Ceasing coverage on Qube

There weren’t any surprises in Qube’s 2016 results but we think there is better value elsewhere.

Despite Qube’s Logistics division recording a 4 per cent fall in revenue in the year to June, from $616 million to $594m, the division’s earnings before interest and tax (EBIT) increased 5 per cent to $59m. Cost savings and operational improvements helped, including moving some activities from Qube’s Somerton terminal to its Vic Dock facility, while new customers helped offset declining volumes from existing customers.  

Revenue in the company’s Ports & Bulk division fell 14 per cent to $676m due to the full-year impact of four major contracts ending or being restructured on less profitable terms in the second half of the 2015 financial year. Although Qube gained additional contracts in 2016, they had only a minimal contribution to the result but should become more profitable in coming years.

Table 1: Qube result 2016
Year to June 302016215Change (%)
U’lying revenue ($m)13201432(8)
U’lying EBITDA ($m)246268(8)
U’lying EBIT ($m)145164(12)
U’lying NPAT ($m)87105(17)
U’lying EPS (c)7.69.8(22)
DPS (c)5.5*5.5-
*2.8c final div (no change), fully franked, ex date 12 Sep, DRP (2.5 per cent discount)

Key points:

  • No surprises in 2016 result

  • Patrick transaction completed

  • Qube also acquires full ownership in Moorebank

The operating leverage arising from this division’s substantial fixed costs meant EBIT fell by 41 per cent, to $57m.

By contrast, Qube’s share of NPAT from its investments in various Ports & Bulk division ‘associates’ rose 36 per cent to $15m. Twenty-five per cent owned Prixcar – which transports and stores cars across Australia – was the main contributor, with Qube’s share of NPAT rising seven times to more than $4m. However, this result was flattered by the profit on the sale of a property by Prixcar, which more than offset the loss of its major customer during 2016.

Qube’s Strategic Assets division also performed well, with revenue rising 36 per cent and EBIT rising 43 per cent. Earnings from this division are expected to decline in 2017 but to increase over the medium term as its Moorebank rail terminals become operational and the company leases new warehouses on the Moorebank site.

Acquisition of Patrick Terminals

Qube has been busy so far in 2017, with its acquisition of Patrick Container Terminals in a joint venture with Canadian investor Brookfield Infrastructure and its partners closing earlier this month.

Qube also moved to full ownership of the Moorebank project in southwestern Sydney by paying Aurizon $99m for the 33 per cent of the project that it didn’t already own.

The purchase increases Qube’s minimum required investment in the Moorebank development over the next five years by 50 per cent, from $250m to $375m, but of course it will now obtain all of the future profits from the project over its 99-year lease term.  

Ceasing coverage

We think both the Patrick acquisition and the Moorebank project add valuable assets to Qube’s portfolio but, as we noted in Moving Qube to a Hold, earnings from Moorebank will only start cranking up early next decade.

Qube’ share price has risen 7 per cent since Moving Qube to a Hold and, after adjusting for the additional earnings from Moorebank, Qube is now selling on a multiple of 18 times 2021 earnings. As such, we think there is better elsewhere and, while we’ll keep monitoring the company should it become better value, for now we’re CEASING COVERAGE.

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