Tag Archives: Transport

article 3 months old

Transurban Traveling Strongly

-Sydney network driving growth
-Brisbane trammelled by Gateway upgrade
-Melbourne's western distributor potential
 

By Eva Brocklehurst

Toll road operator Transurban ((TCL)) continues to reveal robust traffic and revenue numbers with the Sydney network the highlight in the December quarter, registering benefits from the M5 widening and a better local economy. Overall, first half traffic was up 8.4% while proportionate toll revenue increased by 19%.

Macquarie explains the strength in Sydney traffic as largely because of population growth which reflects the rebound in the economy along with job opportunities. Passenger vehicle registrations grew at 2.2% in the last three quarters, above the five-year average.

Melbourne witnessed some slowing and, while the similar falls in both southern and western links make it hard to attribute much to road works, the broker observes some slowing of demand. Bottlenecks on the Bolte Bridge have affected both roads but the offset is the 5.1% increase in average tolls. CityLink traffic grew 1.9% year on year.

Brisbane traffic appears to be softening too and, with road works around the Gateway feed, no bounce is expected associated with the G20 meeting. Macquarie suspects the second half will be tougher and expects Brisbane will struggle to achieve the core growth of 3.0% per annum, as population growth slows and the support industry for the mining sector shrinks.

This development should be offset by stronger numbers in the US and on Sydney's M2. While softening traffic numbers were always likely and forecasts are reflecting a resumption of trend or slightly lower, the beauty of the stock, in Macquarie's view, is that unless the whole east coast of Australia slows one softer market does not appear to jeopardise revenue growth.

Over the next two years, as road works occur, Macquarie expects net revenue growth should be at least 8.0%. US roads continue to deliver strong growth, albeit from a low base, generating proportionate toll revenue of $80m. The ramp up of the express lanes remains robust with benefits to Transurban coming from a lower Australian dollar as well.

Morgans expected the Sydney roads would be the driver of growth amid strong employment conditions, the NSW government's infrastructure spending program and the roll out of GLIDE. The broker notes the impact on traffic from Melbourne's CityLink widening is not yet evident but the new capacity, due early 2018, the truck toll multiplier increase next year and the potential in the western distributor should all drive longer-term growth.

Brisbane traffic was the weakest, Morgans agrees, which is reflecting more subject economic conditions in that city as well as congestion at the northern end of the Gateway Bridge. The broker notes the Queensland government will undertake the Gateway upgrade this year, completing it in late 2018, and this may have a negative impact on traffic volumes on the bridge during construction, although better flows will be probable once completed.

The broker reduces traffic growth forecasts for the road during construction, to 2.0% from 2.5%, but makes no other material changes to forecasts. Another aspect of the Brisbane numbers Morgans observes is that Brisbane's average tolls grew at less than the allowed toll increase because of car traffic growing faster than truck traffic. Trucks have higher tolls compared with cars and represent a relatively high proportion of traffic in Brisbane compared to other Transurban roads.

Morgans has an Add rating and $10.16 target, highlighting the expectation that Melbourne's western distributor, should it proceed, could add 60-70c per share to valuation. Traffic numbers were above estimates but, despite raising its forecasts, Citi drops its rating back to Neutral from Buy.

Morgan Stanley on the other hand retains an Overweight rating and considers the 12-month forward yield and dividend growth attractive, with a number of growth projects on the horizon underpinning the outlook. The upside emanates from the east coast population growing faster than expected, leading to increased traffic, Morgan Stanley suggests. Downside risks are seen emanating from a worsening economy and if the company’s growth strategy is subject to delays or cost over-runs.

Several brokers are yet to update on these latest numbers and the Buy ratings on FNArena's database stand at three, with three Hold ratings. Macquarie is currently restricted on rating and target. The consensus target is $10.82, suggesting 4.2% upside to the last share price (but as said, not all brokers have as yet updated post the market update). The dividend yield on consensus estimates is 4.3% for FY16 and 4.7% for FY17.

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article 3 months old

Strengthening Tailwinds For Qantas

-More upside probable from lower oil prices
-Capital management as soon as first half result?
-International capacity growth considered rational
 

By Eva Brocklehurst

Strong tailwinds from weak oil prices and positive trends in foreign exchange means Qantas ((QAN)) has guided to robust pre-tax profit of $875-925m in the first half.

This is a little below many broker forecasts, the reason likely being the interruptions from the Bali volcano, but the complaints are only half hearted, given the company is continuing to turn around.

UBS suspects yield growth is soft but further evidence of the sustainability of earnings and capital management initiatives should drive ongoing stock performance. In this aspect, the broker estimates that around 60% of divisional earnings are underpinned by the more stable domestic and frequent flyer business.

