EUR 850.00 For Business Accounts Only

Morningstar | Solid FY18 for Qube; FVE up 6% on Improving Outlook

Narrow-moat Qube Holdings reported a solid fiscal 2018 result, with underlying NPAT increasing 4% to AUD 107 million, in line with our expectations. More importantly, management pointed to solid growth in 2019. The outlook is improving in a couple of areas, mainly at the Patrick stevedoring business and the ports and bulk business.

We make minor upgrades to our medium-term earnings forecasts and increase our fair value estimate 6% to AUD 2.55. At the current price, Qube is roughly fairly valued. We continue to like the long-term growth strategy of building a vertically integrated logistics company, which should afford Qube cost advantages over competitors. But much of this positive outlook is already factored in given it trades on an expensive P/E of more than 30 times and offers a dividend yield of just 2%. Additionally, we see risks around high exposure to the volatile resources sector, the potential for a slow ramp up at Moorebank, and the expiry of Patrick's Fremantle lease in 2019.

With a capital return from Patrick and a stronger outlook for most underlying assets, management opted to pay a small special dividend of AUD 2 cents per share, bringing total dividends to AUD 7.5 cps, fully franked. A nice display of financial strength but with so much investment going on, it might have been prudent to keep the cash. Capital expenditure totalled AUD 410 million in fiscal 2018, 81% relating to growth projects, as opposed to maintenance. This drove an increase in gearing to 24% from 19% last year, still well below management's 30%-40% target range. Net debt/EBITDA was 2.9 times, and will rise in coming years on the Moorebank development and other growth projects.

Logistics division EBITDA fell 5% to AUD 63 million, mainly due to temporary negatives. The New South Wales drought severely impacted grain export volumes and the firm lost its Sydney Haulage empty container park, which caused cost inefficiencies. Qube already bought a new empty container park close to Port Botany to replace the one it lost, so this impact won't repeat. The drought will continue to impact earnings in fiscal 2019, but won't last forever. The outlook is fairly stable, with solid growth in containerised freight volumes likely to be partly offset by intense competition causing downward pressure on prices.

Ports and bulk performed well, with EBITDA increasing 19% to AUD 88 million. This division benefited from the recovering resources industry and strong imports of cars and consumer goods. It goes into fiscal 2019 with good momentum, aided by new customer contracts and investment in new assets. Though we expect consumer spending to soften as house prices retreat, and China's fixed asset investment is likely to cool over the longer term.

Infrastructure and property division EBITDA increased 118% to AUD 33 million on the full year contribution of AAT, which benefited from stronger car and mining equipment imports. Leasing up of the Minto site following its recent redevelopment also helped, though most earnings upside will come in fiscal 2019.

Management flagged some delays at Moorebank in gaining regulatory and environmental approvals. Completion of the rail terminal will be delayed by up to six months beyond the original date of March 2019. This may impact the initial warehouses, particularly if there are further delays. However, the delays shouldn't materially impact the long-term returns from this project. Minimum capital expenditure in the first five years at Moorebank has increased to AUD 642 million from AUD 400 million on the warehouses for Target and Qube and the decision to automate the rail terminal. Positively, management flagged strong tenant interest in the site, though most tenants will wait to see the benefits of the completed rail terminal before formally committing. We continue to believe this will be a long term success, driving substantial cost efficiencies for tenants importing large volumes of containers through Port Botany.

Conditions for the Patrick stevedoring business are improving, with growth in market demand and Patrick’s market share. Qube's share of Patrick's underlying earnings increased 28% to AUD 35 million, on 8% growth in volumes and cost synergies post the acquisition. These were partly offset by continued pressure on pricing caused by shipping line consolidation and surplus stevedoring capacity at key ports. The outlook is good, with two recent contract wins likely leading to stronger volumes in fiscal 2019. Productivity improvements are tracking well, and planning for rail automation at Port Botany is progressing. The main risk is the Fremantle lease expires in June 2019 and the port authority is seeking public expressions of interest. Given deep-pocketed Asian stevedores have set up in East coast ports and accepted poor financial returns, there is a risk Patrick could lose the site, be forced to pay higher rent or face more competition. Fremantle is significant to Patrick, representing 17% of its container volumes.