Qube Holdings moves vast amounts of containerised and bulk freight in, out and around Australia. Its earnings are clearly tied to industrial activity and its operational efficiency in logistics.
We see unpack three Cornerstone Questions in this note;
- Is QUB a freight infrastructure provider or a logistics company?
- Does QUB need acquisitions to grow?
- Is there earnings risk in 2024 as the domestic economy slows?
Company Overview
Qube moves vast amounts of containerised and bulk freight in, out and around Australia. The company operates in integrated logistics operations spanning various sectors of the supply chain industry. Founded in 2006, Qube has established itself as a prominent player in the logistics and infrastructure sectors within Australia. QUB organic earnings are exposed to Australian GDP activity and operational improvement.
The company has pursued a growth strategy through both organic initiatives and strategic acquisitions. The company aims to expand its service offerings, enhance its market presence, and capitalize on emerging opportunities. EBITDA growth since 2010-2022 has grown at 38% CAGR as new assets, acquisitions coupled with organic growth have contributed.
Figure 1: QUB’s assets located in Australia’s key transport precincts
Figure 2: QUB EBITDA mix by function
QUB’s earnings are divided into two primary segments: 1) its operating divisions, namely Logistics & Infrastructure and Ports & Bulks, and 2) its 50% interest in Patrick Terminals. QUB records Patrick Terminals as an asset on its balance sheet. Within reporting periods, QUB adjusts the carrying value of its investment based on its share of Patrick Terminals’ net income or loss.
Cornerstone Questions
1. IS QUB AN INFRASTRUCTURE PROVIDER OR A LOGISTICS COMPANY?
Back in 2007 when QUB secured an initial 30% interest in the large Moorebank Industrial Property Trust, it was certainly arguable the company was beginning to resemble an infrastructure business.
The second and third tranches were acquired in 2012 and 2016 from Stockland and Aurizon respectively so that QUB eventually owned the whole venture. Fast forward to 2021 when it was sold and QUB reverted to its core logistics competency.
The difference is important because the fair valuation multiple applicable to the latter is substantially more modest.
Asset and infrastructure development continue, but at more modest levels of ambition and capital.
The $154m stage 1 automation of the Interstate Rail Terminal at Moorebank (NSW) is expected to be completed in January 2024.
Phase 1 of the IMEX Terminal at Moorebank will be completed in early 2024 with Phases 2 and 3 progressively introduced over FY24 and FY25. At that point, the IMEX Terminal will have the capacity of 1m TEUs pa.
Figure 3: QUB: a logistics or infrastructure-based valuation? In our view logistics multiple is more appropriate.
LOGISTICS NOT INFRASTRUCTURE
QUB’s bread and butter is the movement of cargo through Australia’s main ports and across its rail networks. This is supported by an array of dispersed depots and warehouses and fed by a fleet of prime movers (trucks), cranes, and related equipment. QUB revenue is primarily transaction-based, with payment for the movement of cargo. In this sense, the QUB revenue model is at risk. QUB is free to establish commercial terms with customers, with little revenue earned under-regulated outcomes. In our view, QUB revenue model is more in line with logistics providers vs an infrastructure (particularly a regulated asset) provider.
The spread of QUB’s customer base is testimony to the core nature of its business – logistics. Manufacturing, agriculture, forestry, mining and energy, retail and food processing among other industries all utilise QUB’s services to move product.
While QUB differentiates its activities into two segments – Ports & Bulk and Logistics & Infrastructure - it still formally reports these combined as its operational business. It separately reports the 50% stake in Patrick Terminals as an associate.
QUB’s revenue model is based on contracts with industrial companies so its earnings are derived from the performance of those contracts. The revenue base is highly diversified by geography, customer, product and service so that the top 10 customers represent just 23% of the total revenue of the operating business and no single customer is more than 4% of the total revenue.
The Ports & Bulk segment is about 56% of the operating division revenue. Its main industry exposures are energy and forestry with the movement of cargo through the four largest ports being the primary facilitator. QUB’s assets are located mostly on the eastern seaboard from Brisbane around to Adelaide, plus the west coast centred on Perth. QUB’s New Zealand assets stretch the length of the country.
Figure 4: QUB Ports and Bulk revenue contribution
Figure 5: QUB Logistics & Infrastructure sector exposure
2. DOES QUB NEED ACQUISITIONS TO GROW?
Organic industry is Growth is GDP+
At the core of QUB’s financial performance is the persistent growth of needing to move goods around the economy. The pandemic caused a minor interruption to container flows, but the trend is now 3.3% higher than pre-pandemic levels.
The industry average revenue per lift for full containers in 2022 was $326 compared to $259 in 2018, mainly due to significant increases in Terminal Access Charges (charged to freight customers) offsetting a decline in Quayside revenues (charged to shipping lines).
QUB’s Patrick Terminals division has put through 14% price changes for 2023. This comes off the back of +17% in 2022. The strong price outcomes will help offset COGS pressure (energy, wages across 9500 staff, rent). We expect QUB to be able to maintain steady container market share in 2024 of ~40%.
Figure 6: Industry growth. Container port volumes have grown 4.4% CAGR since 2001. QUB guides to volume growth of 3-4% growth into the future.
Figure 7: QUB grew both revenue and earnings through the pandemic period driven by volume growth and ramp-up of many of QUB’s assets.