The case for capital management remains strong, brokers contend. Citi assumes 60c per share of capital management in FY16. UBS continues to forecast a further $1.5bn will be paid out over the remainder of FY16 and FY17, with $500m likely at the first half result in February.

JP Morgan updates its models to account for the guidance and oil price revisions, which are expected to reflect a “lower for longer” scenario. The net effect is a 2.4% reduction in net profit forecasts. The broker takes account of the slightly lower revenue because of the interruption from the Bali volcano, and slightly higher costs given workforce reduction targets.

Volcanic activity in Bali has resulted in several brokers paring their estimates for FY16. Around $42m in one-off items were included in the guidance. Given the nature of the airline industry, Morgans warns against stripping out such external events as they have a habit of recurring.

Typical seasonality implies an FY16 pre-tax profit of around $1.6bn on the back of first half guidance and the broker expects, given a falling oil price, this is achievable. Morgans now factors in a US$60/bbl crude oil price in FY17 and believes there is more upside to come for Qantas as the market revises FY17-18 expectations on lower oil price assumptions.

Qantas continues to re-shape its cost base and make improvements to utilisation and, from an investor perspective, Macquarie highlights the importance of this, as it provides critical cash flow. The business model is now more sustainable and increased returns should result through the cycle, the broker maintains.

Traffic trends are positive, with Qantas November capacity growth of 4.2% and revenue per kilometre growth of 5.5%. Domestic capacity growth is subdued but international is growing strongly, up 9.0% in November, Macquarie observes. From a Qantas perspective the broker considers the market rational, given the capacity growth is principally being driven by utilisation.

Macquarie remains buoyed by Qantas commentary regarding improving revenue per average seat kilometres (RASK). Load factors are also supportive, improving 1.1 percentage points in the first half and particularly strong across the Jetstar and international business.

The broker also notes that, since the market update on October 21, the Singapore jet fuel price has fallen a further 16%. The broker's research suggests this will remain at subdued levels throughout FY16 and into FY17.

Morgan Stanley is increasingly confident in both its earnings forecasts and in capital management expectations. This is underpinned by the new guidance as well as scope for further oil-driven upgrades.

Composition and quality of earnings remain to be dissected but, on the quantum of earnings forecasts alone, this should be enough to underwrite capital management initiatives. The broker suspects a buy-back of $700m could be announced at the first half results

Morgan Stanley suspects the market is still discounting the sustainability of the airline's revival and expects revenue will return to being the main driver of FY16 earnings, above the less definable factors such as oil prices and cost reductions. The total underlying yield of the airline is 15% which the broker compares to US carriers at 0-11%.

Qantas has seven Buy ratings on FNArena's database. The consensus target is $4.82, suggesting 26.4% upside to the last share price. Targets range from $4.30 (UBS) to $5.40 (Morgan Stanley). The dividend yield on FY16 and FY17 forecasts is 5.8% and 3.7% respectively.

In late mail, Credit Suisse has now "initiated" coverage of Qantas, although the broker had previously covered the stock up to 2013. The broker estimates that a combination of lower fuel prices and management's cost efficiency drive and capacity restraint could lead to the generation of free cash flow equivalent to 40% of the company's market cap over the next two years. Credit Suisse further believes consensus forecasts are too low on the basis that Qantas will not likely pass all the benefits of fuel cost reductions onto customers.

The broker's profit forecasts thus sit some 30% above the market. An outperform rating has been set, providing Qantas with the highest possible eight-from-eight Buy equivalent ratings from FNArena database brokers. Credit Suisse's target of $5.50 is the new high marker, lifting the consensus target to $4.91 (29% upside).
 

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article 3 months old

Qantas Prepares For Descent

By Michael Gable 

There is a fair bit of data coming out this week which will hopefully give the market a catalyst to continue that climb into the end of the year. One event that we find interesting is Friday's meeting of OPEC. We get asked all the time about energy stocks because they are historically very cheap. As we've mentioned plenty of times before, we just don't know when the oil price will go up again, so its best to not allocate more funds to that sector. The reason why the oil price is so low is because OPEC is keeping the supply high to drive out the American producers. Until they cut their supply, the oil price will stay low, and energy stock prices will stay depressed. It is as simple as that.

A Reuters survey showed that OPEC supply rose in November to 31.77 million barrels per day from 31.64 million in October. So chances are that there will be no major announcement in regards to cutting the oil supply, which means another long period of depressed prices. OPEC meet every six months so it will take another half a year until we maybe have a chance at looking at oil stocks again. Any investment before then is high risk.

