Asciano lately revealed that Toronto-based Brookfield Infrastructure pitched a cash-and-scrip offer on Friday that valued the company at $9.05 a share. Investors are cautious about this offer as they belive that it undervalues the company. Share price is still trading below the offer price, because a formal offer is yet to be made. Brookfield made a statement that there is no gurantee that the transaction will happen, which acted as a dampener on the stock price.
In a recent presentation made to the investors the company highlighted how its five-year plan is broadly on track. The five-year plan of the company consisted of business improvement and general cost cuts, reduction in capital expenditure, improvement in cash flows and opportunities to create value across all divisions including joint ventures, partnerships, acquisitions and divestments. The business improvement program has delivered cumulative savings of $115 million over the last three years. The five year FY16 target for business improvement has now been doubled from $150 million to $300 million.
Redevelopment of Port Botany Freight Terminal (Source - Company Reports)
The company’s container volume growth stands at 1.5xGDP rather than 2.5xGDP. The company has completed Automation at Port Botany, step change at the port will drive an improved competitive position. There is fragmentation of the new competition in container terminals on east coast. However the Australian economic growth will be soft for a longer period than expected. EBIT CAGR is likely to achieve the low end of the target range of 10% to 15% after 3 years. It is unlikely that the company will achieve its five-year target. EPS CAGR of 19.8% over the first expected to continue to be higher than EBIT growth. The company’s underlying revenue increased last year by 6.7% to $3.8 billion and underlying earnings before earnings and tax increased 5% to 720 million.
The catch up capital expenditure has been higher than originally anticipated, but is now reducing significantly. It is expected that the capital stock expenditure program will be completed over the next two years, with annual sustaining capital expenditure expected to run at a steady state for the medium term of $300-400 million per annum. Return on capital employed (ROCE) is improving more slowly than original trajectory, Pacific national now well above cost of capital while Patrick ex- legacy goodwill remains high. Capital expenditure including committed growth Capital expenditure is expected to stay in FY16 forecasted range of $390 – 440 million.
There is significant leverage and flexibility in business platform for economic upswing. The cash flow of company is expected to improve as a result of decline in capital expenditure. The increase in cash flow will drive an increase in payout ratio. Dividend per share has increased at a CAGR of 24% over the last three years. Fully franked final dividend of 8.5 cents per share was announced last year, a 36% increase in dividends over the same period in the last financial year. The dividend payout ratio last year was 39.7%, at the top end of the payout range established by the board in FY13. Lower capital expenditure will drive strong growth in cash flow enabling the board to lift its dividend payout ration beyond the current range of 20 to 40%. The EBIT growth is expected to be better than 5% growth achieved in FY14.
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Asciano Daily Chart (Source - Thomson Reuters)
The company has improved its balance sheet over the years. In 2011, the company had short-term debt overhand that threatened the continuation of the business, but the company claims that it has been taken care of. The company today has an average debt maturity of under 5 years and net leverage has fallen from 7 times to 3 times which is within the target range of 2.5 to 3 times. The company’s interest coverage is also very comfortable at about 5 times, which is more than the targeted minimum of 3.5 times.
The company admits however that the business conditions are going to be tough in the coming years. The tough business conditions necessitated cost cuts and workforce changes in the past year. The growth numbers while steady and are still modest. The competition is likely to have an impact on access to labour and infrastructure resources. Skills shortages are driven by ongoing demand for labour from mining related sectors of the Australian economy and its impact on wage inflation. The bulk ports and stevedoring sector is a fragmented, highly competitive market with generally low barriers creating an environment for potential price discounting and disruption to the market. Increased completion has led to loss of major customers in the past and the trend can repeat in the future.
The company is currently trading at a stock price of $7.86, which is close to a 52 week high of 8.190, largely due to a spike in price after the news of the takeover offer was made public. At the current price the company is trading at a Price to Earnings multiple of 30.6 and a dividend yield of 2.09%.