Qube Holdings Ltd (QUB) - NEUTRAL

Qube Holdings (QUB) reported a solid FY18 result, in our view, with underlying revenue up +9.1%, underlying operating earnings (EBITDA) up +3.6%, and underlying net profit after amortization (NPATA) up +6.0% to $122.8m.

Date of Report	ASX	Price	Price Target	Analyst Recommendation
30/08/18	QUB	A$2.80	A$2.90	NEUTRAL

Date of Report

30/08/18

ASX

QUB

Price

A$2.80

Price Target

A$2.90

Analyst Recommendation

NEUTRAL

Sector : Transportation and Logistics	52-Week Range: A$2.13 – 2.89
Industry: Industrials	Market Cap: A$4,494m

Source: Bloomberg

Company Description

INVESTMENT SUMMARY

We rate QUB as a Neutral for the following reasons:

Attractive assets which are strategically located.
Leveraged to improving economic growth (e.g. commodity markets, new passenger vehicle sales).
Additional project work in future years, leading to improved margins.
Successfully leasing out the warehouse space at Moorebank Logistics Park and offering logistics services at incremental margins (e.g. recently announced Target Australia deal and agreements under-progress with another prospective tenant).
Technological advances (and automations) at its ports and operations leading to better cost outcomes and improved margins.
Potential bolt-on acquisitions to supplement organic growth.
Strong balance sheet position – current gearing of 19% below management’s target range of 30-40%.

We see the following key risks to our investment thesis:

Downturn in the domestic economy (or key end markets such as agriculture, retail), leading to excess capacity and pricing pressure.
Margin pressure due to costs pressures.
Value destructive acquisition (dilutive to earnings and a distraction for management).
Competitive pressures leading to margin erosion – Logistics industry is a highly competitive market.
QUB does not meet market expectation in achieving capacity utilization at Moorebank Logistics Park.

ANALYST’S NOTE

Whilst the Moorebank Project has experienced some delays and raised disputes with land preparation works, in our view this does not change the long-term prospects for the project. On a positive note, group result was driven by an unexpected high contribution from Patrick.

The Board declared a special fully franked dividend of 2.0 cps along with full year dividend of 5.5 cps. The special dividend speaks to management’s confidence in the outlook for the company and operating cash flows.

FY18 Results by division:
1. Ports and Bulk.In FY18, Ports and Bulk delivered underlying revenue growth of +13.2% to $840.7m and underlying EBITDA growth of +19.2% to $87.6m, driven by strong motor vehicle import volumes and emergence of new project cargo work which is relatively unsustainable in our view, due to the short tern nature of such high margin projects.
2. Logistics. The Logistics division was impacted by several headwinds, with EBITDA down -5.0% on pcp, despite revenue growth of 7.9%. Amidst a competitive environment, the division struggled against the impact of the Company’s exit from Aurizon interstate operations as well as the end of the lease at the Sydney Haulage site. Management has provided sources of future upside for the division, namely securing new customers and the near competition of a new warehouse in Altona. Following the appointment of a new COO in FY17, management has decided to integrate the divisions to achieve cost savings and operational benefits across the two divisions going forward.
3. Infrastructure and Property Division (formerly Strategic Assets). Underlying revenue for the division rose +73.5% to $95.4m and underlying earnings rose +117.8% to $33.1m, attributable to the first full year contribution from AAT following QUB’s acquisition of the remaining 50% stake in November 2016.
Update on the Moorebank Project. Management has noted some delays to MLP however affirm that these should not have a material impact on project returns. Key updates:
1. Whilst approval for the East Precinct of the project was granted in FY18, the project has now been delayed due to approval delays for the West Precinct from the RMS which is now expected to be received by the first quarter of 2019.
2. Management has raised its expectations of minimum project costs from its previous estimate of $400m to be around $642m.
3. Delays in receiving regulatory approvals for rail terminals have delayed commencement of rail operations by 3-6 months from the estimated delivery date of March 2019, which according to management should not impact the project, as the rail link is still expected to be operational before warehousing operations commence.
Unexpectedly strong contribution from Patrick. The surprise to QUB’s results largely came from the performance of Patrick, exceeding Management’s expectations all round. Volumes increased by +15.6% compared to market growth of +8.4%, benefiting from organic growth of existing customers, new contracts secured during FY18 as well as subcontracted volumes from other stevedores. Underlying revenue was up +21.1% to $576.1m and the Company’s share of underlying NPATA rose +28.4% to $34.8m.

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FY18 RESULTS SUMMARY

Figure 1: QUB FY18 results summary

Source: Company

Global comps…

Figure 2: QUB peer group analysis – consensus estimates

Source: Bloomberg

Figure 3: QUB Financial Summary

Source: BTIG, Company, Bloomberg

COMPANY DESCRIPTION

Qube Holdings Limited (QUB) is a diversified logistics and infrastructure company providing logistics services for clients in both import and export cargo supply chains. The Company operates three main divisions: Ports & Bulk (integrated port services, bulk material handling and bulk haulage), Logistics (largest integrated third party container logistics provider in Australia), and Strategic Assets (investing and developing future infrastructure).

Source: Company

Recommendation Rating Guide

Recommendation Rating Guide	Total Return Expectations on a 12-mth view
Speculative Buy	Greater than +30%
Buy	Greater than +10%
Neutral	Greater than 0%
Sell	Less than -10%

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