5,289m (YTD -3.4% vs. GSJBW est FY10 -10.0%).
The result was helped by improvement in steel volumes (+62% on pcp and +12% on Dec qtr). Containerised freight volumes remained steady during the quarter whilst the express business continues to grow (+8% on pcp).
This result represents a strong improvement on recent quarters, suggesting there is material upside risk to our FY10 forecast for intermodal volumes.
Pacific National Coal
Coal haulage NTK up 33% on pcp (YTD +26%, GSJBW est +7.5%, excluding Qld coal), largely reflecting continued ramp-up of Queensland operations (albeit Qld volumes were adversely impacted by weather).
We understand that NSW coal volumes were broadly flat on pcp, which is a disappointing outcome albeit due to track outages as opposed to issues with demand.
Nevertheless, given the impact of wet weather and these track outages, we suspect there might be some minor downside risks to our FY10 growth forecasts for coal.
GSJBW Comment
Maintain BUY. Overall, the performance in 3Q FY10 was somewhat disappointing, albeit more because it removes the potential for upside in FY10 consensus estimates, as opposed to implying significant consensus downgrades.
Furthermore, the trend in AIO's market share at its container ports is of some concern to us and will need to be carefully monitored. However we are encouraged by recent press reports (eg Lloyds DCN) suggesting that the efficiency of Patrick's operations at Port Botany have improved significantly, resulting in higher levels of customer satisfaction.
Putting that issue aside, the volume recovery story is generally playing out as we had hoped and given our view that the economy will continue to grow strongly as we move further into FY10, we expect to see continued improvement in AIO's operational performance.
Despite today's mixed result, we remain comfortable with the merit of investing in AIO, particularly given our focus is more on FY11, when the recovery in its volumes should be in full swing and its coal business will be experiencing significant growth as new contracts are fulfilled.
Furthermore, we are still fundamentally attracted to the medium to long term growth prospects in its coal business, particularly in Queensland. We still feel this is an opportunity that is being undervalued by the market.
We believe that the recent price behaviour of AIO already more than captures this disappointing update and hence we are not anticipating a strong negative reaction from the market, albeit it is now difficult for us to see any material re-rating occurring until its FY10 result and thereafter.
12 Month Target Price: $2.35