Another area of high risk are stocks with fundamental issues that are entrenched in a technical downtrend. In the last week, we have seen huge falls in stocks like Dick Smith and Slater & Gordon. Sometimes investors can find it hard to know whether to bail out or not. If the company is drilling holes in the desert and making no money, then its an easy decision because of the risk that the company goes bust. However, Dick Smith and Slater & Gordon are making money and have value and that can make it hard for the investor to sell out, knowing that the value will be realised at some point.

Today we look at Qantas ((QAN)).
 

 

QAN shares have been edging higher the last several months but in the shape of a rising wedge. This is a negative sign because the usual break is to the downside. That is, a move under the lower diagonal blue line would indicate a steep drop for QAN. When a stock breaks out of a rising wedge, it tends to find support at the base of that wedge. In this case we are looking at a target of $3 for QAN.


Content included in this article is not by association the view of FNArena (see our disclaimer).
 
Michael Gable is managing Director of  Fairmont Equities (www.fairmontequities.com)

Michael assists investors to achieve their goals by providing advice ranging from short term trading to longer term portfolio management, deals in all ASX listed securities and specialises in covered call writing to help long term investors protect their share portfolios and generate additional income.

Michael is RG146 Accredited and holds the following formal qualifications:

• Bachelor of Engineering, Hons. (University of Sydney) 
• Bachelor of Commerce (University of Sydney) 
• Diploma of Mortgage Lending (Finsia) 
• Diploma of Financial Services [Financial Planning] (Finsia) 
• Completion of ASX Accredited Derivatives Adviser Levels 1 & 2

Disclaimer

Michael Gable is an Authorised Representative (No. 376892) and Fairmont Equities Pty Ltd is a Corporate Authorised Representative (No. 444397) of Novus Capital Limited (AFS Licence No. 238168). The information contained in this report is general information only and is copy write to Fairmont Equities. Fairmont Equities reserves all intellectual property rights. This report should not be interpreted as one that provides personal financial or investment advice. Any examples presented are for illustration purposes only. Past performance is not a reliable indicator of future performance. No person, persons or organisation should invest monies or take action on the reliance of the material contained in this report, but instead should satisfy themselves independently (whether by expert advice or others) of the appropriateness of any such action. Fairmont Equities, it directors and/or officers accept no responsibility for the accuracy, completeness or timeliness of the information contained in the report.

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article 3 months old

MaxiTRANS Gains Traction

-Rationalisation to stabilise earnings
-Suspension product returns to market
-And expected to lift FY16 earnings
 

By Eva Brocklehurst

Broader market conditions remain patchy for vehicle parts manufacturer MaxiTRANS ((MXI)) but the re-introduction of an important suspension product is expected to help FY16 earnings.

The company has provided guidance for profit of $4.8-5.8m in the first half, which Canaccord Genuity welcomes as a sign the business is recovering. The recovery has come largely through operational improvements and efficiencies. The broker expects FY16 profit of $10.4m, upgrading estimates by 12%.

Canaccord Genuity lifts underlying FY16 and FY17 earnings forecasts to 5.6c and 6.1c per share respectively. A Buy rating is retained and target is 77c.

The company has rationalised its plant, closing the Bundaberg facility and relocating production to other sites, which is expected to provide an annualised benefit of $1.75m. After product recalls adversely affected earnings in FY15, the CS suspension product has been returned to the market. This should underpin earnings, the broker believes.

Three underperforming Queensland retail operations will also be closed while a new warehouse in Victoria should reduce operating costs. Rationalisation is expected to help stabilise earnings within the parts business, which remains patchy, in Canaccord Genuity's observation.

In contrast the van market remains strong, with the company boasting an order book out to mid 2016. The broker notes, while demand for trailers and tippers is variable, there are some sizeable potential orders in the market.

The parts and services business is important to the company's long-term growth strategy but scale is also being sought in the MTC panel manufacturing operations in China.
 

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article 3 months old

Brokers Sceptical Of Brambles’ Targets

-Focus on better quality
-Product customisation
-And retaining pallet customers
 

By Eva Brocklehurst

Pallets and containers business Brambles ((BXB)) remains pre-occupied with the opportunities it can pursue long term - and its earnings targets. Management is confident it can achieve a 20% return by FY19 from the $1.5bn in growth capex to be invested over the next four years and has reiterated FY16 guidance.

Brokers are still wary, noting significant earnings growth is required to justify the investment. Still, there is also a greater focus on protecting the business, UBS observes. This entails better pallet quality, more certainty of supply and a holistic focus on solutions. These strategies may dilute returns in the near term but extend the sustainability of the business and its long term growth potential.

