bxb will go accumulate now for 6 months

Asciano (AIO) shares rallied strongly on Friday after the company announced it is has no ‘current’ intention of making a takeover bid for Brambles (BXB). Interestingly, the company also announced that it was committed to retaining its 4.1% interest in Brambles. Macquarie Research Equities (MRE) subsequently upgraded their recommendation to outperform on the stock and believe this will now focus the company’s attention on realising the latent value in the share price.


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In the short term, MRE believe this is a clear positive for AIO investors. BXB was potentially a company -transforming event that was a potential break to investing. While there is likely to be much speculation of how long ‘current’ is, MRE suspect this is most likely to be three to six months, and MRE do not believe Asciano’s interest in Brambles has diminished (demonstrated by its intention to retain its 4.1% stake).

The carrying cost of the BXB investment is +$35m pa, pre tax, ie 18% of cash earnings – thus the impact is significant. However, the risk is relatively low. If Brambles stumbles in delivering its accelerated growth target, AIO can pounce; and if it does start to deliver, AIO can exit its investment at a tidy profit. It only needs $0.63pa (ie 5%) growth in Brambles’ share price to offset the unfunded interest expense.

The move enables Asciano to focus investors on its fundamentals, which are attractive. Asciano has opportunities to accelerate its long-term growth path in coal, continue to capture the organic growth in the ports business and the intermodal freight forwarding. Combined with steady cost management, and rebound in the rural earnings, future year’s cash earnings growth of +20%pa over the next three years is forecast.

The major catalyst is AIO completing the Rio Tinto contract, and demonstrating it has significant debt capacity to pursue new opportunities

Action and recommendation
With the statement that it has ‘no current intention’ of making a bid for BXB, MRE believe AIO will be working overtime in the coming three to six months to realise the latent value which MRE identified in the share price. As a result, MRE have upgraded their recommendation to outperform.

Traders looking for maximum exposure to short-term movements in the AIO share price should consider the following equity warrants for a high-risk, high-return strategy.