QUBE Holdings, the small but innovative logistics group chaired by former Patrick's boss Chris Corrigan, has taken another big step forward with last week's Quattro Grain deal.
Qube's success in striking a joint venture with three leading grain exporters – Hong Kong's Noble Group, Cargill Australia and Emerald Grain – to build a new bulk handling depot at NSW's Port Kembla, and raising $200 million in a private placement of stock at $2.12 a share, was well-received by the market, with the group's shares closing on Friday at $2.19. Maurice James, Qube's managing director, has pitched the deal – which will create direct competition to the east coast's dominant grain handler, GrainCorp – as moving the company away from import-related businesses in both its container and bulk handling divisions.
"The diversification strategy is deliberate to diversify into export-related activities," Mr James told The Australian Financial Review last week, adding that Qube was expanding into bulk haulage and agricultural commodity businesses in response to demand for logistics services between regional areas and ports.
Qube has spent $40 million this year buying Western Australia's Walmsley Bulk Haulage, which hauls iron ore for Pilbara miners, and Queensland's Beaumont Transport, which hauls coal and grains among other commodities.
Analysts say the Quattro deal, which involves Qube and its partners building a new bulk handling depot at Port Kembla as well as rail-related infrastructure, underscores the group's determination to own as much of the supply chain as it can.
Qube has already secured agreements from Noble, Cargill and Emerald to provide rail haulage services into Port Kembla, as well as providing stevedoring services to load grain on ships.
"The benefits from this structure are both cost synergies from better volumes and scale, as well as increased customer stickiness, as Qube owns and operates high-quality infrastructure in an efficient manner," says Credit Suisse analyst Nicholas Markiewicz.
Credit Suisse has a 12-month target price of $2.41 on the stock.Trading at premium to market
Like most analysts covering Qube, Credit Suisse has a "neutral" rating, noting that the logistics group is already trading at a premium to the market of about 23 times forecast fiscal 2015 earnings and has not disclosed exactly how the Quattro development and recent acquisitions will benefit profits.
Credit Suisse forecasts Qube will generate another three years of "relatively weak returns" before it starts to benefit from the Quattro Grain deal and this year's acquisitions, estimating the company's return on invested capital in fiscal 2014 will be 7.5 per cent.
Qube says it is targeting a "long-term" after-tax return on investment of 12 per cent to 15 per cent on the Quattro Grain venture.
Other analysts are waiting to see the outcome of Qube's bids to develop Sydney's Moorebank intermodal terminal and the Port of Melbourne's Webb Dock before putting higher price targets on the stock.
CIMB, which has a price target of $2.04, forecasts April will be "a company defining" month as decisions on the successful tenderer for Melbourne's third container terminal and the Moorebank's bidding shortlist are announced.
Qube's underlying earnings do not justify a premium above the company's current share price, according to CIMB analyst Mark Williams, who argues the stock could fall if the company misses out on the Port of Melbourne terminal or Moorebank shortlist.
"The investment case is still tied to management's ability to grow the business successfully over the next three to five years," Mr Williams says.
Although Qube only needs $50 million from last week's $200 million capital raising to develop Quattro Grain, it is setting aside cash for potential developments in Melbourne and at Moorebank.
UBS, which managed Qube's capital raising, estimates Qube would need to spend some $350 million over 2015 and 2016 to fit out a new container terminal if it is successful winning the Port of Melbourne tender.
The bank said it was unclear how much money Qube, which is partnering with rail operator Aurizon to bid for Moorebank, would need to spend on the intermodal terminal, but said spending would probably be limited to building a new rail terminal, with warehousing likely to be built by customers.