The investor briefing, which took place in California, dwelt on the business in the Americas, which accounted for 47% of sales in FY15. Macquarie suspects the FY19 target will be difficult to achieve as US margin pressure is likely to continue through FY16, despite a valuation tailwind from a weak Australian dollar.

Transport costs are rising in the US. Macquarie was disappointed in that the briefing provided no potential turnaround story or mitigation strategies to counter increased costs. The issue for Brambles, in the broker's opinion, is the timing mismatch in being able to pass on costs through re-pricing customer contracts, of which many are around three years in duration.

Following the acquisition of IFCO, the company's RPC (reusable plastic containers for produce) footprint has been primarily expanded across Europe. Therefore, as the US is the largest market it remains a significant opportunity, with around 86% estimated to be unserved in RPC. Product customisation provides the platform from which Brambles can take share from alternatives.

Even so, the opportunity is not simple. Increased competition and stricter global standards for fresh produce sales are driving some retailers to seek alternative RPC designs to differentiate their display. Macquarie anticipates that the company's approach will remain measured, as scale is ultimately what drive the economics of the business.

Another issue is customer retention in the pallets business, CHEP. CHEP North America has delivered an average of 5.0% constant currency sales growth over the last five years. The broker notes, in a relatively commoditised business, this highlights the strength of the network. Nevertheless, organic volume growth has averaged less than 1.0% over the same period.

With pricing and volume growth largely beyond the company's control, Macquarie welcomes customer retention initiatives although the benefits will be realised only gradually. There is also the opportunity for growth through technical innovation. The economics of tracking pallets remains tough to justify but Macquarie considers it a large opportunity. The main obstacle is the cost of tracking, relative to the low cost of replacing pallets.

Citi likes the focus on investing in quality, not just quantity, and considers the company is taking a more balanced and robust approach in growing its business. In RPC, the move to a wood-look crate for Wal-Mart has triggered interest from other retailers, while European retailers are looking to switch back to green from black.

It may be too early to decide whether this will support an acceleration in RPC, of which IFCO could benefit. The opportunity is there as the market share for cardboard falls away.

Brambles is trading at a material premium to the All Industrials, ex banks and resources. Citi believes this is fair, given the market position that CHEP occupies as well as the high levels of return on capital that the business delivers. The broker is cautious about the ability to deliver the stated returns from the additional growth capex, but recognises the quality of the business nonetheless.

Consequently, management is expected to deploy growth capex only when it makes sense for the long-term benefit of shareholders and Citi's Neutral rating is retained. On the other hand, Deutsche Bank believes the market is too sceptical in pricing in the potential in the stock. The broker is attracted to the long-term business model, despite the risks of not meeting targets, and sticks with a Buy recommendation.

Pallets in the Americas were a drag over recent years, and improving the return to 25% from the current 18% is the chief enabler of a better performance, UBS contends. The broker considers the business a solid and defensive growth story, which should deliver 6-9.0% per annum earnings growth in the medium term. However, expectations for double digit growth could somewhat ambitious.

FNArena's database contains three Buy ratings and four Hold. The consensus target is $10.71, suggesting 9.9% upside to the last share price. Targets range from $10.29 to $11.11.
 

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article 3 months old

Sydney Airport Well Set For Growth Options

-Widens opportunities with T3 purchase
-Badgery's Creek a key uncertainty
-Potential for distribution increase
 

By Eva Brocklehurst

Sydney Airport Holdings ((SYD)) posted a first half result that pleased brokers. Yield has expanded on the back of prior investment in the airport and international passenger growth is on the rise, supported by a number of new wide-body services which will commence operations in the second half.

Besides ramping up the potential for organic growth, the company has also announced an agreement with Qantas ((QAN)) to purchase Terminal 3 for $535m, which is expected to be earnings and cash flow accretive immediately. The transaction will be funded by a mix of debt and cash.

Aeronautical, retail and property revenue will be recognised initially by the airport, commencing after finalisation of the transaction, with advertising and valet revenue to be recognised from June 30, 2019. Strategically the acquisition will deliver control over all airport assets and provide the flexibility to move to a common user terminal after 2019, when Qantas' existing lease runs out.

The purchase effectively brings forward a transaction that would have occurred when the lease ran out and until 2019 Macquarie suspects Sydney Airport has limited influence. Still, in 2019 it will be able to revamp and integrate the retail strategy for the whole airport. Sydney Airport has recently committed to increase its operating expenditure by $8m per annum as part of the new international aeronautical agreement to improve service quality.

