In my last post of 30/04/2013 I suggested there was a nexus between KSC and a relatively new investment of mine, NWH. My reasoning was that as KSC's East Coast business has been stressed for about four years, and it's not getting worse (probably improving fractionally), so any new risks must come from WA – the end of the mining boom, perhaps. So let's look at the WA business. As luck would have it, much of my investigation relevant to NWH is pertinent to KSC.
KSC's two timber haulage businesses in the South West of WA are in the same boat as the East Coast business – if anything, there will be a small macro-level improvements – e.g., more timber exported to Japan. On top of that, there will be synergies to be extracted from now having two similar timber-transport businesses servicing complementary hinterlands – Dardanup and Bunbury. The Bunbury-based Collare Transport business was acquired in December 2012, and hence the synergies are yet to manifest themselves.
As for the two mining-related transport companies, Pacific Transport and Regal Transport, the raw metrics provided via the acquisition announcements tells us that Regal was not only the larger, but seemingly the more profitable. Anyhow, Pacific was quickly rolled into Regal. Regal was, and remains, substantially a Pilbara play. Because NWH is also substantially a Pilbara play, I did some research to support that investment, and the relevance to KSC is perhaps that both their SPs have retreated recently, pursuant to the mining-boom-has-ended mantra. However, the tonnage of iron ore being shipped out of the Pilbara is increasing this morning's Businesspectator carried a Pilbara-expansion story at:
If one searches the Internet one finds multiple articles like this. If one adds words like “heavy haulage” to the search, one reads that heavy haulage is increasing as mines move into production, because of the huge machinery and plant items required by producing mines – items that tend to be imported via Port Headland. Regal Transport is in the thick of this – look at:
http://www.ksgroup.com.au/regal/regalcontact.html
and you will see where Regal transport has depots – Newman, Port Hedland and Karratha, plus the two ex-Pacific depots at Derby and Broome.
I do not see the Regal Transport business retreating pursuant to the mining boom retreat. It could retreat for other reasons like predatory competition, but that remains to be seen.
In summary, the East Coast business will improve slowly as KSC adjusts to to the sudden decline a few years ago. The WA timber-hauling business should improve slightly. There is no reason to expect Regal Transport's mining-linked business to go backward. I could be wrong, but then why according to the 09/04/2013 announcement did the directors take up their allocation of shares pursuant to the $2.3126 DRP on 03/04/2013? Also in respect to its WA business, the March 2013 presentation reads:
• In Western Australia where Regal Transport enjoyed solid 32% revenue growth enjoyed solid 32% revenue growth based on mining expansion in the Pilbara and Kimberley regions. • With the acquisition of Bunbury based Collare Transport we expect to see further improvement in our timber business improvement in our timber business. • Our Western Australian business looks set to experience growth in the second half.
I'm stuffed if I know why the SP has retreated. If it is simply Mr Market's paranoia, then I am not concerned, because I hold KSC for the fully franked dividend yield.
KSC Price at posting:
$1.79 Sentiment: Buy Disclosure: Held
(20min delay)