Qube Holdings Limited

Company Overview: Qube Holdings Limited (ASX: QUB) provides comprehensive logistics solutions across multiple aspects of the import-export supply chain. In addition, the group is involved in the management, development, and operation of strategic properties with future development potential into logistics facilities. QUB’s Board assesses the performance of the business with the segments based on Operating Division, Infrastructure & Property (including Strategic Assets), Patrick, Corporate and Other.

QUB Details 

Earnings Growth across all Divisions and Healthy Operational Performance: Qube Holdings Limited (ASX: QUB) provides comprehensive logistics solutions across multiple aspects of the import-export supply chain. In addition, the group is involved in the management, development, and operation of strategic properties with future development potential into logistics facilities. As on 07 September 2020, the market capitalization of the company stood at ~$5.09 billion. The broad diversification and strong market positions of the company protected it from ongoing economic headwinds during FY20. QUB delivered a decent result in the face of the global pandemic and seems to be well-positioned for growth with a healthy balance sheet in FY20. During the year, the company reported an increase of 9% in revenue to $1,883.6 million but a decline in underlying EBITA to $160.3 million. In the same time span, underlying NPAT of the company was $104.2 million. The company has won two contracts with Shell Australia (Shell) and BlueScope Steel (BlueScope), which are likely to represent the two largest contracts by revenue for the company. It has also completed the acquisition of the Chalmers business in September 2019 and retained a stake of 100% of the Quattro Ports (Quattro) in March 2020. The decent financial and operational performance enabled the Board to declare a fully franked dividend of 5.2 cents per share in FY20. 

Despite the headwinds from the bushfires, droughts and the global pandemic, the strong market positions and diversification enabled the company to grow its underlying revenue compared to the prior corresponding period. Over the span of 4 years from FY16 to FY20, the company witnessed a CAGR of 9.73% in revenue, demonstrating its ability to generate meaningful earnings and cash flows despite these circumstances, indicating healthy operational performance supported by future earnings growth.

FY20 Financial Highlights (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Qube Holdings Limited. CPP Investment Board is the largest shareholder in the company, with a percentage holding of 8.38%.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Cost Management and Higher Profitability: During FY20, gross margin of the company stood at 69.0%, higher than the industry median of 64.2%. This indicates that the company is well managing its costs and is capable of converting its revenue into profits. In the same time span, EBITDA margin of the company went up to 21.6% from 16.9% in the previous year, indicating increased profitability. During the year, net margin of the company stood at 4.7% relative to the industry median of 29.3% and Return on Equity of the company was 2.9% as compared to the industry median of 10.0%. In the same time span, current ratio of the company stood at 2.04x, higher than the industry median of 1.16x. This shows that the company is liquid enough to pay off its current liabilities using current assets. During FY20, assets/equity ratio of the company was 1.80x, lower than the industry median of 1.86x. This indicates that the business is financed with a significant proportion of investor funding and a small amount of debt, resulting in a financially stable balance sheet. In the same time span, debt/equity ratio of the company was 0.66x.

Key Margins (Source: Refinitiv, Thomson Reuters)

Venture awards preferred Road Haulage tenderer to Qube: The company has recently announced that it has been awarded the preferred Road Haulage tenderer status for the Riley Iron Mine from Venture Minerals Limited. It has also been chosen to provide the necessary Burnie Port Services for the completion of the logistics solution to deliver Iron Ore on board ship from the Riley Mine gate.

Impact of COVID-19: The onset of the COVID-19 pandemic started impacting the operations of the company towards the end of February 2020. However, most of the operations of the company were considered essential and thus were able to operate with minimal impact on its bulk export operations. The company witnessed some impact on its financial performance but was able to mitigate the negative outcomes with cost savings through initiatives including temporary reductions in fixed remuneration, reduced property, and equipment costs as well as lower variable operating costs. High variability in the company’s cost base, scale, strong market positions and balance sheet places QUB to benefit from any improvement in volumes when the impact of COVID-19 subsides, and economic growth resumes.

FY20 Segment Performance Highlights: The company is divided into various segments, namely, Operating Division, Infrastructure & Property (including Strategic Assets), Patrick and Corporate and Other. During FY20, the operating division contributed the maximum part in the underlying revenue with $1,785.4 million and statutory EBITDA of $395.4 million. In the same time span, Infrastructure and property generated underlying revenue of $98 million and statutory EBITDA of $54.6 million. During the year, the corporate segment reported statutory revenue of $1.3 million. In the past year, Patrick was able to maintain a market share of ~45% via an increased market share at Port Botany and Fisherman Island. The company is in a competitive position and is increasing its market share with major contract wins and accretive acquisitions and investments.

 Segment Breakdown (Source: Company Reports)

Key Risks: The company is exposed to a variety of risks, including the risks related to its operational performance, including dependence on any single customer, product, commodity, or geography, to deliver acceptable financial returns. It is also susceptible to geographical risk and is also influenced by a range of factors, including global and domestic economic conditions. QUB may also face risks from IT and Cyber Security, Regulation and Compliance, Industrial Relations, etc.

Future Expectations and Outlook: QUB will continue to invest in technology, equipment, facilities, and potential acquisitions in its target markets to deliver cost-effective logistics solutions to drive long-term growth. It seems to be well-positioned for a decent earnings recovery when volumes return to more normal levels and to deliver long term earnings growth from its highly strategic assets. The company has provided guidance for FY21 and expects capex of ~$500 million and investment in new facilities and equipment.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company has an ability to generate decent earnings and cash flows in uncertain circumstances, demonstrating the benefit of its long-term strategy of diversification within import and export supply chains. It may experience weaker conditions in FY21 until the impact of COVID-19 subsides. As per ASX, the stock of QUB gave a negative return of 4.26% in the past three months. We have valued the stock using the EV/Sales multiple based illustrative relative valuation and have arrived at a target price of lower double-digit (in percentage terms). Considering the resilient financial performance, new contract wins, decent market share, and modest long-term outlook, we recommend a ‘Buy’ rating on the stock at the current market price of $2.67, down by 1.111% on 7 September 2020.

QUB Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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