Aeronautical revenue will be a higher proportion of T3 revenue compared with the existing airport composition, given the transaction does not involve car parking. Also, T3 is used for domestic and regional services so there is no duty free retail to boost earnings.

While not considered an inefficient terminal under exclusive Qantas control, brokers suspect capacity utilisation may be increased under common usage from 2019. Regardless, the accretive value of T3 and greater confidence in the international passenger outlook has driven a 2-3% upgrade to cash flow per share forecasts for UBS.

Deutsche Bank believes around 90% of the incremental revenue from T3 will flow to earnings and upgrades forecasts to reflect this outcome. The broker expects more opportunities to enhance revenue at T3 will be forthcoming, although there is likely to be some contraction in margins given integration costs associated with the purchase. Analysis suggests capacity into Sydney will increase in the second half of this year and the airport is positioning for a stronger 2016.

Meanwhile, the distribution was upgraded to 25.5c per security for the first half and is expected to be fully covered by net operating receipts. Morgans is hopeful there will be a further upgrade. Assuming the T3 acquisition is completed on schedule, and incremental earnings are realised as the company expects, then Morgans forecasts cash flow of 26c per security. A further 0.5c increase in the second half distribution may be possible, the broker contends, although this is not concreted into forecasts.

The main obstacle to an increase in distributions would be the capital contributions required for the second Sydney airport. On this point, the relative appeal of the stock, UBS asserts, is tempered by the uncertainty regarding the company's involvement in the Badgery's Creek airport development.

A notice regarding the second Sydney airport is expected from the government at the end of the year. This is a significant issue for Sydney Airport with the major uncertainty being the means of pre-funding the development before it opens in 2025. Morgans does not expect major capital investment from Sydney Airport until after 2020.

Macquarie believes confirmation of an ability to invest capital sensibly is what will ultimately drive value in the stock. The discipline and patience shown around the T3 opportunity demonstrates what can be done with the second airport and this should become clearer in the next nine months, Macquarie maintains. Revenue opportunities remain varied and range from new food areas, new yield management in car parking and hotel developments.

The stock looks fairly valued to Morgan Stanley, although yield and organic growth are attractive. This is reflected in the consensus target on FNArena's database which, at $5.77, is close to the last share price and compares with $5.53 ahead of the results. There are three Buy ratings and four Hold on the database. The distribution yield is 4.5% on FY15 estimates and 4.9% on FY16. 
 

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article 3 months old

Weekly Broker Wrap: Supermarkets, Aviation And Small Caps

-Aldi profile to broaden & grow
-New supermarket operator probable
-Coles/Woolies share loss likely
-Pacific Smiles expands
-Tomizone in the right place
-Greencross "rare value"?
-GDI Property concerns overplayed?
 

By Eva Brocklehurst

Supermarkets

Aldi has revealed some financial details owing to an Australian government inquiry into company tax avoidance. The company's pre-tax profit margin in FY13 was 5.2%, which Citi notes is above Coles ((WES)) and below Woolworths ((WOW)). The broker envisages Aldi has scope to grow and move on price in Australia. Adjusting for store size, given Aldi stores are half the size of local rivals, sales per store total $28m versus Coles at $33m and Woolworths at $37m. The lower sales productivity is attributable to lower prices.

JP Morgan agrees that the German-owned retailer's financial performance in Australia suggests growth is ahead of its peers. The broker suspects sales growth was around 13% in 2014. Aldi's customer profile is expected to broaden as product quality improves and more branded products are offered. JP Morgan now suspects a new entrant in food retail is likely to gain confidence now Aldi's financial performance is known. Any weakness that was thrown up in the financial revelations would have acted as a deterrent. The broker  maintains there is the prospect of another specialised format operator entering Australia and this will be a negative for incumbents, including independents supplied by Metcash ((MTS)).

Morgan Stanley observes Aldi and Costco are now reaching mainstream Australia and both are now over index with younger people and large households. The broker's survey of Australian consumers took note of future indicators of market share such as queue length, convenience and fresh offerings. Morgan Stanley believes FY20 market share forecasts may prove too conservative at 11.1% for Aldi and 1.8% for Costco, given an expanded addressable market. It appears near impossible for Coles and Woolworths to retain market share while the independents (IGA) at 11.4% do not have enough share to give up.

Deutsche Bank's supermarket pricing study for the June quarter was flat, easing back from the 2.2% inflation observed in the prior quarter and the weakest outcome since September 2013. Woolworths is investing heavily in branded product pricing and this is probably the segment where prices became too high. Woolworths increased price investment in the quarter but Coles does not appear to have responded aggressively. Both supermarkets experienced around 6.0% deflation in private label in the quarter but Woolworths branded product fell 2.6% while Coles grew 5.1%. The broker believes Coles has continued to control its own pricing dynamic and maintained solid trading momentum.

