Asciano (AIO) has been sold off heavily this year, with the stock price down 15.57% since 02-Jan-08. Macquarie Research Equities (MRE) said that false rumours in the market that AIO is having trouble funding capital requirements for its Queensland coal contracts has resulted in the stock being aggressively oversold. AIO is now MRE�s key pick in the sector and they accordingly reiterate their outperform recommendation and 12-month price target of $9.82.
MRE have spoken to management and the rumours surrounding the funding for the rolling stock is completely false in two regards. Firstly, AIO will not need financing for the new rolling stock for at least another 12 months. Even if they were to do so now, as the rumours suggest, there is back to back earnings certainty in these contracts that virtually ensures availability of funds at the right price.
Operationally the business is sound. Management also indicated that the shutting down of the grain business is going smoothly and port container volumes continue to be extremely strong, and already in the five months to November, port volumes were up 9.0%, ahead of our forecast for the year of 7.8%. Additionally, all indications are that December will be a record month.
While its debt level is high, AIO has only $284m of debt (5% of total) to rollover this year. Management have indicated that while a regearing is desirable, it is by no means necessary. Even if AIO were to regear, there is clear evidence that credit markets are still open for quality infrastructure assets � like the Dec-07 $350.5m purchase of Hobart Airport.
Quant is supportive. Analysis by the Quant team last year found the child entities traditionally underperform in the near term after the demerger, and consequently strongly outperform after their first reporting period, with a median outperformance of 16.9% over 12 months. The larger the demerger, the longer the period of 'probationary' underperformance. AIO reports on March 12. Management buying � Mark Rowsthorn purchased an additional 500k shares in AIO on January 7. A BXB loss won�t change the thesis. MRE�s valuation is at $9.30. If we allow for a $50m loss on the exit of the BXB stake, this only drops this valuation by $0.08.
Action and recommendation AIO is significantly undervalued. MRE maintain the Outperform and AIO is now MRE�s preferred pick in the sector.
AIO Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
