EUR 850.00 For Business Accounts Only

Morningstar | Qube Remains Fairly Valued Following Strong First Half

Shares in narrow-moat-rated Qube remain fairly valued following a pleasing first-half fiscal 2019 result, with solid volume growth in ports and bulk and Patrick driving underlying NPAT of AUD 65 million, 20% ahead of the previous corresponding period, or pcp, and slightly outpacing our prior expectations. The firm retained guidance of "solid" adjusted NPAT growth in fiscal 2019, albeit not as strong as the first half. We upgrade our forecasts marginally and increase our fair value estimate by 3% to AUD 2.62 per share. Our long-term estimates, however, are largely unchanged. Qube's long-term prospects are attractive. The vertically integrated logistics company enjoys cost advantages over competitors, and the Moorebank facility should further entrench its advantage. However, trading at a forward P/E of 38, most of this upside in the firm is already priced in.

The operating division, which includes the former logistics and ports and bulk divisions, grew underlying EBITA 5% to AUD 82 million. Volume upticks in ports and bulk, which is exposed to the recovering resources industry, drove the increase, offsetting a flat half for Logistics. This remains in line with our full-year forecast of around AUD 171 million. We forecast an EBITDA CAGR of 8% over the next five years as solid growth in containerised freight volumes is partly offset by intense competition keeping pressure on prices, limiting margin expansion.

Underlying EBITA in infrastructure and property of AUD 21 million is in line with our full-year forecast of AUD 40 million. The Moorebank project appears on track to begin operating--albeit in a limited capacity--in early fiscal 2020. We are optimistic on the long-term potential of the Moorebank Logistics Park and expect it to drive substantial cost efficiencies for tenants importing large volumes of containers through Port Botany.

The Patrick container business enjoyed increased volumes and market share gains over the six months to December 2018. Further productivity gains helped drive the 15% increase in Qube's share of Patrick's underlying NPAT before amortisation to AUD 19 million, which tracks our unchanged forecast of AUD 37 million. The outlook remains positive, with no contract losses over the half. We continue to forecast annual increases in container volumes of a little more than 3% over the next five years, combined with an uptick in pricing, driving a 6% CAGR of Patrick's underlying earnings over the same period.

Qube declared an interim dividend of AUD 2.8 cents per share, representing an increase of 4% on the pcp, in addition to a AUD 1 cent per share special dividend, both fully franked. While this is above the firm's payout ratio of 50% to 60% of underlying earnings per share, the dividend policy is currently under review to allow for more flexibility. With net debt of AUD 1.07 billion, Qube's current leverage ratio of 28% is below the target 30% to 40% range. Although the balance sheet's strength allows increased dividends, with significant capital expenditure earmarked over the next few years, it may be more sensible to save the excess cash. Qube increased fiscal 2019 capital expenditures guidance to AUD 500 million-AUD 600 million, up from prior guidance of AUD 350 million-AUD 450 million, representing pulling forward investment in Moorebank.