Deutsche Bank makes a case that, if Woolworths' earnings in food and liquor were re-based sufficiently for it to be in a position to grow in line with the food retail industry, it could deserve to trade at a 10% premium to the market. The broker calculates the current share price implies margins that are 100 basis points worse than consensus, or a fall of 200 basis points from their peak. That said, it is likely the market is pricing in enough downside but Deutsche Bank considers it too early to invest. Stocks rarely outperform while estimates are being cut and there are risks ahead of the arrival of a new CEO. The broker advises a Hold rating is appropriate at this juncture.

Aviation

Analysis of forward fares in the domestic market points to steady price increases and Deutsche Bank suggests this supports a recovery in domestic aviation profitability. The broker looks at trends in fares for both economy and business class and notes economy fares are up 10% versus the prior June quarter with business only slightly lower. International fares are more volatile and subdued in terms of growth. Economy fares were flat to lower heading into the first quarter of FY16 and only slightly better in business. This confirms suspicions that Australian carriers' international growth will remain negative into FY16. Some international capacity growth is coming from other carriers but this is averaging around half the growth at the end of 2014.

Small Caps

Pacific Smiles ((PSQ)) has opened two new centres, one in Canberra and one in Brisbane. This increases the company's presence in dental care in Queensland and the ACT and Bell Potter believes there are further expansion opportunities in those regions. The company now operates 49 dental clinics in Australia and has a firm growth path, aided by increasing demand for dental services. Bell Potter has a Hold rating and $2.49 target and valuation represents a total expected return of 12.4%.

Tomizone ((TOM)) provides managed WiFi services and its core product, Lightswitch, is a cloud-based platform that provides key exposure to a rapidly growing market. Bell Potter notes the higher cost of mobile to WiFi data is driving consumers to seek public WiFi (hotspots) while businesses are increasingly offering WiFi to attract customers, learn about their behaviour and connect through targeted marketing and mobile advertising. Tomizone has a track record and large customer base and the broker initiates coverage with a Buy rating and 30c target.

Having recently revised down forecasts Canaccord Genuity now incorporates higher debt levels for Greencross ((GXL)). Nevertheless, the broker believes the company has a strong medium-term growth profile and, at current levels, is in "rare value" territory. Target is $9.00 and a Buy rating is maintained. FY15 earnings growth is still expected at around 42% while FY16 and FY17 earnings are expected to grow 16%. The company has an established portfolio of around 200 retail locations and 130 veterinary practices in Australasia and is well positioned to leverage its significant first-mover advantage.

GDI Property ((GDI)) could potentially deliver more than 10% earnings growth in FY16 should it accretively re-invest some of the proceeds from the sale of Castlereagh St, Sydney, and/or increase its buy-back to 10% from 5.0%, Moelis observes. Despite a strong growth outlook the broker notes the stock continues to trade at around 10% discount to net tangible assets relative to the sector average premium of 26%. This is largely to do with the $334m balance sheet exposure to a soft Perth office market, Moelis suspects. The broker believes concerns are overplayed as 88% of this exposure relates to securely leased properties, with no value being attributed to the strong funds management business. A Buy rating and $1.08 target are maintained.
 

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article 3 months old

Will The Asciano Takeover Bid Succeed?

-Concerns around terms
-What about the franking credits?
-Question over use of scrip
 

By Eva Brocklehurst

Canada's Brookfield Infrastructure Partners has stirred the pot at Asciano ((AIO)), making an indicative bid for the rail, terminal and port contractor. The details of the approach are as yet unclear but the bid implies a price of $9.05 a share and uses a combination of cash and scrip.

The approach looks opportunistic to several brokers, given the automation of Port Botany has just been completed. This represented the last material risk in the company's cost reduction program. Deutsche Bank expects dividends to grow 35% in FY15, 46% in FY16 and 17% in FY17. The broker also notes that Toll Holdings ((TOL)) was recently acquired by Japan Post at multiples which suggest Asciano is being offered a relative discount, given its higher quality assets and cash flow.

As of June 30 2014 Asciano had $267m in its franking account and there has been no mention of how this will be dealt with. Deutsche Bank expects the amount will rise as of FY15, given the pay-out ratio is less than 100%. Hence, the broker expects the Brookfield offer will be improved by at least this amount - equating to around 27.5c a share.