This provides a strong base level of growth as to which QUB can leverage. The requirement to grow is in part a function of QUB’s culture, but also a requirement of the public market.
Over 2018-23E period, EBITDA grew at 11% CAGR. Over the next two years, the market is forecasting EBITDA growth to slow to 7% pa. In our view, QUB needs additional inorganic growth to maintain its earnings multiple (which is at a 30% premium to global logistics peers).
Figure 8: Consensus EBITDA imply a slowing of earnings growth from 11% to 7%.
BALANCE SHEET AND INORGANIC GROWTH
A persistent criticism of QUB in recent years has been the relatively balance sheet high gearing. The 2021 sale of the warehousing and property components of the Moorebank Logistics Park (MLP) to the LOGOS Property Group consortium for $1.7bn before tax largely resolved this concern.
QUB’s gearing is now around 23% (or 37% including lease liabilities) or ~2.0 ND/EBITDA, so the balance sheet does have some capacity to make acquisitions of ~$350m at present (target gearing 30-40%).
Indeed, it recently acquired two small businesses for a combined $145m funded from existing undrawn debt facilities. But to take on a large acquisition might once again raise concerns about its leverage position.
In our view, the business can de-lever reasonably quickly over the coming years. QUB in the past has paid special dividends and we see no reason why additional capital management could be considered in the absence of further acquisitions.
Figure 9: QUB financial leverage has halved. The market assumes further de-leveraging on back of cash generation. Target gearing 2-2.5x ND/EBITDA
QUB has a long history of acquisitions including P&O, AAT, Patrick, Prixcar, Moorebank Logistics Park, Quattro Ports, True Blue Containers and a host of other business acquisitions. The company has moulded these into its own Qube-branded businesses across every aspect of transport logistics.
The potential for further significant acquisitions may be limited by what the ACCC would allow. The regulator was concerned about QUB’s 2021 acquisition of the Newcastle Agri Terminal despite there being two grain terminals at the port.
Australia’s major ports are all privatised except in Perth and the main stevedoring companies (including Patrick) dominate the provision of quayside and landside activities at those ports.
We can only see incremental acquisitions being the avenue for inorganic growth in future.
3. IS THERE NEAR-TERM RISK IN QUB EARNINGS?
QUB has guided to softer 2H23 earnings given industry conditions in the period. These include;
1) NZ adverse weather in Jan/Feb;
2) slowing of volume growth post the pandemic boom and;
3) port congestion/labour supply issues.
The market is currently forecasting EBITDA of $230m 2H23 vs $235m delivered in the 1H23. Looking into FY24E, earnings step up ~$250m per half, equating to +10% EBITDA growth for FY24E.
Recent acquisitions in May 2023 totalling $145m, combined with prior acquisitions should contribute an incremental $12-15m per half, which implies organic EBITDA growth of just ~3-4% FY24E is needed to meet market expectations. Acquisition contribution is important in FY24 given the potential for a slowdown in retail, agricultural and manufacturing exposed industries in FY24 (combined this is 65% of industry exposure for logistics).
QUB should be able to show margin improvement in FY24E as some of the headwinds from FY23 ease. QUB, like many other companies, is still playing catch-up with passing through the full impact of higher inflation.
In short, we see earnings risk as being neutral for the FY24 outlook at the August result. Both 1H23 and FY22 Results led to earnings upgrades of 6-7% to market expectations.
Risks to Investment View
QUB’s earnings may be affected by the terms of the wide array of contracts it engages in. The level of economic activity in Australia is a key element of the activities performed by QUB so any change in this would affect its own performance.
QUB relies on a wide range of vehicles, terminal equipment, port equipment, and railway and road networks that can be affected by factors such as weather and maintenance. Financial risks are associated with QUB’s own debt management and how it manages its capital base for existing operations and acquisitions. Employee/union relations remain an important aspect for the company to manage.
Recommendation
We commence our coverage of QUB with a Hold recommendation.
Figure 10: QUB Peer group – Logistics companies trade at a ~50% discount to infrastructure companies on an EV/EBITDA basis.
Figure 11: QUB lost its infrastructure shine. NTM PER multiple is now more inline with the multiples of global logistics peers.
Figure 12: QUB EV/EBITDA also trending towards global logistics peer average 10x vs higher infrastructure multiples.
Investment View
QUB is exposed to the broad growth of the Australian economy, with most areas of business able to deliver consistent GDP+ style earnings growth. There are elements of cyclicality, particularly in areas that service resources and agriculture-related volumes.
The business operates in an oligopolistic industry structure which allows players to generate appropriate returns on capital.
It has a strong entrepreneurial culture and a track record of capital allocation.
The balance sheet has significantly de-levered following the disposal of the Moorebank Property Development in Sydney, opening the door for capital management in the absence of acquisitions. QUB in our view is a logistics business, rather than an infrastructure business. This has important ramifications for the equity value of QUB.
Over the last 2 years, the multiple has re-rated from the early 22s. QUB currently trades 13-14x. Logistics businesses globally tend to trade at ~10x EV/EBITDA across the cycle. Infrastructure businesses can trade at >17x.
QUB deserves a premium to pureplay logics business given its track record, balance sheet capacity and ability to make further tuck-in acquisitions. We rate QUB a Hold.
