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. Qube’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 

Decent Financial Results Despite Unprecedented Challenges: Qube Holdings Limited (ASX: QUB) is engaged in the provision of comprehensive logistics solutions across multiple aspects of the import-export supply chain. As on 2 November 2020, the market capitalization of the company stood at ~$5.04 billion. Despite the unprecedented challenges faced in FY2020, the company was able to deliver a decent financial performance. The diversification strategy of the company across Ports, Bulk, and Logistics operations significantly reduced the impact of COVID-19 across the group and underlying financial results for the operating division were pleasing with growth in earnings over the prior comparable period.

Strong competitive position in attractive markets and highly diversified activities resulted in an increase of 9% in underlying revenue to $1.9 billion. However, underlying EBITA of the company witnessed a decline of 11.2% to $160.3 million. The company maintained a decent market share across the group with major contract wins during the period. During the year, the company made accretive acquisitions and investments which are likely to support long term earnings growth. The headwinds posed by the global health pandemic reduced underlying NPATA by over $21 million to $121.2 million through lower revenue and increased overall costs. The Board has declared a fully franked final dividend of 2.3 cents per share, taking the full year dividend to 5.2 cents per share. This reflects a dividend yield of 1.96% as on 2 November 2020.

FY20 Financial Highlights (Source: Company Reports)

During the period, injury rates of the company have witnessed an improvement, continuing its long-term trend, with an increase of 18% and 7% in the LTIFR and TRIFR in FY19, respectively. The company is focused on continued investment in people with internal and external development programs and is working on improving its sustainability outcomes, develop targets to reduce emissions, and focus on gender diversity in its workforce.

During FY20, the company reported net assets of $3,308.9 million and net debt of $1,193.3 million. The company also enhanced its liquidity and strengthen its balance sheet with a $500 million entitlement offer to support continued growth. The group is maintaining a leverage ratio of 26% and has maintained a conservative balance sheet with adequate liquidity and sizeable headroom to borrowing covenants.

Balance sheet & Funding (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Qube Holdings Limited.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Margins: On the balance sheet front, assets/equity ratio of the company stood at 1.80x during FY20, lower than the industry median of 1.86x and debt/equity ratio of the company was 0.66x relative to the industry median of 0.33x. In the same time span, current ratio of the company was 2.04x, higher than the industry median of 1.16x. This indicates that the company retains a decent liquidity position. During FY20, the company reported cash cycle of 69.6 days, higher than the industry median of 27.7 days.

On the profitability side, gross margin of the company stood at 69%, higher than the industry median of 64.2% and EBITDA margin witnessed an improvement over the previous year and stood at 21.6%, reflecting an increase from 16.9% in FY19. During FY20, return on equity of the company stood at 2.9% as compared to the industry median of 10%.

Key Margins (Source: Refinitiv, Thomson Reuters)

Patrick Port of Melbourne Lease Extension and Rail Funding: The company has recently announced that Patrick Terminals, wherein QUB holds an interest of 50%, has entered lease arrangements to extend its tenure at the Port of Melbourne to 2066. Patrick has also upgraded its capabilities at East Swanson Dock to handle vessels carrying over 11,000 TEU and has entered a Development Deed with the Port of Melbourne to co-fund and build the rail terminal. The rail terminal is expected to be completed by mid-2023.

Moorebank Logistics Park Monetization Process: The company has announced that it has received several Non-Binding Indicative Offers from high quality counterparties in relation to a potential monetization of the Moorebank Logistics Park in the second stage of the process. The company has entered a period of exclusivity with LOGOS Property Group to optimize the complex process. However, it remains subject to a number of conditions and will determine if it has to proceed with a transaction by the end of CY20.

Indicative Revenue Segmentation- Logistics Business Unit: The company has a highly diversified business weighted towards the major capital cities on the East Coast. During FY20, the company witnessed growth in revenue in all states except New South Wales (NSW). This was mainly due to the contribution of LCR acquisition in Queensland (QLD), Chalmers acquisition in QLD and Victoria (VIC) and Altona warehouse in VIC. The company reported decent growth in food processing, agriculture and revenue related to freight forwarding from an increase in volumes and new contract wins. During FY20, the company saw a decline in revenue from NSW from 31.4% in FY19 to 26.1% in FY20. This was due to the subdued rail and road volumes because of the continued drought.

Revenue by Region and Industry (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.

Outlook: The company may witness near-term headwinds and expects the weaker conditions in key markets to continue in FY21. However, QUB retains an ability to mitigate the impact through further cost initiatives, new revenue opportunities, and accretive acquisitions. It will continue to invest in technology, equipment, facilities, and potential acquisitions in its target markets to deliver reliable logistics solutions for long-term growth. The company expects to report a capital expenditure of ~$500 million because of locomotives and wagons for the BlueScope contract, the MLP development, and investment in new facilities and equipment across the group. The company is likely to hold its AGM on 26 November 2020.

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 seems to be well-positioned for a decent earnings recovery when volumes return to more normal levels and are likely to report growth in long term earnings from its highly strategic assets. The stock of QUB gave a return of 2.34% in the past six months but a negative return of 3.67% in the last three months. On a technical front, the stock of QUB has a support level of ~$2.485 and a resistance level of ~$2.748. We have valued the stock using the EV/Sales multiple based illustrative relative valuation and have arrived at a target upside of lower double-digit (in percentage terms). For the purpose of valuations, we have considered peers from the logistics and transportation providers industry which facilitate the movement of cargo, including Aurizon Holdings Ltd (ASX: AZJ), Alliance Aviation Services Ltd (ASX: AQZ) and Qantas Airways Limited (ASX: QAN). As per ASX, the stock of QUB is inclined towards its 52-weeks’ low levels of $1.672 and retains a decent potential for further growth as depicted by EV/Sales relative valuation methodology. Considering the current trading levels, value accretive business model, decent long-term outlook, and key investment risks, we recommend a ‘Buy’ rating on the stock at the current market price of $2.62, down by 1.133% on 2 November 2020.

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

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