Morgan Stanley:Asciano GroupScenario Analysis: AssessingImpact...

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    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.
 
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