macquarie report - $2.15 target

Asciano Group

Balance sheet now sensibly stated

Event

* Asciano announced a $1.11bn write-down, consisting of $960m goodwill associated with the ports acquisition, $30m of capitalised customer contracts and $120m of tangible assets.

* The company reiterated guidance at around the top end of the previous guidance range of $675-700m. We are at $731m with consensus (Capital IQ) at $720m.

Impact

* Reappraisal of goodwill is sensible: Ports could not support such goodwill and with the advent of a third operator, management has attempted to capture a worst-case scenario; only time will tell whether that is actually the case. AIO has addressed the overinvestment with write-downs of the rail-mounted gantries. Over the last two years, this is now $913m. At ABP, the write-down of ~$230m brings this business write-down to $445m over two years. From a valuation perspective, the write-downs provide a benchmark for our asset values. In ports, we are comfortable with our 10% premium to the asset base; in posts, the premium is double, but that reflects businesses like gain and industrial rail. Our only concern is whether we have underestimated the structural impact that losing the Webb dock has on these businesses.

* Cashflow unaffected: The write-down is obviously non-cash, thus, cashflow is unchanged for the business. Our dividend and valuation outlook are unchanged. In terms of gearing, the traditional D:E multiple does increase, but arguably, this simply highlights why this is a poor measure. The debt service metrics of ND:EBITDA and DSCR are the same.

Earnings and target price revision

* The $150m asset write-downs would save $10-15m pa and lift earnings, ie ~5% initially. But as it is non-cash, it has no impact on cashflow and valuation .

Price catalyst

* 12-month price target: A$2.15 based on a DCF methodology.

* Catalyst: Hunter Valley asset tour on Thursday.

Action and recommendation

* The new board is slowly removing the vestiges of the Toll/Asciano split. After the deleveraging last year, these write-downs are another stage towards having the balance sheet that is now sensibly stated.

* In our view, value has re-appeared in AIO as investors worried over the first quarter numbers and recent market falls. With a management update on Thursday, and panic subsiding over the resource rent tax, we expect the primary earnings driver, coal, to get a renewed hearing on expectation of further contacts. We maintain our Outperform recommendation.