Leighton, UGL and Downer EDI all have their eyes on a fast train

Financial journalist
Print This Post A A A

Twenty-five years ago it was the Very Fast Train (VFT); now it’s the High-Speed Rail (HSR). English being English, neither of them has the ring of France’s TGV – the Train à Grande Vitesse, which simply means ‘high-speed train – but that is the moniker we’re stuck with.

And stuck with for a very long time: last week’s launch by Transport Minister Albanese of Phase 2 of the Government’s strategic study into a fast train line connecting Melbourne to Sydney and Brisbane – about 1800 kilometres – was a non-announcement, really, given that such a project – if built – would not start carrying passengers until 2050. Not to mention the costing (in 2012) dollars put on the project: a highly optimistic $114 billion.

But in honour of the High-Speed Rail project, let’s take a look at the companies in sectors that could benefit.

In the beginning

The earliest work done on the HSR project in an engineering sense will be the early-stage route mapping, environmental impact, land evaluation and geo-technical studies. The Australian share market hosts a range of engineering companies with the expertise to be involved at this stage of the project.

Coffey International Limited (COF, share price 34.5 cents, FY13 forecast yield 2.9%), which offers expertise in engineering consultancy, technical services, geosciences and project management, is one. Cardno Limited (CDD, $6.50, 5.7%), a professional infrastructure and environmental services company, which specialises in consulting engineering, planning, surveying, landscape architecture, environmental services, electrical engineering and geo-technical services, is another.

The same is true for WorleyParsons Limited (WOR, $23.12, 4.1%), which through its Evans & Peck division, advises on rail system planning, construction and upgrading, safety systems, passenger and freight node points and interchanges, as well as operational planning of existing and new passenger and freight railway systems. Evans & Peck is a standout candidate for a feasibility study and geo-technical work along the route.

The standouts

When it comes to building the HSR track, a logical choice for substantial contracts is Leighton Holdings (LEI, $19.44, 5.3%), which has more than 40 years’ experience in building rail projects in Australia and overseas, from design through to the construction, commissioning and ongoing maintenance. Leighton could be expected to be involved in everything from the planning, pre-construction earthmoving, tunnelling, building the tracks, installing the signalling and overhead wiring, through to the power supply and plant, and building stations.

Engineering and infrastructure management groups UGL (UGL, $9.86, 7%) and Downer EDI (DOW, $4.75, 4.6%) would also be likely to pick up HSR work, given their significant involvement in the rail business. UGL manages the Outer Suburban Railcar (Oscar) project for the NSW Government’s CityRail, and operates Melbourne’s metropolitan rail network (in conjunction with Leighton’s John Holland and Hong Kong’s MTR Corporation), as well as Yarra Trams in Melbourne, the world’s largest tram network.

UGL is part of a consortium bidding for the operations, trains and systems (OTS) contract for the NSW Government’s North West Rail Link, which involves the longest railway tunnels yet built in Australia. Another major feather in UGL’s cap is that it is Australia’s only designer and builder of rolling stock, in technology partnerships with major world manufacturers ALSTOM, GE-Transportation and Mitsubishi Electric.

Downer EDI’s rail services include design, manufacture, refurbishment and maintenance of rolling stock and construction (its partner business EMD builds the locomotives and rolling stock overseas) and maintenance of railway infrastructure. Downer EDI holds the Waratah rail contract, a $3.6 billion deal to deliver 78 new trains for Sydney’s metropolitan rail network, a contract that has been plagued by lengthy delays and cost blowouts. Downer EDI expects the project to incur a $430 million loss. It also built the Millennium train fleet for the NSW Government’s CityRail.

Both UGL and Downer EDI have experience building, maintaining and supplying rail systems, and have clearly identified capabilities that would be unlikely to be passed over by the HSR project. What they could not do themselves, they would quickly be able to find the right overseas partner with which to work.

Another engineering business with strong credentials for HSR involvement is RCR Tomlinson Limited (RCR, $2.20, 4.1%). Although it is mainly involved in work for the resources, energy and power sectors, RCR Tomlinson recently announced a merger with fellow engineer Norfolk Group, which brings to the combined company its highly regarded ODG Haden Construction business, a leading provider of electrical and communications engineering solutions, and a major force in the railway signaling systems market.

Also in the signalling/electronic communications field that will be a major part of the HSR project is NetComm Wireless Limited (NTC, 25.5 cents, no dividend forecast), which specialises in the development and supply of advanced high-performance broadband communication systems.

Finally, there is the supply of the actual track: there, the logical candidate would be Arrium Limited (ARI, 83 cents, 6%), the former OneSteel, which is Australia’s only steel ‘long products’ manufacturing business. But Arrium is struggling, and the supply of rail track to the HSR project is a long way off.

Conclusion

A project like HSR, with a long gestation period and a huge array of potential problems – in the approval process, logistical, engineering and financial – should not be the basis of investment decisions in the short-term. There will be lucrative contracts won if – with the best will in the world – the project eventually goes ahead, but in the meantime, investing in any of these businesses requires a hard-headed appraisal of their medium-term prospects.

The most substantial stocks in the HSR group are Leighton, WorleyParsons, Downer EDI and UGL. Leighton and UGL offer yields that are attractive at first sight, but bear in mind that all are exposed to risks in other areas of their business. The best you will do on ratings grounds is a consensus buy/outperform on Downer EDI, a consensus ‘hold’ (with some ‘sells’) on Leighton and a consensus ‘hold’ (with a couple of buy/outperforms) on WorleyParsons. Consensus on UGL is largely neutral at present.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances

Also in the Switzer Super Report

Also from this edition

View More Articles