deutsche bank report - $2.10 target

Impairment charge of A$1,110m to be taken by AIO in 2H10
AIO has today advised that it expects to incur a non-cash impairment charge
of A$1,110m in 2H10. The charge consists of (i) an A$960m impairment to
the Ports businesses, mainly as a result of changes in the long term assumptions
factoring in the entry of a third ports operator and (ii) impairment
of other assets totalling A$150m (which includes an A$120m charge to tangible
rail assets).
Previous guidance affirmed
The previous guidance provided by the company for FY10 EBITDA to be at
the top end of the A$675m to A$700m range has been maintained. We
retain our FY10 EBITDA forecast of A$710m and continue to believe that
the current company guidance is conservative.
Ports business assumptions consistent with our expectations
AIO has indicated that the assumptions adopted in order to lower the carrying
values are conservative and include a third port operator taking up to
a one third share of the ports market. The company also indicated that the
revised terminal growth rate for their ports business is 5% which remains
higher that our volume growth rate of 3.8% through our 10 year DCF and
terminal growth rate of 2.5%. We are therefore comfortable that our valuation
assumptions do not require substantial amendment.
Minimal impact on earnings and valuation
Given that the impairment charge is a non-cash item, it will have a minimal
impact on AIO's earnings and valuation. The writedown will result in
marginally higher EPS over the next few years (increase of 1.0% to 2.5%)
as a result of lower depreciation/amortisation charges, which is offset by
slightly lower free cash as a result of reduction in the tax shield. Overall,
given the limited impact, we retain our price target of $2.10 and BUY recommendation.