Morgan Stanley observes Asciano is trading at a 16% discount to the conditional offer, which suggests the market is concerned around the terms of the deal and potential completion. Due diligence is yet to be completed and a formal proposal will remain dependent on a satisfactory outcome. Morgan Stanley is cautious, envisaging longer-term structural risks, particularly in intermodal and terminals.

Still, the broker acknowledges Asciano's free cash flow is robust and defensive. Given Asciano does not own strategic infrastructure, nor does it have anti-competitive market share, the broker does not foresee any regulatory risks arising which cannot be managed.

The main issue for Australian investors will be the scrip component, which Macquarie speculates could be $1.00, with Brookfield Infrastructure Partners, the listed infrastructure fund, taking a 40% stake in Asciano. The other issue is potential loss of the franking credits. This transaction would place Asciano into a trust and the franking benefit would be lost to Australian shareholders. As a result, a special dividend may be required to gain the support of local investors. Macquarie believes this would need to be around 80c a share.

Brookfield is a logical buyer, UBS maintains, as it holds diversified interests in global infrastructure and utility assets including a rail network in the south of Western Australia. Asciano generates strong cash flow while its high capital intensity results in barriers to entry. UBS also highlights recent reports citing competitor Hutchison is likely to reduce its presence at Australian container ports, which would result in reduced competition in that area.

The broker observe this bid ends a period of speculation regarding a potential sale of the company's ports but there are risks it may not proceed. The use of scrip by a foreign entity with low liquidity is probably going to present a challenge and there is some risk another bidder may emerge, at least for part of Asciano's business. UBS downgrades to Neutral from Buy on the news.

JP Morgan's price target of $7.86 is set at a 10% premium to valuation, to reflect the potential for corporate activity. The broker retains an Overweight rating. As capital expenditure is now reduced, the broker expects dividends will increase and forecasts a pay-out of 45% in the second half of FY15, 55% in FY16 and 60% in FY17.

Goldman Sachs also cautions that a number of steps need to be taken to progress to a formal proposal and the discussions are at a very early stage. Strong earnings growth is expected for Asciano over the next few years as it delivers on its business improvement program. The company should have headroom to reduce gearing and increase the pay-out ratio. Goldman Sachs is not offering a rating or target on Asciano at present.

There are five Buy ratings and three Hold on FNArena's database. The consensus target is $7.73, suggesting 1.3% downside to the last share price. Targets range from $6.47 (Morgan Stanley) to $9.05 (Deutsche Bank).

See also, Asciano Signals Strong Dividend Growth on April 22 2015.
 

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article 3 months old

Tailwinds Building For Sydney Airport

-Agreed price growth for 5 years
-Debt servicing costs to fall
-Capital returns?
 

By Eva Brocklehurst

Sydney Airport Holdings ((SYD)) is expected to improve passenger experiences, with a brand new agreement on aeronautical pricing. The new agreement provides greater certainty as it is underpinned by a fixed pricing path and incorporates capital expenditure over the five-year period, enabling the airport to invest in its terminals and technology and improve services. This contrasts with previous agreements in which capital expenditure was agreed separately with airlines and charges re-set every couple of years.

The company has reached an agreement with the Board of Airline Representatives Australia. The price has not been re-negotiated since 2007 as negotiations were deferred in 2012 for three years to allow the company to establish a new vision for the airport. Macquarie observes that in interim fundamental inputs had materially fallen and many airlines considered the Sydney services were not as good as that of rival Melbourne.

This led to an increased requirement for operational and capital expenditure. Macquarie had built such expectations into earnings forecasts and so the negotiated outcome is a positive surprise, with an initial fee price decline of 0.75% and a price increase of 3.8% thereafter for the next four years.The agreement was reached with regard to a longer-term perspective on bond rates and funding costs. With debt spreads, too, a longer-term average was used in the fee calculation.

Passenger growth assumptions are more conservative than the 2007 negotiations, but Macquarie estimates they are still in the order of 3-4%. In return for generous pricing provisions, Sydney Airport has accepted performance measures to ensure base level services are delivered to airlines and passengers. Hence, Macquarie upgrades cash flow expectations by 7.0% for 2017 and 11.0% in 2018 and 2019.

Morgans is positive about the deal as it provides price certainty and the agreed price growth across the five years is ahead of its forecasts. The current pull-back in the share price is a buying opportunity, in the broker's view. Sydney Airport is in advanced discussions with the airlines regarding their international agreements, which activity accounts for around 35% of the airport's international passengers.

