Company Overview: Qube Holdings Limited (ASX: QUB) provides comprehensive logistics solutions across multiple aspects of the import-export supply chain. In addition, the group is involved in the management, development, and operation of strategic properties with future development potential into logistics facilities. Qube’s Board assesses the performance of the business with the segments based on Operating Division, Infrastructure & Property (including Strategic Assets), Patrick, Corporate and Other.


QUB Details

 
Earnings Growth Across All Divisions: Qube Holdings Limited (ASX: QUB) provides comprehensive logistics solutions across multiple aspects of the import-export supply chain. In addition, the group is involved in the management, development, and operation of strategic properties with future development potential into logistics facilities. As on 18 May 2020, the market capitalization of the company stood at ~$4.39 billion. The broad diversification strategy and strong market position of the company protected it from ongoing economic headwinds during FY19. In the face of the slowing economy, QUB achieved earnings growth across all divisions and a growth of 4.7% in underlying revenue to $1.73 billion. The completion of acquisitions and growth capex resulted in further diversification and supported future earnings growth. As a result, underlying EBITDA of the company went up by 9.5% to $180.5 million, and underlying NPAT witnessed an increase of 15.4% to $123.2 million. The Board focused on broader strategic issues positioning Qube Holdings for further growth in the long-term. At the same time, the company has supported management’s initiatives to improve profitability and returns for shareholders. During FY19, the company reported a healthy balance sheet with a leverage ratio of 32.5% and a cash balance of $537 million. The decent financial and operational performance enabled the Board to declare a fully franked final dividend of 2.9 cents per share, reflecting an increase of 3.6% on the pcp. This bought the total dividend to 6.7 cents per share. Over the span of 4 years from FY15 to FY19, the company witnessed a CAGR of 4.59% in revenue and a CAGR of 5.56% in gross profit.

The company has also released its interim results for the period ended 31 December 2019 wherein it reported an increase in its underlying revenue and earnings despite continued headwinds in several of Qube’s key markets. QUB is likely to witness growth in the medium term from major contracts with Shell Australia and BlueScope Steel secured by the Operating Division.

Qube Holdings Limited is well placed to continue to deliver sustainable and long-term earnings growth from its strong market positions and strategic assets. The company is taking continued measures to mitigate the pressures from bushfires and the spread of the coronavirus through scale, diversification, cost reductions, and ongoing benefits of its investments.


FY19 Financial Highlights (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Qube Holdings Limited. CPP Investment Board is the largest shareholder in the company, with a percentage holding of 8.81%. 

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Decent Liquidity Levels and Increased Profitability: During 1H20, gross margin of the company witnessed a slight increase over the previous year and stood at 68.6%, up from 67.6% in 1H19. Over the span of 2 years, net margin of the company witnessed an improvement and stood at 5.4% as compared to 4.1% in 2H19. The increased gross margin and improvement in the net margin indicates that the company is well managing its costs and is capable of converting its revenue into profits. During the half year ended 31 December 2019, EBITDA margin of the company went up to 21.3% from 15.6% in 2H19, indicating increased profitability. Return on Equity of the company stood at 1.8% as compared to 1.2% in 2H17. This indicates that the company is well managing the capital of its shareholders and is capable of generating profits internally. During 1H20, current ratio of the company stood at 1.58x, higher than the industry median of 0.53x. This indicates that the company is liquid enough to pay off its current liabilities using its existing assets. In the same time span, assets/equity ratio of the company was 2.03x, and debt/equity ratio stood at 0.88x.


Key Metrics (Source: Refinitiv, Thomson Reuters)

Diversified Earnings Base and Conservative Balance Sheet: During 1H20, the company reported growth in underlying earnings despite continued headwinds in several of Qube’s key markets, reflecting Qube’s diversified earnings base and strong market positions. During 1H20, underlying revenue of the company went up by 12.9% to $970.1 million, and underlying EBITDA witnessed an increase of 2.1% to $95.6 million. Increased recognition by the customers of the company, its logistics capabilities and cost and service benefits resulted in an increase of 5.3% in underlying NPAT to $68 million. During the half-year, the company made continued progress across the Moorebank Logistics Park activities with the completion of Target warehouse. The pleasing contribution from the operating results reflecting organic growth of the company. The success of QUB has been supported by its strategy of maintaining a conservative balance sheet with adequate liquidity and sizeable headroom to borrowing covenants. The company provided additional liquidity and established $300 million in bilateral debt facilities and extended the term of $100 million of debt facilities. The company has also paid a fully franked interim dividend of 2.9 cents per share, reflecting an increase of 3.6% on the pcp.


1H20 Financial Highlights (Source: Company Reports)

Successful Completion of Institutional Entitlement Offer: The company has announced the successful completion of the institutional component of its fully underwritten accelerated pro-rata non-renounceable entitlement offer. Under the offer, the company raised approximately $264 million at $1.95 per share. These proceeds will offer support for the investment in the company’s core businesses and will help pursue growth opportunities in the current uncertain environment.

Key Risks of Investment: Most of Qube’s operations will continue to function as the freight and logistics sector has been defined as an essential service in Australia and New Zealand during the fallout of the virus. However, the company experienced weaker container volumes and expects minimal disruptions in the bulk activities, reflecting the general slowdown in economic activity in Australia. On the other side, it witnessed solid volumes of forestry related logistics activities in New Zealand and Oil and gas activities have also been steady. In light of the continued uncertainty and tighter restrictions due to COVID-19, the company might face a reduction in volumes in several markets. 

Future Expectations and Growth Opportunities: Qube Holdings Limited continues to benefit from its diversified operations and variability in its cost base, which has enabled it to continue to generate positive earnings and cash flow despite declining volumes in parts of its business. Despite the momentous challenges, the company is well placed to work with all its key stakeholders and address the current dynamic environment. QUB is in a decent financial position with significant liquidity of over $450 million after the payment of the interim dividend. The company does not have any near-term debt maturities and material headroom to its covenants. It is reducing its cost base and is seeking to mitigate these environmental pressures through scale and diversification. The company believes that its strategy of becoming the lowest cost and most efficient logistics solutions provider is on track and is likely to attract significant long-term investors.


Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: As per ASX, the stock of QUB gave a return of 5.88% in the past one month and is trading slightly below the average of 52-week high and low levels on average levels of $3.572 and $1.673, respectively. The company has redefined its debt position to maintain a conservative balance sheet. QUB continued to deliver growth despite operating in competitive markets, the bushfires, and the outbreak of the coronavirus. Considering the trading levels, decent returns in the past one month, the resilience of the business and positive outlook in the long run, we have valued the stock using Price to cash flow multiple based relative valuation approach and have arrived at a target price offering an upside of lower double-digit (in percentage terms). For the said purposes, we have considered Aurizon Holdings Ltd, Transurban Group, and Sydney Airport Holdings Pty Ltd as peers. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of $2.520 (up 1.205% on 18 May 2020). 


QUB Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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