Key points

• Cashed-up multinationals will increasingly acquire smaller country-based logistics companies and bolt them on to global transport infrastructure.
• Qube has excellent medium-term growth prospects through its investment in the Moorebank intermodal transport project in Sydney.
• The falling Australian dollar, potential for Australian wine exports into Asia, and signs of improving industry conditions for viticulture should eventually encourage another predator to knock on Treasury Wine Estate’s door.

Much has been made of the coming boom in Asian middle-class consumption and its effect on food demand. Less considered is the transportation of food across diverse Asian markets and the massive investment needed in supply-chain integration.

The OECD predicts a global middle class of 4.9 billion by 2030, from 1.8 billion in 2009. Two-thirds of the new middle class will be Asian and their diets will change dramatically as more protein is incorporated. Stronger global transport networks will be needed to facilitate trade and help feed another 3 billion middle-class consumers within 15 years.

Cashed-up multinationals will increasingly acquire smaller country-based logistics companies and bolt them on to global transport infrastructure. The goal: to better integrate supply chains across Asia, move more goods at lower cost, and get ready for middle-class consumption growth.

It’s a big task. Diverse Asian markets have fragmented supply chains and transport infrastructure. Investment of $US8 trillion in South East Asia alone is needed by 2020 to bridge the region’s infrastructure gap, according to estimates from the World Economic Forum.

Japan Post’s $6.5 billion takeover of Toll Holdings in May reinforced the potential of logistics in Asia. Japan Post brought the capital, and Toll had the expertise in running an integrated freight and logistics business. Toll’s growing Asian footprint and customer relationships in the region was another attraction for Japan Post.

Brookfield Infrastructure Group’s surprise $8.85 billion bid in August for rail and ports operator Asciano makes sense: Asciano handles nearly half of all container traffic entering or leaving Australia. Brookfield can combine its North American and European assets with Asciano’s Australian port operations, and bolster its global container platform.

It can also drive better integration of Asciano’s domestic operations. There is scope for Asciano’s well-performing rail business and its improving ports business to work closer together and for the company to be “transport agnostic” – that is, provide a more seamless logistics service to clients rather than focus on a particular transport mode.

Takeover tailwinds

Conditions are ripe for takeovers of transport companies as the lower Australian dollar makes them more attractive to foreign predators in US-dollar terms. Multinationals struggling to lift or maintain organic growth rates in a sluggish global economy will be forced to flex their balance sheets, buy smaller players, and grow by acquisition.

The takeover of Toll Holdings and the bid for Asciano will surely have other global transport companies running their rulers over similar Australian assets.

Qube Holdings and Aurizon Holdings (which we will cover in a later column) are worthy takeover candidates. Both are well run, have quality assets, operate in duopolistic industry structures, and are sound long-term investments in their own right, regardless of takeover. Buying companies on the basis of takeover alone is fraught with dangers because the timing is impossible to predict.

Qube stacks up

Shares in the ports and logistics operator for containerised and bulk products have fallen from a 52-week high of $3.05 to $2.02. A slowing Australian economy is bad news for port volumes and Qube’s 2014-15 full-year result was slightly below market expectation.

Qube has a stellar annualised five-year total shareholder return (including dividend reinvestment) of 22%. But the one-year return is minus 17%. Australian transport companies have a challenging short-term outlook amid slowing domestic demand, and the sharemarket correction in July and September crunched share prices.

Chart 1: Qube Holdings

Source: Yahoo!7 Finance, 17 September 2015

Qube reported 18% revenue growth to $1.4 billion, and 13.5% growth in underlying earnings (EBIT) to $163.9 million for FY15. Guidance was unchanged: earnings from the ports and bulks operations will be lower in FY16 than FY15.

The Sydney-based company has significant strategic value, given its position in the duopolistic container stevedoring and automotive stevedoring industries. Only it and Asciano offer a range of logistics services in all five capital cities. Qube has shown it can grow faster than the economy through astute acquisitions.

The company has excellent medium-term growth prospects through its investment in the Moorebank intermodal transport project in Sydney. Moorebank will become Australia’s largest inland intermodal terminal when fully developed. The project, due for completion in FY17, is a game changer for Qube, a catalyst for a share-price re-rating as tenancy signings are made, and another reason for a foreign predator to make a bid before the value at Moorebank is unlocked.

Macquarie Equities said in August: “While the near-term outlook remains challenging, Qube management’s track record of delivering accretive growth opportunities will continue to drive the stock. The key catalyst for Qube remains tenancy signings at Moorebank to underpin value, and while long-dated, the project remains highly accretive, in our view.”

Seven of 12 broking firms that research Qube have a buy or strong buy recommendation, four have a hold, and one has an underperform, consensus estimates show. The mean price target of $2.69 suggests Qube is about 30% undervalued from the current price.

At $2.02 a share, Qube trades on a forecast Price Earnings multiple of 20 times FY16 earnings. Asciano, at $8.17, trades on 19 times forward earnings and looks fully valued.

Asciano and Qube both have significant strategic appeal. Their assets are hard to replicate because of their industry structures, and easier for foreign players to buy rather than build. They would be worth more in the hands of a global logistics company that can integrate them into Asia Pacific supply chains –a reason Japan Post and Brookfield arguably paid “overs” for their bids for Toll Holdings and Asciano respectively.

A handful of substantial shareholders in Qube could wrangle a higher price from a predator, should a bid eventuate. But there’s enough value in Qube at the current price to reward investors over the next three years, regardless of corporate activity.

Takeover update

Woodside Petroleum’s bid for Oil Search this month unleashed a flurry of media reports that predicted the mergers and acquisitions (M&A) boom had finally arrived in Australia, and speculated on potential takeover candidates.

There are several M&A positives: cheap debt, low equity prices, an Australian sharemarket trading in line with its long-run average PE multiple, and balance sheets collectively in good shape. But low business confidence is weighing on M&A volumes.

That could change if Australia’s new Prime Minister, Malcom Turnbull, can boost consumer and business confidence over the next 12 months, and create more regulatory and political certainty for corporate Australia to invest.

This month’s takeover targets list adds Qube Holdings and Aurizon. I considered adding Woolworths and Treasury Wine Estates, and may do so in coming issues.

Underperforming Woolworths needs a shake-up and will come under the gaze of private equity if its share price keeps falling and its Masters hardware chain continues to disappoint.

Private equity could strip Masters out of Woolworths, buy Mitre 10 from the struggling Metcash, combine the groups and provide a stronger competitor for Bunnings. Separating the hardware business could help Woolworths regain its operational mojo.

That deal has been speculated before, but the slide in Woolworths – its shares have fallen by about a third from the 52-week high of $36 – adds to the urgency for change.

Wine group Treasury Estates has been a takeover target for some time and last year rejected two private equity bids that valued it at $3.1 billion. Treasury’s performance this year vindicates the board’s decision: the one-year total shareholder return is 47%.

However, the falling Australian dollar, potential for Australian wine exports into Asia, and signs of improving industry conditions for viticulture should eventually encourage another predator to knock on Treasury’s door.

No takeover targets have been removed from the current list, shown below:

Tony Featherstone is a former managing editor of BRW and Shares magazines. All prices and analysis at September 15, 2015.

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.