Qube Raises Interest In Moorebank
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Qube Holdings ((QUB)) will shortly announce its first tenant for Moorebank warehousing, a catalyst brokers are keenly anticipating. The company has stated the first tenancy will include a purpose-built warehouse developed for the customer via a long-term logistics contract with Qube. The company will undertake a $350m capital raising to fund both new warehousing and further opportunities.
The warehouse construction at the company's intermodal development on the outskirts of Sydney will commence in early 2018. Brokers observe securing a first tenant is an important step to prove up the value of Moorebank for investors and customers. A key risk is the appeals process which has commenced against the NSW government and Qube, that seeks to have the development approval for the project reassessed for refusal.
The company anticipates funding $400m in capital expenditure over the next five years from debt, cash and operating cash flow to develop Moorebank, and believes it makes sense to develop a self-owned warehouse in the early years and then potentially use external capital when rents and/or capitalisation rates reflect a premium rating for the precinct.
The planned equity raising is larger than Macquarie had anticipated, although the broker considers it a positive signal in relation to a further tenant announcement. The broker also believes the announcement should go some way to allaying fears around the near-term prospects for Moorebank. Citi also considers the capital raising suggests increased confidence in the ability to fill the warehouse footprint and rail throughput.
The company will raise $350m to fund more than $80m in new warehousing at Moorebank, $70m in growth expenditure across its broader business and retain the remainder for capital investment opportunities. The raising includes a $228m entitlement offer, one-for-15 at $2.35 a share, and a $122m placement.
The quantum of the capital raising surprised Ord Minnett, which had believed the group could fund foreseeable growth opportunities. Given more than half the proceeds will be used to pay down debt, the timing suggests to the broker that the company is likely positioning for an, as yet, unspecified opportunity.
The broker believes the equity raising increases the likelihood Qube may acquire Aurizon's ((AZJ)) intermodal freight business. This possibility is a concern because Ord Minnett suspects the vendor is unlikely to allow the acquirer to cherry pick the best parts, such as Acacia Ridge. Rather, any buyer may have to take the whole loss-making business.
The broker does not change its view with the capital raising, although believes it should be a real game-changer, but suspects there is some uncertainty about the use of the proceeds which may weigh on the share price in the short term.
Morgans expects the proceeds will initially be used to retire debt. Gearing was already at the bottom of the company's target 30-40% range and will drop to around 20% after the capital raising.
The broker estimates the company has over $500m at hand for investment, having already indicated it was interested in Aurizon's intermodal business and the key asset of Acacia Ridge, as well as Forestfield (Perth) rail terminus and rolling stock. Asset sales from Toll Holdings are also envisaged as a possibility.
Macquarie suggests Acacia Ridge, south of Brisbane, would be a prize. Aurizon is conducting a review of its loss-making intermodal business and, with Qube being the Acacia Ridge operator, this would complement its Moorebank terminal and provide the company with virtual control of the north-south rail volumes. Macquarie estimates the asset could be valued at around $100m.
Citi is yet to be convinced of the benefits of Qube owning Aurizon's intermodal business and would prefer proceeds are more skewed to the Moorebank precinct.
Two major contracts for Patrick have been extended and a decision on infrastructure levies for full containers is expected in the near term. Morgans expects earnings for the Patrick business will lift, as cost reductions and productivity gains offset weaken volumes that were caused by poor industry structures.
Rental increases at key ports are likely to be offset by an increase in infrastructure levies and the company is confident earnings in the logistics and ports & bulk segments will emerge from the slump of FY16. With Patrick performing in line with expectations, Citi envisages upside for the share price as new customers are announced at Moorebank.
Prior to the capital raising announcement, Credit Suisse had suggested that the growth potential of Moorebank is likely to be diluted by weaker value creation in the ports & bulk and Patrick segments. At that stage the broker downgraded to Underperform, finding the valuation stretched.
There are four Buy ratings on FNArena's database, three Hold and one Sell (Credit Suisse, yet to comment on the capital raising). The consensus target is $2.65, signalling -0.5% downside to the last share price. Targets range from $2.20 (Morgan Stanley) to $3.05 (Ord Minnett).
Disclaimer: the writer has shares in Qube Holdings.
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