It will pay to maintain a sceptical frame of mind over the next few weeks as we will be bombarded with $15 million advertising about the worth of the Queensland Rail National float.
There will be lots of glitzy ads with shots of long, snaking coal trains, mines, ports and ship loading to tell us that this is a classy float and worthy of our hard earned cash.
Think Telstra T2 and T3 and look at the current Telstra share price, to remind yourself that not all market successes are born in government privatisations (CSL is the very obvious and large exception to that broad statement).
The QR offer may be worth about $7 billion at top value and become Australia’s largest since the last Telstra share sale in 2006 which raised $15.5 billion (and didn’t we all make a lot of money on that, even those who stagged the shares probably lost much of it in the 2007-09 slump).
“QR National is a growth story – it is Australia’s largest rail freight company and the world’s largest rail transporter of coal from mine to port for export markets,” Queensland Treasurer, Andrew Fraser, said at the launch of the pre-registration process for retail investors.
It is all that and a bit more, but Mr Fraser and the Queensland Government are the vendors (and a bit nervous from what various media reports suggested yesterday).
It’s in the nature of all vendors to embellish the worth of what they are selling and so it should be in the nature of all prospective purchasers to examine everything said and written with a grain of salt and a few hard questions.
These include, do I know this industry, this company and the sellers?
What do you know about coal (coking, PCI, thermal). Who are the buyers (They are not all Chinese steel mills). What do you know about the Chinese economy? And do you understand the quarterly pricing system for coal and iron ore and how that can rise and fall quite quickly?
And you should realise that if this company floats its very likely to become am proxy for the coal industry in that its share price will be responsive to rises and falls in demand and in the comments (and share prices of) the likes of BHP and other big exporters.
Other questions are, what’s in it for me (capital gain vs. dividend income) and do I want to hold this when all the money is made by sellers of coal in this country?
And then there’s the question of timing.
Why buy into a float when the history of IPOs is that the shares usually sink under the weight of early selling by big institutions and other speculators taking early profits with the knowledge of buying back in at a lower price and boosting returns?
QR National may not list, it depends on the health of the stockmarket and on the health of economies in Asia, such as China. A sharp slump in China, or bad news could derail the offer (no pun intended).
The Queensland Government intends keeping 25% to 40% of the floated entity for an unknown period of time. That’s a risk.
Be aware that that unsold portion will overhang the market and keep a lid on the price, just as the overhang in Telstra, firstly with the Federal Government, and then with The Future Fund, helped restrict its gains, especially after T2.
Also be aware that if the float proceeds there will be tensions between the Government and its advisers and fund managers: the former will want as high a price as possible, the latter will want it as low as possible to maximise their capital gains and profits (and bonuses).
So there will be lots of stories and market talk about the poor pricing, the tough market (and for IPOs it still is, with the Valmeus float from Bilfinger a costly failure earlier in the year).
Ignore all those and make your judgement on what you think and understand about the investment.
This is an industrial float being sold with a ‘China story’ to make it seem sexy to investors.
But essentially it is loading and carrying coal from mines in Central Queensland to ports along the coast where it is discharged and then reloaded on ships for export. it’s a utility of sorts.
It is all about cost control and being a near monopoly, will quite likely run into problems along the way with the competition regulator, just as Telstra has done.
Finally, being a Queensland government asset, it is heavily unionised, which means high costs, for which there will be rising pressure to cut over time.
Queensland’s unions oppose this sell off because it means a big chunk of their membership will move from the comfort of public service, to the private sector.
These costs and regulatory issues will be downplayed by all concerned during the float process, but remember Telstra and how these issues came to torment it.
But there is one major difference to Telstra.
QR National is a near monopoly and has no real competitors, bar Asciano, the ports group which is building coal moving operations in the Hunter Valley in NSW and in central Queensland (And QR National has invaded the Hunter Valley to make life tough for Asciano).
In that the business could be very profitable and an easy life if the two companies follow the route in banking and retailing, for example, and agree to compete fitfully.
This will set up tension with the coal miners and exporters, most of whom are big enough to monster the company (and its competitor) into a more aggressive level of competition and rate setting.
Railways are a novel investment in this country, which makes valuing a float like this much harder. And don’t fall for comparisons with the US, they will be erroneous.
The American rail
