I'm much less inclined to believe in conspiracy theories. More useful getting to know the businesses IMHO.
For one I'd be interested in the degree of difference that the downturn will have on volumes at its ports and rail businesses.
I read on fund manager's take on Asciano as (MMC Asset Management, a couple of years ago) a businesses that's leveraged to the GDP. It grows not in line with GDP but with a slice above it as well.
If things get really bad and GDP goes backwards does that mean that position reverses?
The below article seems to suggest there's fundamental reasoning behind the fall in AIO's price.
7:55 PM, 11 Nov 2008 Stephen Bartholomeusz Without a leg to stand on TOP News Wall St extends losses on economic anxiety 2:33 AM Europe shares extend losses 3:03 AM Grim economic data throws spotlight on crisis summit 2:57 AM Obama asks Bush to help US auto industry 2:47 AM Qantas picks up Rudd's former chief of staff 2:30 AM
The Spectators Bartholomeusz: Without a leg to stand on The next Google? Bartholomeusz: Aussie banks play it safe Gottliebsen: Turbo-charged losses Kohler: Big government takes over
The freefall in the value of Asciano securities before trading was halted was ominous. A good business with good management has been so badly financed that it has been left swinging naked in the chill winds of the credit crisis.
Asciano has sought to arrest the crisis – a complete loss of confidence that has seen Asciano’s securities plummet in value from more than $11 to 69 cents in less than 18 months – by providing reassurance tonight that its earnings are on track and that it is in advanced discussions with parties that could see injections of capital directly into the group’s operating businesses.
Asciano chairman Tim Poole said there was a high level of interest in the group. From Asciano’s perspective, there was a particular focus on its preferred strategy of a "partial monetisation" of its capital-hungry Pacific National coal haulage business.
He dismissed speculation that Asciano would attempt a conventional capital raising (the collapse in value of its securities buried even the faintest lingering possibility of a conventional issue) and also that the group would defer and combine its planned interim distribution for this financial year with its final distribution. The distributions have been underwritten, which means an interim distribution could have imposed further pressure on the security price and see securities issued at token prices. The deferral will also preserve some liquidity.
The latest collapse in Asciano’s price appears to have been triggered by a Citigroup research report that switched its recommendation on Asciano from a buy to a sell. That prompted a dramatic plunge in the price, from $1.72 to 69 cents.
The severity of the market’s treatment says that it doesn’t expect Asciano to be able to solve the problem of its mountainous debt burden, nor does it expect the private equity firms that conditionally offered $4.40 per security in August, and recently approached Asciano again, to provide any kind of floor under the price.
Asciano’s predicament is of its own making. When it separated from Toll Holdings last year it took with it most of the group's debt. That was in tune with its view of itself as a listed infrastructure business, most of which were/are heavily geared to leverage their returns.
It is the interest costs associated with its near $5 billion of debt – about half of it maturing in 2010 – that have almost sunk Asciano.
At an operational level it has performed strongly, with earnings before interest, tax, depreciation and amortisation (EBITDA) rising 10.1 per cent to $678 million in the year to June. Poole said tonight that the group was performing in line with budget for the first four months of the financial year, or a six per cent increase in EBITDA over the same period last year.
Even if one puts one-off losses of $239 million ($104 million relating to its ill-fated sortie onto the Brambles register) to one side, the $423 million of earnings before interest and tax generated in 2007-08 provided only minimal coverage for financing costs of $386 million. A modest increase in profit doesn’t do much to alter the basic dilemma of having far too much debt.
Asciano is a capital-hungry business, with capital expenditures of $353 million last year against depreciation and amortisation of $255 million. Asciano has said its maintenance capex was only $124 million, with "growth" capex of $229 million.
The bind for the group is that to position itself so that it can manage the big 2010 re-financing it needs to raise capital and to raise capital it has to not only continue to produce solid earnings numbers but also maintain both its maintenance spending and the investment in its growth. Turning down the growth capex too significantly in order to retain cash would undermine the value of its businesses and ability to raise capital either against them or, ultimately, within the parent entity.
The attempt to monetise the most capital hungry of its business units is aimed at raising capital to both reduce leverage and the scale of Asciano’s share of the capex requirement going forward. By raising capital against a business unit rather than within the parent, Asciano would disconnect negotiations over the value received from the meltdown in the value of its securities.
The market appears to be signalling a conviction that the juggling act required to develop a solution that allows Asciano to maintain spending and put itself in a position to reduce its leverage is beyond its capabilities in the current, extraordinarily difficult and fear-laden environment – even though the group has said it had no actual requirement for extra liquidity this financial year and said tonight that it was in full compliance with its banking covenants. There are no market-related triggers in these covenants.
In fact the market is signalling something more than scepticism about Asciano’s ability to re-make its balance sheet. It is saying that the economic downturn will hit Asciano’s ports and rail freight businesses hard and add significant downward pressure on its profitability and add substantially to the difficulty of re-financing.
Its response to Poole’s reassurances of Asciano’s current trading will be important – whether it responds positively or takes the view that in such a volatile environment the past, even the very recent past, is no useful guide to the future.
Asciano probably only had one shot at arresting the crisis of confidence that overwhelmed trading in its securities today.
If tonight’s statement doesn’t work to calm the market when trading resumes, it risks a continuing rush for the exit that would complete the destabilisation of the group and leave it as one of those zombie-like creatures – Centro, Babcock & Brown and, until recently, Allco and ABC – that the crisis has created.
As we’ve seen with the implosions of those groups, a disintegration of market value also undermines the negotiating position with potential buyers of even attractive assets. Asciano probably needs to complete a major "monetisation," quickly and at a demonstrably fair price, if it is to arrest the crisis of confidence that has enveloped it.
AIO Price at posting:
55.2¢ Sentiment: None Disclosure: Not Held
