Qube Holdings Thrown An Opportunity

Australia | Mar 14 2017

DP World Australia has raised some of its port levies and flagged an opportunity for Qube Holdings to follow suit.

-Unlikely DP World Australia will face meaningful loss of market share
-Opportunity for Patrick to relieve margin pressures
-Sign of a more rational stevedoring industry?


By Eva Brocklehurst

Port and logistics operator Qube Holdings ((QUB)) has been thrown an opportunity. Competitor DP World Australia intends to raise the levy it applies to the truck and rail operators picking up or delivering full containers to and from its Port Botany (Sydney) and Melbourne terminals. DP World Australia competes with Qube's Patrick operations.

This price increase is reflecting substantial cost increases, DP World Australia stated, and the increased charges will apply to the land-side logistics operators, not the shipping lines (customers) that it charges for lifting containers on/off vessels.

Qube appears to have the option of either following DP World's lead and increase its own levies, or hold levies constant with the aim of gaining market share. Morgans suggests the former is more likely, urging caution, as it is unlikely DP World will face meaningful market share losses from the decision given charges for customers are not being increased.

The broker suspects cost increases have not fully flowed through to Patrick's cost base. Patrick is yet to complete its market rent review for the Melbourne terminal.

Morgans assumes Qube will lift its levies by $20 per container. The broker also assesses that full containers comprise around 80% of total containers that are moved, while those moved through Port Botany and Melbourne comprise 70% of the total across the four ports where Patrick operates.

With all else being constant, such a levy increase would add around 6-8% to the broker's profit forecasts. The broker also highlights the profit increase does not translate into an equivalent valuation increase because of the value diversification provided by Qube's various operating divisions and the Moorebank project. Hence, the announcement may be positive for Patrick but has less meaningful valuation impact for Qube as a whole.

There is material upside potential for Patrick, UBS believes. The broker estimates a surcharge could raise an additional $25m in revenue for Patrick, while the costs that the surcharge would seek to recover have already been incurred. The broker estimates this would produce a 20% boost to the $40m after-tax contribution to Qube's profits in FY18. It is hard for UBS to envisage a scenario whereby Patrick does not follow DP World's lead.

Logically, the increased charge will ultimately be passed on to the underlying importer or exporter, and is unlikely to be material in the context of a total land-side logistics cost. Hence, UBS agrees there is unlikely to be much gained in terms of market share if Patrick chose not to follow suit.

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