citi initiates coverage on aio with a ...buy, page-7

Morgan Stanley:

Asciano Group
Scenario Analysis: Assessing
Impact of a 3rd Port Operator
Third operator needs Melbourne: We believe a 3rd
port stevedore requires capacity at each of the east
coast container port terminals to be competitive. Whilst
price is important, scheduling can increase the cost for
shippers. Demurrage costs can add up to ~$15k per day.
To date, Hutchison Port Holdings (HPH) has been
awarded the new facilities at Brisbane and Sydney only.
Delays to timetable: Based on the timetable for the
Victorian government?s feasibility study into relocating
automotive services from Webb Dock (to be completed
by December 2011) to Port of Geelong, we believe the
earliest a 3rd operator could enter Melbourne operations
is now 2016. It could still be later, depending on whether
Swanson Dock proceeds ahead of Webb Dock.
Base case: Our base case assumes that HPH enters
Melbourne in FY18 under a rational scenario,
penetrating the east coast in a steady manner, with
tariffs declining by ~8% in FY18 and ~5% in FY19.
Significant price discounting possible: Based on a
~10% return on investment and ~75% operational
efficiencies, we estimate that HPH could offer price
discounts of up to ~30%, although it is likely that HPH
will be a more rational player, in our view.
Scenario analysis: In our report, we look at the impact
of a 3rd operator?s entering the market in 2016 in a more
aggressive approach. Our key conclusion is that under
major bear case scenarios relating to Ports (~33%
market share by FY18 and a ~20% price discount), we
derive a fair valuation of ~A$1.65 (which is broadly in
line with the current price). Ports contribute ~25% to
group FY12e EBITDA.
Valuation & Rating: Our A$1.80 price target is derived
from the sum-of-the-parts (SOTP), 12-month forward,
DCF valuation. We maintain our Overweight rating.

Investment Thesis
? Market reaction to the entry of a 3rd
port operator could be over-done. We
value AIO at A$1.65 in the worst case
scenario for its ports division (HPH
materializes in FY16, tariffs fall by
20%);
? The recent sale of DP World Australia
represents a FY10e EV/EBITDA
multiple of 12.7, compared to our
valuation of Patrick at 8.1x FY11e
EV/EBITDA;
? Buoyant global coal demand new
contract wins to drive revenue growth
in the Hunter Valley and Queensland
at attractive returns.
? Port volumes continue to rebound.
Key Value Drivers
? Trade volumes, particularly
containerized freight.
? Global coal demand.
Key Upside Risks
? Container volumes improve faster
than expected or market share is won.
? Additional Queensland coal contracts
are won at attractive returns.
? Asciano wins some or all of the BMA
coal contract
? Management executes their business
strategy well, achieving cost savings
well in excess of guidance.
Key Downside Risks
? Poor second quarter container
volumes leading up to Christmas
(traditionally peak season)
? Coal growth expectations fail to
materialize, either due to capacity
constraints, fluctuation in weather
affecting mine production, or supply
chain congestion
? A third port operator materializes
earlier than expected in Melbourne.