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Morningstar | Moorebank to Hammer Home Qube’s Competitive Advantage

Narrow-moat-rated Qube Holdings is fairly valued at present, trading at a small premium to our unchanged AUD 2.62 fair value estimate. Earnings are growing relatively strongly in fiscal 2019, mainly on a marked improvement in the resources sector benefiting the ports and bulk business. Longer term though, Qube’s main attraction is the logistics division, which should benefit hugely from the Moorebank intermodal development. With Moorebank close to opening, we reiterate our view that potential short-term issues like delays and soft tenant demand are immaterial to the long-term view for this high-quality, long-life asset.

The resources sector accounts for around half ports and bulk revenue, and is the key driver of earnings growth. The balance comes from transport services for forestry products, machinery and vehicles among other things. In this division, Qube has amassed a portfolio of assets capable of offering bulk transport, warehousing, storage, and stevedoring services. Offering multiple services to customers enables Qube to utilise its assets more efficiently and deliver a more reliable, cost-effective service than smaller competitors. It also benefits from greater diversity across products, services and geographies, likely providing a bit more earnings stability than small operators could expect.

However, we think these are only minor competitive advantages, despite the strong current performance of the ports and bulk business. The resources industry is highly cyclical and returns for companies servicing the industry are likely to suffer considerably in the next downturn. Even if conditions in mining remain strong for a prolonged period, which we doubt, we’d expect new entrants to drive price competition and erode excess returns.

Rather, we believe the container logistics business has the most long-term potential and the greatest ability to defend excess returns.

The key is the large scale of the Moorebank intermodal facility and the extent of Qube’s vertical integration. Controlling the bulk of the supply chain from “ship to shelf,” Qube can drive material cost savings by cutting out middlemen and utilising the cost advantage of trains over trucks. Delivery time savings are also expected as bottlenecks can be removed and assets can be managed holistically. We anticipate Qube being able to offer a cheaper and faster logistics service to customers, while keeping some of the cost savings for itself. In this way, Qube should be able to make strong returns without competitors spoiling the party.

Sydney is the key market to watch. Port Botany is a major import bottleneck at present. The site is too small to operate efficiently and the local roads are heavily congested. Qube’s solution is to simplify port functions--rather than process containers at the port, it will just get the containers off the ships and on to trains quickly and with mostly automated systems.

Once on rail, containers will be taken to the soon-to-open Moorebank intermodal terminal, where they will be delivered to colocated warehouses or put on trucks to be delivered nearby. With an abundance of land at Moorebank, containers should be more efficiently processed. Qube owns stakes in and controls all the key parts of the supply chain--stevedores, trains, trucks and intermodal terminal--allowing it to run each part to maximise volumes and minimise costs. When Moorebank is ramped up and operating efficiently at scale, total supply chain savings could be up to 25% for importers and exporters. This gives Qube a major cost advantage over competing logistic solutions.

Moorebank will progressively complete over the next few years. The rail link joining to the dedicated freight line, the import/export train terminal and early warehouses should complete in 2019. The next stage of development including the interstate rail terminal should complete in 2022. Warehouses will be built as demand warrants. Once complete, Moorebank should be an exceptional asset. It will reduce supply chain costs, take trucks off some of Sydney’s most congested roads, reduce greenhouse gas emissions, and generate strong returns for Qube shareholders. A real win-win for Qube and the community.

While nothing of Moorebank’s scale is planned in other cities, Qube is likely to build more intermodal terminals--it already operates several--and streamline supply chains to drive efficiencies in each of its markets.