-Transport needs more economic fuel
-Port and rail has most favoured outlook
-Logistics is stretched
-Waiting for Qantas to deliver
By Eva Brocklehurst
The transport sector is at a crossroads. It's driven as far as it can on current fundamentals but is awaiting a further rebound in the economy to fuel up. The recent rally in the share market has lifted most players in the sector, according to brokers, except perhaps Virgin Australia ((VAH)). CIMB believes this strengthening of the sector is not because of improved fundamentals, and there is a likelihood that earnings and guidance will fail to meet expectations. Macquarie also suspects that much of the recent rally stems form multiple (PE) expansion rather than an improved earnings outlook. UBS expects earnings growth will eventuate for the sector, except the airlines and Toll Holdings ((TOL)).
CIMB sees sub-sectors port and rail having the most favourable outlook. Asciano ((AIO)) and Aurizon ((AZJ)) have coal exports to thank for this. CIMB believes this justifies their share price movements and has the broker become more comfortable with forecasts. UBS expects AIO and AZJ will post earnings growth of around 25% in FY13, based on volume growth, leverage and business improvement. Macquarie is more concerned that, for AIO - rated Hold - soft trading in intermodal and container ports will be a constraint on share price. Still, the broker finds the stock looks cheap relative to the sector. Moreover, it is attractive on a price/earnings basis given strong earnings growth prospects for the next two year. AZJ has similar constraints in intermodal but Macquarie rates it a Buy. The company still enjoys earnings certainty associated with the regulated business, an under-geared balance sheet, cost reductions and improving free cash flow.
CIMB has downgraded the logistics sub sector, and Brambles (BXB) and Toll ((TOL)) to Underperform because of valuation concerns. The broker believes valuations have become too stretched relative to the underlying fundamentals of the economy. A cyclical recovery would justify re-rating these but at this stage the broker finds no catalyst. UBS expects Brambles should continue to recover, but faces earnings dilution from a recent equity raising. Toll is expected to reveal sluggish general freight and problems with offshore investments which will dilute performance. Macquarie has stated its preference for earnings certainty and a track record of delivery. Here, it has upgraded Brambles to Buy, given its steady and improving growth profile, efficiencies and earnings predictability. However, Toll gets a downgrade to Hold because it's nearing valuation and there are challenges in global forwarding and maintaining margins. In respect of nearing valuation, Macquarie also places K&S ((KSC)) in the downgrade to Hold basket.
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