Corrigan's Moorebank secret

Qube Holdings (QUB) is a logistics company chaired by ‘the man who broke the waterfront unions’, Chris Corrigan, and backed up by a team widely regarded as the best in the Australian logistics and transport sector.

Corrigan, as chairman, is playing a minor role in comparison to the impact he had as managing director of Patrick Stevedores in the 1990s, when the company dramatically improved productivity in Australian ports through a controversial overhaul of workplace practices.

However, several of Corrigan’s original team have reformed at Qube and it’s worth noting that the hostile takeover of Patrick by Toll in 2006 was a bitter lengthy process that prevented the key executives from completing their strategic plans. Those executives are now having a second chance.

Qube has a selection of logistics and transport assets, many of which present long-term opportunity that is not well appreciated by the market. The jewel in the crown is the strategic Moorebank land ownership, which is likely to be developed into the country’s largest inland intermodal terminal. Moorebank, west of Sydney, is ideally located in between the $1 billion government-funded Southern Sydney Freight Line (SSFL) and the major M3 and M5 roadways. The terminal is required to allow a greater modal shift from road to rail, and to achieve the government’s objective of reducing the road congestion around Port Botany.

Qube was initially formed via Kaplan Funds management as a combined listed funds management business and owner of logistics and transport assets in 2007. KFM (KIL), as it was known at the time, acquired the non-core assets that DP World had acquired from the distressed P&O Ports (auto, general stevedoring and landside logistics). DP World was more interested in the container stevedoring.

Sam Kaplan, of KIL, is Corrigan’s long-term associate and is now deputy chairman at Qube.

After these significant acquisitions, which included cheaply priced call options for the minority interests, it was decided that KFM had enough of a footprint to transform to a conventional operating company. The corporatisation and exercise of the options has simplified the structure and improved earnings visibility.

Diversified earnings exposure

The strategy all along has been to integrate the port-related supply chain via acquisition in the very fragmented sector. Apart from the successful selection of acquisition targets, the other critical component to the company’s success has been the ability to identify efficient solutions for its customers across multiple sectors.

Over the years the service offering has diversified and expanded dramatically. Currently it has a national portfolio of port-related assets and has expanded on the initial P&O assets to include bulk logistics and stevedoring, and more recently into agriculture and oil and gas. The acquisition of South Spur in 2008 provided an entry into the NSW container rail market. Today it operates nearly all the import-export container volumes in the state, benefiting from the modal shift from road to rail.

In resources, the focus has been integration of the chain from mine to port, both organically and via acquisition. One successful project has been investing in, developing and operating a multi-user facility at Utah Point in the Pilbara, allowing a group of smaller miners to gain port access. 

In agribusiness, the announcement in March – in the wake of the failed bid by Archer Daniels Midland for GrainCorp – of a joint venture with Noble Group to develop a multi-user grain handling facility at Port Kembla is an example of identifying an opportunity to provide a more efficient solution for potential customers. Like many of its opportunities, this is scalable and can add to Qube’s national footprint.

Moorebank – From landowner to terminal operator

The federal government-owned Moorebank Intermodal Company, or MIC, last week informed the joint venture of Qube Holdings and Aurizon Holdings, known as SIMTA, that it had been selected to enter direct negotiations for the development and operation of an intermodal terminal at Moorebank in NSW.

Qube management has spent many years working towards this outcome and a successful agreement with the government would be a key catalyst for the stock. Qube (67%) and Aurizon (33%) own an 83 hectare site that is currently earning a rental yield from the federal Department of Defence. Next door is a large government-owned site, which has previously been considered separately to Qube’s site for development into an intermodal terminal. 

Whilst it was always expected that Moorebank’s whole of precinct approach would be selected as the best option, the prospect of locking down some details in regards to the approval process required capital expenditure, and ownership of the terminal will make it much easier to determine exactly what value Moorebank will create for shareholders.

