Election play opportunities – Qube and the airlines

Financial journalist
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This week’s election has been very keenly anticipated by both investors and the management teams of listed companies and, as many company heads stated during the just-completed reporting season, the outcome most eagerly awaited is certainty, as in a clear-cut mandate for one side of politics.

The most obvious bet on the election outcome and one which has received plenty of airplay (see Switzer articles here and here) is salary packaging and fleet management services group McMillan Shakespeare (MMS), which stands to lose more than 30% –40% of current earnings from the Rudd government’s proposed changes to fringe benefit tax (FBT) laws, announced in July. The Coalition has promised to scrap the government’s changes to the FBT rules – so if it wins, MMS wins.

That has been a big factor in MMS’ rise of 46% since it returned from a trading halt, but much of the expectation of a Coalition win seems to be priced-in.

The outliers

One potential beneficiary from a Coalition win could be ports logistics operator Qube Holdings (QUB), which is developing a $1 billion inter-modal freight terminal at Moorebank in Western Sydney to serve Port Botany. The problem is that the federal government wants to build its own $1.6 billion inter-modal freight terminal across the road, on land owned by the Defence Department.

This is a particularly bitter dispute. Qube chief executive Maurice James has described the government’s plan as a “federally funded farce” that was a “very close cousin of the pink bats scandal in terms of wasting public money.” 
The government has hit back by saying its proposal would be an “open access” terminal, meaning that freight firms would not have to apply to a potential competitor for access to the terminal. The government cites a report it commissioned from advisory firm Greenhill Caliburn, which found that the government’s site was the better option, being bigger and nearer the freight line.

An interesting footnote to the dispute is that Qube chairman Chris Corrigan and chief executive Maurice James were formerly managing director and head of ports at Patrick Corporation, which famously took on the Maritime Union of Australia (MUA) in the 1998 waterfront dispute. Cynics on the share market note that the Labor government would not have fond memories of that dispute – and would not lose any sleep over any discomfort experienced by Corrigan and James. A Coalition administration might take a different view.

Another interesting situation is the country’s largest grain merchant, GrainCorp (GNC), which has been under a $3 billion-plus takeover offer from US agribusiness heavyweight Archer Daniels Midland (ADM) for almost a year. The deal has a December 31 deadline, waiting on approval from the Foreign Investment Review Board (FIRB). Under the deal, ADM cannot sell its 19.9% stake in GrainCorp until December 31.

What would concern ADM – and GrainCorp shareholders – is the fact that foreign ownership of Australian agricultural assets has crept into the election campaign as an issue. National Party leader Warren Truss – the potential Deputy Prime Minister after September 7 – has signalled that an incoming Coalition Treasurer would “address concerns” about the deal. Truss has said that he has “serious reservations” about whether the sale of GrainCorp to ADM was in the national interest.

Miners

The Coalition also says it will abolish the mineral resources rent tax (MRRT) and the carbon tax. Removing this tax will not affect the resources stocks for the simple reason that most of the companies potentially covered are not paying the tax, because of lower profits and the depreciation allowances.

In fact, with Rio Tinto (RIO) actually being paid a refund on the mineral resource rent tax it did pay in 2012-13 – because the Australian Taxation Office (ATO) found it overpaid – you could argue that removing the tax is a bad thing for the big miners.

BHP is understood to have paid MRRT in the second quarter of the financial year, while Glencore-Xstrata has probably not paid any yet. Fortescue Metals (FMG) has not paid any MRRT and does not expect to for years.

Airlines

On the carbon tax, abolition could be expected to benefit the airline stocks, which have the tax applied to them through the aviation fuel excise. Regional operator Regional Express (REX) was very vocal on this point when delivering its result last month, saying the carbon tax caused a 45% slump in its annual profit, from $25 million to $14 million. (REX is still the most profitable listed airline in Australia.)

REX paid $2.4 million in carbon tax in FY13, a cost it did not have in the prior year. Executive chairman and major shareholder Lim Kim Hai said the impact of the carbon tax on consumer spending also hurt the company, with revenue of $258 million in 2012/13 down 5% from the prior year.

Virgin Australia (VAH) paid nearly $48 million in carbon tax in FY13 and said it was a factor in its net $98.1 million loss, because strong competition in the market meant it could not recover the tax impost from customers. Qantas (QAN) paid $106 million in carbon tax in FY13 – $77 million for Qantas Domestic and $29 million for Jetstar – on its way to a tiny $6 million profit. While quite a number of factors go into determining an airline’s profitability, clearly there would be significant bottom-line boosts to these companies with no carbon tax applied.

However, it is not always that simple. Power generator and seller AGL Energy (AGK), which is Australia’s second-largest carbon tax-payer behind GDF Suez, actually warned in August that it would take a short-term hit if the carbon tax is scrapped, because it would lose its compensation payments from the federal government – paid because it operates the Loy Yang A power station in Gippsland. AGL received $240.1 million in carbon tax compensation during the year: but it said its carbon costs for the year totalled $580 million. Chief executive Michael Fraser added that scrapping the carbon tax would benefit the company over the longer-term, through lower ongoing costs.

The IT factor

Where the National Broadband Network (NBN) is concerned, Telstra (TLS) has said it is “agnostic” over whether Labor or the Coalition has the best method of deploying the National Broadband Network project. Telstra has its $11 billion deal with the government to give NBN Co. access to its ducts, pits and pipes infrastructure, so that fibre cable can be laid alongside Telstra’s existing copper cable, and has committed to transferring its customers onto the NBN as the new network is laid out.

The Coalition will honour this deal, but some analysts say the Coalition’s “fibre to the node” plan will result in a faster and cheaper rollout, which will generate accelerated disconnection and migration payments for Telstra. However, any such benefit is likely to be small, given that it would be offset by a decline in copper revenue.

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