Unpacking Moorebank’s value

Fears have been circulating over how a fall in iron ore volumes harms Qube Logistics. The growth opportunity of the Moorebank project, however, has largely gone ignored.

The Qube share price has been weak in recent times, primarily due to fears around its iron ore exposure. With the Moorebank development confirmed, we believe a worst-case scenario around iron ore volumes being cut from customers Atlas Iron and Arrium is priced in.

Bulk resources comprise about 25% of revenues. However, Qube has a diversified exposure with no customer across the whole business comprising greater than 5% of revenue.

As well as Moorebank, the company has expansion opportunities into agriculture and oil & gas to complement its existing exposure to logistics, general and auto stevedoring.

The very capable management team has proven many times over the years that they have the ability to grow earnings even when market conditions are against them. This has primarily been due to expertise in providing efficient solutions for customers through integration of the supply chain and identifying accretive acquisition opportunities.

Although Chris Corrigan takes a back seat role as non-executive chairman, the executive team is mostly the same team he trained at Patrick. Maurice James is chief executive, but the strength is the depth through all divisions.

In 2006, Patrick was acquired in a hostile takeover by Toll Holdings (TOL), and spun out into Asciano (AIO). The executive team all left, but they didn’t have to wait long to start again with Qube forming in 2007. Since then a number of the old Patrick staff have left Asciano and joined Qube. It provides a competitive advantage with many Qube staff and executives having detailed knowledge of their competitor.

Green light for Moorebank

On Friday an agreement with the federal government was announced. Qube, through its SIMTA consortium (Qube and Aurizon), will develop the $1 billion Moorebank project as a whole of precinct approach with both the SIMTA land and the government land.

The agreement is a big win for Qube after years of trying to develop a freight terminal on land it owns next to a government site.

It is also an opportunity that Corrigan and his team have been planning since their Patrick days.

Qube couldn’t agree with the previous Labor government over its development plans, but despite this they still pushed ahead with all the required development approvals. 

When the labor government knocked back their proposal, I don’t think the team even contemplated the chance that they wouldn’t eventually get the terminal up and running. Their confidence came from knowing they had the best location, with capabilities to run the connecting operations. They also knew that logic would eventually win out, as the congestion issues at Port Botany have only been getting worse and there are no other appropriate proposals to fix the problem.

Qube and Aurizon have been in exclusive negotiations with the government since May over rights to develop the site.

The terminal will be an open access import-export freight terminal with a capacity of 1.05 million containers a year, and an interstate freight terminal with a capacity of 500,000 containers a year. It will provide the infrastructure to clear the congestion at Port Botany, and also enable significantly higher volumes to go through the port in years to come.

Qube is particularly interested in the import-export volumes to and from Port Botany. The government had already spent over $1 billion on a dedicated rail line between Port Botany and Moorebank. Further, the major M5 and M7 highways are nearby, ensuring the site is the ideal location to provide efficiency improvements.

They have already been operating rail volumes in NSW for a few years, and have started integrating the fragmented supply chain. But, now with an intermodal terminal on the way, it opens up a new level of integration opportunities.

With a combined 240 hectares of land on the two sites there is significant capacity for warehousing on site and to create efficiencies between the usual step from rail to the distribution centre.

Moorebank earnings

From the beginning management has never really given detailed guidance around earnings forecasts. They prefer to run with the general “earnings will grow” and then let the results do the talking. Moorebank is no different, and as a result many analysts are not factoring in the potential earnings benefit from the terminal development.

Qube has spent $250 million purchasing the land. There is expected to be around a $150 million cost to connect the Southern Sydney Freight Line to the Moorebank site, and then another $500 million building the warehouses and surrounding infrastructure. 

Although we need further details to accurately forecast earnings, to provide a guide we can look at the current supply chain and determine the potential revenue for Qube.

From ship to retail store the container supply chain is about $1500 per twenty foot equivalent (TEU) container. About half of this is the container stevedoring which Qube has no exposure to and is not likely to gain exposure in NSW any time soon. However, Qube has the capabilities to do the other half.

As an absolute minimum they will get $150 per container, with an upside target of $500. We can then assume a 15-20% earnings before interest, tax, depreciation and amortization (EBITDA) margin which should be achievable.

The next assumption is around timing, with a target start date of 2017 initially at 200,000 TEU containers, building up to one million containers.

From this it can be seen there is an upside target of around $100 million EBITDA, and a low case of about $23 million EBITDA.

The development is also likely to open up further accretive acquisition opportunities.

We are not factoring much of this in yet, as further details are required around the cost of development and structure of operating the government land.

Iron ore impact

The total combined revenue Qube gets from Atlas (AGO) and Arrium (ARI) is approximately 6-8%.

If Atlas closes its high-cost mine it would have an approximate 1% earnings per share (EPS) impact for Qube. If all operations where closed, then it would have a 4% impact.  Atlas’s high-cost Abydos mine produces about 3 million tonnes per annum of the company’s entire production of 15 million tonnes.

Similarly, if Arrium (ARI) stopped all volumes, there would be a 4% impact on Qube, and a 1-2% impact if the high-cost operations are halted.

It’s also important to remember that Qube owns infrastructure for these two contracts which it could sell or utilise with volumes from other operators.

Summary

Our view is that the impact from lower iron ore volumes is factored in, and Qube is well placed to continue its high rate of growth due to the diversified nature of their operations and strategic opportunities.

The Moorebank development will underpin many years of growth, and there are many other opportunities across the business, particularly in agriculture.

We are downgrading our 2014-15 forecast EPS by 3% and 2015-16 forecast by 5%, reflecting the likely loss of iron ore volumes.

Our price target is reduced from $2.70 to $2.60, and we maintain our “buy” recommendation. 

To see Qube Logistic's forecasts and financial summary, click here.