Our suspicion is that after final details are concluded the value proposition will be far greater than the market currently perceives. The basis for this is that Qube is the best operator and the only company with capacity to provide an integrated solution of the container supply chain from rail operation to the retail store. The two sites combined will have final capacity of 1.7 million containers and provide the potential for Qube to earn between $200-$500 revenue per container at a 15% EBITDA margin.

The site will be open access, allowing other operators to directly compete, and it will take many years to be fully developed. However, given the fragmented nature of the supply chain, there is significant opportunity for Qube to gain a large percentage of container volumes with its integrated solution. The site is large enough to include warehousing and distribution centre capacity on site, creating value for retail customers.

Management background – Corrigan and Patrick

Under Corrigan’s lead, Patrick was one of the main protagonists in the 1998 Australian waterfront dispute which centred on the Port of Melbourne. After the major union shake-up, the Patrick share price increased more than 10 times in less than a decade. Hence, the team knows all about creating shareholder value.

Asciano (AIO) demerged from Toll in 2007, owning Patrick and Pacific National. When Asciano had a near-death experience during the GFC it is believed that Corrigan and his team was part of a consortium who bid for Asciano in an attempt to pick up a bargain. Interestingly, container stevedoring is currently the one obvious missing link for Qube. However, it has enough other growth opportunities to pursue, and with the container stevedoring market becoming more competitive it would likely only enter at depressed prices.

There is extensive depth in the board of directors and executive team. Other than Corrigan, some of the other key players include Sam Kaplan (deputy chairman), Maurice James (MD), Paul Lewis (CFO), and another 10 key members.

There are many strategic shareholders. Wilh Wilhelmsen and Kawasaki are key customers and also substantial shareholders. The large global Carlyle Infrastructure Partners (CIP) is a major shareholder, with 12.5%, as is Taverners Group with 5.5%. Taverners is Peter Scanlon’s investment vehicle, with Ross Burney as chief executive. Burney is a non-executive director of Qube, and Scanlon is Corrigan’s long-term supporter, who was chairman of Patrick.

Despite this history, Patrick (now Asciano) largely has a different market exposure than Qube. That is, Asciano’s major earnings exposure is container stevedoring through Patrick, and coal logistics through Pacific National – two areas that Qube currently doesn’t have exposure to.

Long-term opportunity

If you are after short-term returns it may be better to look elsewhere; however, if you have a five-year timeframe, then this is one of the most sound long-term growth stories in the market.

The stock currently has a market cap of approximately $2.5 billion, with a share price of $2.36. The stock is trading on a price earnings ratio (P/E) of 24 x FY14, and has been perceived as overvalued for much of its time since the low of $0.50 in 2009.  

Currently, out of the 10 brokers listed on Bloomberg as covering the stock, only one has a buy. It has been a similar story for much of QUB’s past, with analyst recommendations generally underestimating the long-term value of the assets and the operational ability of management. It is a situation that may well continue – that is, the stock is likely to look expensive on a short-term basis as the long-term strategic assets are developed.

This story really is all about management, and their ability to consistently identify and execute growth opportunities. They are constantly on the lookout for new opportunities and the market generally only finds out about many of them after the deal has been done, or after they are contributing to earnings. 

The same general earnings guidance from the company of “Qube confirms its expectation that underlying earnings per share is expected to grow for the period to June 2014 (subject to no material change in economic conditions)” has been repeated after just about all of its results. Given the amount of growth opportunities currently being pursued, other than a major economic downturn I can’t see any need for them to change this general guidance of earnings per share growth for many years to come. In the event of market weakness, the diversified earnings exposure offers some protection and the company would be well placed to take advantage of any discounted acquisition opportunities.

We have a long term Buy recommendation on the stock, with a discounted cash flow valuation of $2.60 including a $0.30 component for Moorebank. The recommendation is based on a five-year investment timeframe, and shorter-term investors may want to wait for lower prices on any broader market weakness.

To see Qube Holdings’ forecasts and financial summary, click here.