Shares in Qube Holdings (ASX:QUB) have enjoyed fairly consistent gains over the course of this year. Its premium rating in comparison to global transport logistics peers reflects the Company’s investments (in land, terminals and physical infrastructure) which help drive QUB’s strong earnings growth. These factors have helped shift the EPS growth profile from around low-to-mid single digit over the last 2-3 years to high single digit currently.

Accordingly, we recently research the Company in The Dynamic Investor to assess the prospects for a continued re-rating.

About Qube Holdings

Qube Holdings provides comprehensive logistics solutions across multiple aspects of the import-export supply chain. The Company’s Operating Division comprises two core business units: Logistics & Infrastructure and Ports & Bulk.

Logistics & Infrastructure (L&I) provides a broad range of services relating to the import and export of mainly containerised cargo. Ports & Bulk (P&B) has two core activities comprising port logistics and bulk logistics. It provides a range of logistics services relating to the import and export of mainly non-containerised freight.

QUB also owns a 50% interest in Patrick, which is an operator of container stevedoring services in Australia’s four largest container terminal ports.

Key Fundamental Drivers

Higher Return Targets Appear Achievable

At the FY24 results release, the Company lifted its Return on Average Capital Employed (ROACE) target from 10% to 12% over the medium term. Underlying Group ROACE improved to 9.5% (from 9.1% in FY23). There is scope for the ROACE to improve towards the revised 12% target, as a significant portion of capital begins to generate a higher rate of return. These include the two MLP Terminals, new locomotives and wagons not yet operational. In addition, QUB now have $718m of capital invested not yet generating earnings, including two terminals, property and infrastructure assets.

Reversion in Market Share to Impact Patrick Earnings

Patrick reported an impressive FY24 result, with EBITA growth (+31.6%) outstripping underlying revenue growth (17.5%). Earnings growth was driven by higher volumes and improved productivity despite lower storage revenues and higher operating costs.

Patrick’s market share increased from 42% to 47%, predominantly due to the impact of industrial action at competitor DP World. Patrick’s ability to efficiently handle these higher volumes reflects the benefits from the substantial investment in landside infrastructure and equipment that Patrick has and continues to undertake.

With market share expected to revert back towards historical levels, the Company provided guidance for Patrick’s NPATA contribution to decline by -10% to -15% in FY25 (relative to FY24). There also is risk of further market share losses from Patrick’s upcoming union negotiations.

Acquisitions Increase Gearing Levels Towards Target Range

QUB’s balance sheet remains moderately geared, at 27.2% (on a net debt to [net debt + equity] basis) as at 30 June 2024. There is available balance sheet capacity, as the Company has a targeted gearing range of 30-40%. Following recent acquisitions, gearing is likely to reach the mid-point of the target gearing range. To reduce gearing, QUB has expressed its interest in further asset sales as well as divestment of non-core or under-performing assets of ‘at least $180-250m in gross proceeds’ in 1H25.

Can Qube Still Pursue an Additional Stake in Patrick?

With QUB having balance sheet capacity for some time, a key investor consideration is what QUB intend to do with the 50% of Patrick it does not currently own. The Company has stated that it does not intend on fully owning Patrick. To this end, the QUB could take a 1-5% incremental stake in Patrick, which would allow QUB to consolidate Patrick into its financials through controlling >50% of the business.

In isolation, assuming a 5% incremental stake is debt-funded, the level of gearing would still be within the 30-40% target range. However, pursuing an additional stake in Patrick may have slipped down management’s pecking order. This is due to several (more immediate) priorities, including: i) Debt-funded acquisitions, ii) The potential (but unknown) mitigation from asset sales/non-core divestment’s, iii) Elevated CAPEX guidance for FY25 and iv) Management’s focus on integration of recent acquisitions.

Fundamental View

QUB shares are currently trading a discount of ~9% to current market valuations. This reflects the potential for higher targeted ROACE and the significant amount of capital that is not yet generating earnings. However, we consider that QUB’s investment risk has increased as a result of: i) Weak cash generation (from elevated CAPEX requirements), ii) Reduced balance sheet capacity and iii) Integration risk from recent acquisitions.

Charting View

We last looked at the QUB chart in early April in The Dynamic Investor and noted that it was getting ready to breakout and rally higher. At this stage, it looks like QUB has further upside from here and is likely to push higher. Investors can consider using the 20 day moving average as a tight trailing stop, or the 100 day moving average if more room is required. As we can see on this chart, QUB tends to respect both of those levels.

 

 

Michael Gable is managing director of Fairmont Equities.

 

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