Sydney Airport should benefit from a number of tailwinds over coming years. Morgans observes international passenger growth, which drives 75% of earnings, will benefit from a tripling of bilateral air rights between Australia and China as well as an increase in capacity between Sydney and the US. The broker also expects servicing of debt will fall as out-of-the-money interest rate swaps expire and are replaced at lower rates. This should help drive cash flow and distribution growth.

Morgans expects distributions will lift to 28.9c in FY16. Guidance for FY15 is 25c a share. Moreover, this improved cash flow should improve credit metrics and create potential for shareholders to be rewarded with capital management initiatives. The broker estimates up to $800m could be distributed to fund a special distribution, buy-back, or capital return.

Credit Suisse is the fly in the ointment among brokers, reducing distribution estimates by 3.6% for 2016 and 4.8% for 2017. The broker now expects 2016 to provide 27c a share and 2017 to provide 29.5c. The broker also considers the risk of not achieving the 2015 distribution is now higher. The company's policy is to pay out 100% of cash flow as a distribution but the broker notes cash flows, even for an infrastructure business, are not smooth and airport earnings could be more volatile than investors expect. Credit Suisse was not so struck by the agreement, having expected higher growth. The broker also expects higher operating costs for providing more services to airlines and passengers.

The steady revenue growth is attractive on a relative basis, in JP Morgan's view. The price growth path is close to the broker's base case assumption and the fear the negotiations would lead to a material downgrade to fees because of the lower interest rate environment appears to be unjustified.

FNArena's database has four Buy ratings and three Hold for Sydney Airport. The consensus target is $5.37, suggesting 2.2% upside to the last share price. The dividend yield on FY15 and FY16 consensus forecasts is 4.8% and 5.2% respectively.
 

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article 3 months old

Qantas Descending?


Bottom Line 26/05/15

Daily Trend: Down
WeeklyTrend: Up
Monthly Trend: Up
Support levels: $3.12 / $2.99 / $2.81
Resistance levels: $3.79/ $4.11

Technical Discussion

Qantas Airways ((QAN)) is involved in the operation of international and domestic air transportation services, the provision of freight services and the operation of a Frequent Flyer loyalty program. The Company’s main business is the transportation of customers using two complementary airline brands which are Qantas and Jetstar. It also controls subsidiary businesses including other airlines and businesses in specialist markets, such as Q Catering. The Company operates in four sections; Qantas Domestic, Qantas International, Qantas Loyalty and Qantas Freight. For the six months ending the 31st of December 2014 revenues increased 2% to A$8.07B. Net income totalled A$203M vs. loss of A$235M Broker consensus is currently “Buy”. No dividend is paid.

Reasons to be more optimistic:
→ Cash flow should remain positive for the foreseeable future with the company also be confident of a credit rating upgrade.
→ Traffic for February shows continued revenue momentum with the yields both domestically and internationally on the rise.
→ The company has updated guidance for the first half with a profit of between $300m and $350m anticipated.
→ Cost cutting measures are continuing.
→ Market dynamics have been improving, especially domestically.
 

On the day of our last review price had just broken through the upper boundary of the zone of resistance which portended a consolidation prior to another leg higher.  That’s pretty much what’s transpired with old resistance/new support being tested and clearly rejected with buyer’s once again chasing price higher.  It’s been a stellar come-back for Qantas since December 2013 with the company gaining almost 300% up to the pivot high made a couple of weeks ago.  Some profit taking has been witnessed over the past couple of weeks but it’s certainly nothing to be discouraged about in the bigger scheme of things.  Price could even come-back to retest the zone of support again and still be in a strong position. 

The only slight reason for concern is the large increase in volume which coincided with the recent pivot high.  It’s uncanny how often volume bubbles coincide with a significant top which means we have to tread carefully over the next week or two.  If downside traction does take hold then a deeper, albeit healthy retracement could be in its early stages.  It’s also worth pointing out that several large brokers have put out “buy” signals recently which automatically brings out the contrarian in us.  This is perhaps being a little cynical but it’s amazing how often some brokers jump on the bandwagon late; just another reason to not get carried away and buy just for the sake of it.

Trading Strategy

Although it’s always good to add strong trending stocks to your portfolio we don’t recommend jumping on right here and now.  As mentioned above, the large increase in volume at the recent pivot high could be an early warning sign of a pending longer pause for breath or even a deeper pull-back.  If the recent profit taking only triggers a sideways meander then our interest will be rekindled.  For the moment we’ll remain side-lined and watch from a distance.
 

Re-published with permission of the publisher. www.thechartist.com.au All copyright remains with the publisher. The above views expressed are not by association FNArena's (see our disclaimer).

Risk Disclosure Statement

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Technical limitations If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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