THE broking arms of the investment banks charged with spruiking the float of rail freight business QR National have conceded that it should be sold at a discount to its main coal haulage rival, Asciano.
But the five joint lead managers of the second-biggest float in Australian history are trying to convince large investors that the state-owned QR National should be valued at a premium to its peers in North America such as Union Pacific and Canadian Pacific Railway.
Tomes of pre-marketing research have just landed on institutional investors' desks from each of the float's lead managers - Merrill Lynch, UBS, Credit Suisse, Goldman Sachs and RBS Morgans - who have valued QR National at between $6.7 billion and $7.6 billion.
Asciano has been the brokers' choice of comparison because it shares a duopoly with QR National in the haulage of coal by train on Australia's east coast.
But fund managers are sceptical about the comparison because Asciano's coal business is still dwarfed by the rest of its ports and stevedoring operations. QR National's management is also seen as untested, while the nagging issue remains the size of the stake that the Queensland government will retain in the listed company.
Merrill Lynch has set its base price-to-earnings multiple for QR National at 16 times, compared with Asciano, owner of the rail freight group Pacific National, at 17.9 times. The broker said it believed QR National should be valued at a discount because of a "lack of market familiarity with the assets".
"The risk around loss of coal haulage contracts [for QR National] is an unknown," it said. "The risks and strengths of Asciano are better known given Asciano's history of public ownership. Investors may argue that they would like to see a price-to-earnings discount for QR given the lack of disclosure and trading history."
But in comparing it with similar rail companies in North America, Merrill Lynch said it believed "QR's growth potential, cost-out programs, and the take-or-pay nature of its contracts mean a premium should apply to QR versus the US rail companies".
The Lance Hockridge-led QR National expects to boost pre-tax earnings from $204 million to $427 million this financial year, and by 35 per cent to $578 million in 2011-12. Its pre-tax margins in coal haulage last financial year were 24 per cent compared with Asciano's at 32.5 per cent.
Broker forecasts for earnings next financial year are slightly lower because of an expected delay in the "northern missing link" project connecting Queensland's Goonyella and Newlands rail systems.
Fund managers say investor appetite for a float of QR National has improved since July when the initial public offering of the construction company Valemus was ditched at the 11th hour.
"Things have definitely improved but we are at the end of a share price spike in the market and by the time QR goes to market you might find we are back in the doldrums," one said.
"It is a massive float so it will depend a lot on the climate in the market at the time they are taking the bids. It remains to be seen whether the interest is there."
The prospectus is due to be published in two weeks, before an institutional book-build in mid November. QR National is then slated to be listed by about December 1.
Frequently Asked Questions about this Article…
What is the QR National float and why does it matter to everyday investors?
The QR National float is the planned public listing of the state-owned rail freight business QR National. It's significant because it's one of the largest floats in Australian history and will give investors access to a major coal-haulage operator that competes with Asciano (owner of Pacific National). The IPO could influence sector valuations and provide a new investment option in Australian rail and freight.
How are brokers valuing QR National ahead of the IPO?
The five joint lead managers (Merrill Lynch, UBS, Credit Suisse, Goldman Sachs and RBS Morgans) have valued QR National between about $6.7 billion and $7.6 billion in their pre-marketing research. Merrill Lynch used a base P/E multiple of 16 times for QR National when comparing valuations.
Why are some brokers saying QR National should trade at a discount to Asciano?
Brokers argue QR National may warrant a discount to Asciano because of limited market familiarity with QR's assets, an untested management team, and a shorter disclosure and trading history. Merrill Lynch specifically highlighted the unknown risk of loss of coal-haulage contracts and suggested investors might expect a P/E discount given those uncertainties.
What arguments are being made for valuing QR National at a premium to international rail peers?
Some lead managers argue QR National could deserve a premium to North American rail peers like Union Pacific and Canadian Pacific because of QR's growth potential, planned cost-out programs and the take-or-pay nature of some of its contracts, which could provide steadier revenue.
What are the key financial forecasts for QR National mentioned in the article?
Management expects pre-tax earnings to rise from $204 million to $427 million in the current financial year, and to about $578 million in 2011–12 (a roughly 35% increase). The article also notes QR's coal-haulage pre-tax margins were about 24% last financial year, versus Asciano's 32.5%.
What risks specific to QR National should investors consider from the article?
Key risks highlighted include: an untested management team, uncertainty around how much of the company the Queensland government will retain, potential loss of coal-haulage contracts, limited disclosure and trading history, and possible project delays (such as the ‘northern missing link’) that could affect near-term earnings.
How might market conditions and investor appetite affect the success of the QR National IPO?
Fund managers in the article said investor appetite has improved since July, but stressed the float's success will depend heavily on market climate when bids are taken because it's a very large offering. If market momentum cools, interest and pricing could be affected despite pre-marketing support.
What is the timeline for the QR National prospectus, book-build and expected listing?
According to the article, the prospectus was due to be published in about two weeks, followed by an institutional book-build in mid-November, with QR National slated to be listed around December 1.
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