broker research

Asciano Group
Chalking up another coal win
Volatility Index: very high
Recommendation: Outperform

Event

AIO announced a coal haulage deal with Macarthur Coal (MCC AU, $10, OP, TP: $13.50) in Queensland for around 7mt starting in November. It is worth noting this is an expansion of the contract AIO signed in May 2009 with Macarthur, thus they are now hauling 10.7mt.

All Australia's four major ports have fully released December trade statistics with system growth up 5.6% on prior corresponding period, driven by full imports.

Impact

Coal is becoming the bread and butter for Asciano. The contract win sees AIO having around 32mt of contracted volume in Queensland by 2011, and 13 train sets, 11 for coal and 2 for copper. However such success remains dwarfed by the potential opportunities. At this stage, with existing Queensland customers there is 23mt of contract renewal volume, before consideration of the benefit of the Northern Missing Link. Overall, AIO has the opportunity to bid on approximately 20 train sets. At this stage, we are factoring in AIO nearly doubling its business in Queensland, but that is only capturing half the opportunity. With a pre tax RoFE of +20% and stable 10-year take-or-pay contracts, AIO's earnings are becoming less cyclical which will aid the rating of the stock.

Earnings and target price revision

We have upgraded our 2012, 2013 and 2014 expectations by approximately 3% as a result of the additional coal trains factored into our forecast.

Price catalyst

12-month price target: A$2.07.

Catalyst: Tightening of management guidance and signing additional coal contracts in Qld with Rio Tinto, Anglo and BHP.

Action and recommendation

AIO is clearly on a roll in Queensland. The missing customer is BHP. A win with BHP would be a major breakthrough. With additional haulage volume required and contract renewals to 2015, AIO is in a good position to win some volume, especially as it establishes its track record in the Goonyella system.

The recent weakness in AIO's share price has followed the market but is arguably unjustified. The predictable coal business, with leverage to the volume growth, is running independently of the economic cycle, and is starting to swamp AIO's other business, growing to 45% of the earnings before interest and tax contribution (Financial Year 2012).

Thus investors can buy this predictable growth with the option of cyclical leverage from the container ports and intermodal as economic activity starts to recover. AIO's trading multiples, whilst moderate at 13.1x enterprise value to earnings before interest, tax, depreciation and amortisation, will quickly fall as coal volume contracts kick in. We maintain our Outperform rating.