Morningstar Equities Research

Morningstar Equities Research

Qube Holdings Limited QUB| Government Recognises Superior Moorebank Proposal, with Direct Negotiations to Begin with Qube JV

Morningstar Recommendation: Hold
Scott Carroll, Morningstar Analyst – 02 9276 4423
The federal-government-owned Moorebank Intermodal Company, or MIC, has informed the joint venture of Qube Holdings and Aurizon holdings, known as SIMTA, that it has been selected to enter direct negotiations about the development and operation of an intermodal terminal at Moorebank in Sydney. This is a positive outcome for Qube, albeit not unexpected, given the compelling proposal put forward by SIMTA to develop an integrated terminal precinct that utilised both its industrial site and that of MIC, which lies adjacent. The MIC press release stated that the SIMTA proposal was "so strong in comparison to other respondents that it warrants a period of direct negotiation". Qube holds a 67% stake in SIMTA.

No change to our view, earnings forecasts or AUD 2.20 fair value estimate for Qube. Earlier this year, we raised our moat-rating for Qube to narrow, from no-moat, on the basis that we felt SIMTA was the logical (and most likely) private sector operator to play a role in developing an intermodal terminal at Moorebank. Our thesis is now a step closer to playing out, albeit there remains significant uncertainty around the timing, funding arrangements and operational and ownership structure for the terminal. This makes it difficult to estimate the potential value upside that Qube could realise through: i) its investment in SIMTA; and ii) volume growth in its logistics business. Our fair value uncertainty rating for Qube is unchanged at medium.

Integrating the SIMTA site as part of an intermodal precinct, with co-located warehousing and an empty container park, could deliver a competitive advantage for Qube's logistics business even if the terminal is an open-access multi-user facility.

Suncorp Group Limited SUN| Suncorp Surprises with Significant Life Insurance Write-Down

Morningstar Recommendation: Hold
David Ellis, Morningstar Analyst - 02 9276 4582
Suncorp Group surprised with a AUD 500 million after tax non-cash write-down of intangible assets in its life insurance business, as the insurer belatedly recognises worse-than-expected future claims and lapse assumptions. The revised assumptions reduce the carrying value of intangible assets and goodwill, and will reduce reported profit for fiscal 2014. Cash profit and dividend are unaffected, and the write down will have an immaterial impact on Suncorp's already significant capital surplus. Underlying profit after tax for fiscal 2014 for Life is now guided between AUD 75 and AUD 85 million, below our AUD 98 million forecast. Despite the disappointment, Life is only a small contributor to group cash earnings, likely around 5% for fiscal 2014.

We remain upbeat on the long-term earnings outlook, with management taking a conservative view on provisioning in both Life and Banking. Despite a chequered track record, the no-moat, diversified financial services group is well-placed to generate solid shareholder returns due to strong market positions, much improved productivity, a growing capital surplus and measured business growth. Minor adjustments are made to fiscal 2014 cash earnings forecasts due to higher bad debts and net interest margins in Banking and a lower underlying profit in Life. General Insurance profits are unchanged. Fair value is unchanged at AUD 14.00 per share and at current prices the stock is modestly undervalued trading 5% below valuation. Reconfirmation of the 60-80% dividend payout of cash earnings and a commitment to return surplus capital to shareholders bodes well for the likely hood of a special dividend with the release of full year results on 13 August 2014. We do not include a special dividend in our fiscal 2014 forecast, but a AUD 20 cents per share special is likely due the strong capital position and positive outlook. The AUD 500 million write down sees our forecast reported profit decline to AUD 600 million for fiscal 2014.

NRW Holdings Limited NWH| Few New Contracts As Tough Conditions Continue for NRW Holdings

Morningstar Recommendation: Accumulate
Ross MacMillan, Morningstar Analyst - 02 9276 4450
Since announcing weak first-half fiscal 2014 results in February, NRW Holdings has been awarded just one major contract during second half 2014, reflecting the steady decline in domestic mining and energy infrastructure project work available. In April, NRW Holdings was awarded a AUD 200 million 12-month contract for concreting, piping and detailed civil works on the high-profile AUD 10 billion Roy Hill iron ore project, but has won little else in the past three months. NRW Holdings started second-half fiscal 2014 with AUD 1.3 billion of work-in-hand but is likely to end fiscal 2014 with just AUD 1 billion of secured contract work because of mining company cost containment, mining project deferments, resource project completions and increased competition.

NRW Holdings has very high exposure to iron ore mining and infrastructure projects in the Pilbara, West Australia. We are concerned the recent decline in the iron ore price to USD 98 per dry metric tonne, from more than USD 125, may result in a further round of cuts by the major mining companies to planned capital expenditure. We continue to carefully monitor the outlook for the company, but make no material change to our forecasts at this stage. Our fair value estimate of AUD 1.20 is also unchanged. NRW Holdings' shares are undervalued with the market anticipating further delays to large-scale mining projects.

Our no-moat and high uncertainty ratings remain unchanged. NRW Holdings is a specialist civil and mining service contractor, highly leveraged to the Western Australian iron ore mining sector and does not hold any particularly strong competitive advantage over its major competitors, resulting in low barriers to entry.

Fisher & Paykel Healthcare Corporation Limited FPH, FPH-NZ | Fisher & Paykel Healthcare On a Roll, Estimates and Fair Value Upgraded for this High-Quality Name

Morningstar Recommendation: Hold
Nachiket Moghe, CFA, Morningstar Analyst - 64 9 915 6776
Fisher and Paykel Healthcare reported very strong results for fiscal 2014, in line with our projections. Underlying net profit after tax, or NPAT, increased 26% to NZD 97 million as both obstructive sleep apnea, or OSA, and respiratory and acute care, or RAC, delivered strong mid-teens constant-currency revenue growth. Furthermore, margins continue to improve, reflecting manufacturing efficiencies, new products and higher proportion of consumables being manufactured in Mexico. In constant-currency terms, excluding the impact of hedging and spot exchange rates, underlying earnings increased 44% versus the previous year and are up 150% compared with fiscal 2012.

We have revised our medium- to longer-term forecasts as we think the company will continue to achieve mid-teens constant-currency revenue growth during the next five years. We also believe that gross margin improvement will be ahead of the firm's 100 to 200 basis points target annually given management's track record of outperformance and margin upside from premium products and Mexico.

Consequently, our fair value lifts to NZD 4.90 per share from NZD 4.00 per share. Our fair value implies a compound annual growth rate, or CAGR, in pretax earnings of 31% (excluding foreign exchange impact) during the next five years and reported earnings CAGR of 17%. We have a great deal of confidence in the present management team in terms of introduction of new products, expanding the range of products in both hospital and home settings and extracting cost efficiencies. The shares are undervalued, trading at an 11% discount to fair value providing investors an opportunity to initiate positions in this high-quality company. We maintain our narrow moat rating, reflecting intangible assets and switching costs in respiratory and acute care products.

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