Asciano Group (AIO) Stock Recommendation

Submitted by Craig Strzelecki on 23 October, 2007 - 07:13

Asciano Group (AIO) has a valuation of $9.82 and a Neutral recommendation using an NPV approach from Australian sharemarket analyst Macquarie Research Equities. The analysts have initiated coverage over the recently listed stock which was formed out of the restructuring of Toll Holdings (TOL) infrastructure business from Toll’s logistic assets. AIO started its life as an infrastructure company, but they doubt it will be seen as such in coming years. Analysts expect the focus will shift back to its rail roots, a theme which continues to emerge as Asciano attempts to exploit the booming resource sector, a recovering grain sector and an emerging intermodal opportunity. In a duopoly with a government-sponsored competitor, the analysts think Asciano's flexibility and nimbleness will be a strategic advantage. Rail provides a compelling opportunity, with EBITDA growth of 17% pa anticipated over the coming five years. A major contributor to this growth is coal haulage. Asciano is likely to finalise a contract involving 26 million tonnes (Mt) of coal volume in Queensland in the near future. This is a step change, with potential for more. They estimate around 100Mt of new contacts will need to be awarded in NSW and Queensland in the coming years to meet industry demand. This provides AIO with ample opportunity to make further step changes. Each 25Mt will add $0.37 to the analyst’s valuation. Intermodal will play second fiddle to the bulk haulage growth, but as for coal, the resources boom is driving the economic growth of WA and Queensland. This in turn is lifting demand for the long-haul sectors, east-west and northsouth. Combined with ongoing track improvements, this should provide AIO with steady 5-8% revenue growth pa. Asciano’s port assets are also a fantastic foundation for the company. Like an airport, Asciano's ports capture the steady growth of Australian consumer spending. The difference is that the consumption of imports is growing faster than air travel in the current economy at 7.8% and 6.5% in 2008 and 2009. Asciano's added advantage is its stable duopoly with DP World, at least for the coming five years, where volume growth will be facilitated by implementation of new technology. These items not only allow growth, but ultimately lift the barrier to entry for new players.
The analysts's Asciano valuation of $9.82 is based on an NPV approach. Combined with a yield of 5.4%, Asciano provides a 20% 12-month holding period return. This is attractive given the return can be enhanced through further contract wins in coal. However, some prudence is required as AIO has a 4.1% investment in Brambles. At three times Asciano's market capitalisation, clarity over its intentions will ultimately be more significant to the performance of the stock, thus the analysts initiate their coverage with a neutral recommendation.

Asciano Group Limited is listed on the Australian Stock Exchange (ASX) under stock code AIO. You can view their investor website here. AIO was listed on the ASX on 6 June, 2007. Tim Poole is the Chairman of Asciano while Mark Rowsthorn is the Managing Director. Asciano is one of Australia's largest listed infrastructure owners, with a primary focus on transport infrastructure, including ports and rail assets, and associated operations and services. Asciano's portfolios include the unique combination of the Pacific National and Patrick businesses. These two world class businesses own and operate four leading container terminals, bulk export facilities, a significant range of stevedoring equipment and associated services, extensive rail operations, investments in a number of strategic joint ventures, and a highly skilled workforce. Find out the meaning of the recommendations in this primer. Browse for other stockbroker recommendations. Check your charts and good luck with your share trading!

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