Stock: AIO AU
Name: Asciano Group
Price: A$1.66
Market Cap (m): A$4,857
Current valuation (DCF): A$2.12
12mth price target: A$2.10
Recommendation: Outperform
Volatility index: Very High
Event
NCC has made a draft ruling against AIO of declaration of QRNational rail assets in Queensland on the grounds that the Queensland Competition Authority (QCA) regulated regime is satisfactory. It should be noted that the QCA regime has changed with legislative amendments in early September. AIO would argue some success in that some legislative changes have moved to address some of its concerns namely:
Non-discrimination rules are stronger than than the original proposal. We suspect this means that on new track which is not declared, but still under the access regime that QR cannot bundle above and below access, blurring the pricing of each. Given the Northern Missing Link has already been committed to and the Southern Missing Link is actually a consortium, this is likely to be difficult anyway.
The certification period has been extend from 5 years to 10 years. The length is a better matching of above-rail contract life with regulation. It ensures track is regulated with most contracts renewing through the regulated period. It should help miners have certainty within the environment.
Increased separation of above- and below-rail businesses, with requirements for arms-length contracting between related entities and a requirement for some QR Network directors to be non-executive. Whilst AIO was arguing for complete independence, this is still a good first step.
Tougher audit regime and availability of data about QRNetworks, and more timely response to the regulatory process.
Whilst the legislative changes do not address all of AIO's concerns, they do deal with some of the major issues. Area that they fell short of was the instance the scope of the assets certified. From here AIO will respond to the NCC draft and if the draft is not changed, it could appeal to the Australian Competition Tribunal. Such an appeal is the equivalent of a new NCC process, just costlier.
Possibly of more interest is the collapse of the coal miners' bid for QR. With QR entering the pointy end of an IPO process, it is arguable this is a time when mid-tier mining companies can possibly flex some bidding leverage. Within the NML volume the obvious is Qcoal with potentially 10mt of haulage to be contracted. The risk for AIO is QR sacrifices part of its returns to gain the positive momentum of announcing coal contract wins during the IPO process.
Impact
AIO made much about the weak legislative environment when it first proposed proceeding to its declaration application. It is arguable that as a means to start negotiations, AIO has had some success, as the legislative changes that have followed have strengthened the environment. Whether it is robust enough, will only be seen over time, but we are still comfortable that the miners will seek to encourage competition, like Rio/Xstrata did sponsoring AIO into the market. As a result we continue to believe AIO's market share can grow. And it will be the announcement of contract wins that should provide AIO momentum. Whilst the timing of these can never be controlled, during the QR IPO process the impact will be greater.
Action and recommendation
We remain favourably disposed to AIO. Value remains compelling; thus our Outperform rating. During the next eight weeks of its IPO process we expect QR will highlight the growth opportunities within the Queensland market for both market participants, and that they can co-exist. For AIO, with only 15-20% market share, we still believe there is ample scope to lift its share at sensibly priced train sets. It is the growth in market share, delivery in existing contracts which ensures AIO can maintain EPS growth of +30% over the next three years. Management success at continuing to structurally lower the cost base of intermodal and ports will add further leverage to the earnings.
June 2010A 2011E 2012E 2013E
Sales revenue m 2,895.2 3,071.1 3,558.9 3,953.4
EBITDA m 687.8 871.2 1,055.7 1,202.6
EBIT m 440.4 582.7 755.7 885.6
EBIT growth % 15.2 32.3 29.7 17.2
Recurring profit m 188.6 320.7 486.8 641.1
Adjusted profit m 122.1 229.2 345.6 445.6
EPS adj 5.3 7.8 11.8 15.2
EPS adj growth % 932.0 % 48.0 50.7 28.9
PE adj x 31.4 21.2 14.1 10.9
Total DPS 0.0 2.0 2.5 4.5
Total div yield % 0.0 1.2 1.5 2.7
Franking % nmf 75 74 100
EV/EBITDA x 10.7 8.5 7.0 6.1
GCFPS 22.2 18.1 22.5 26.5
PGCFPS x 7.5 9.2 7.4 6.3
Net debt/equity % 81.7 84.4 74.0 65.3
Price/book x 1.8 1.7 1.6 1.4
*All values are in AUD unless otherwise stated.
Source: Company data, Macquarie Research, Sep 2010.
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