Scott Kelly, DNR Capital’s Portfolio Manager for the Australian Equities Income Strategy and Fund, discusses Qube Holdings (ASX:QUB) and why it features as part of the Income portfolio.
Well, the income portfolio’s investment in Qube holdings demonstrates our focus on delivering a sustainable and growing dollar income profile, which is also supported by valuation, upside. Qube is Australia’s largest integrated provider of import and export logistics services. It operates in over 130 locations across Australia, New Zealand, and also Southeast Asia with a workforce of over six and a half thousand employees. Qube ranks very well on DNR Capital’s quality framework. Firstly, in terms of industry strength, Qube is the largest integrated third party container, logistics provider, in Australia, and provides a diverse range of integrated port services, [00:01:00] bulk material handling, and bulk haulage services. In terms of earning strength, Qube has good earnings visibility, underpinned by take or pay contracts, with robust counterparties, and its strong competitive position reflects it’s innovated and competitively priced, quality logistics solutions. Its balance sheet is very robust, particularly post the completion of the Moorebank sale, expected to be in a net cash position, and therefore have balance sheet capacity of at least 800 million to deploy into M and A opportunities and also capital management.
In terms of dividend sustainability and growth, it’s underlying dividend is around six cents per share currently, which might only be a yield of two for the frank, currently, but we expect double digit growth over the next five years. So, we categorize this dividend profile as a “grower in our process.” But, in addition, we estimate Qube will have excess franking balances that will allow it to undertake capital management. Its management team is very experienced, with significant industry background and a strong track record of strategic vision and operational excellence in extracting efficiencies and maximizing asset utilization. And from an ESG perspective, it’s low risk, in terms of the work that we’ve done across that. Well, investment thesis on Qube is pretty clear. They’ve just reached an agreement to sell Moorebank, which we’ll see. It had balance sheet capacity of around 800 million dollars, which it will deploy across both M and A and capital management. With excess franking on hand, we think the special distribution, fully franked, of somewhere between 15 and 25 cents is likely.
And we don’t believe that’s been considered by the market at all. From an underlying operational activity perspective, it continues to perform very well across all key exposures, with tailwinds likely to continue into the next calendar year, very strong port volumes in Sydney and Melbourne, year to date. But I think, importantly also, the market is probably underestimating new contract wins as well as strong leading indicators in mining [00:03:30] agriculture and forestry products, which should all assist underlying growth for the company.
I think the Qube has a very good track record of capital allocation over the last 10 years, and we think additional Bolton acquisitions over the next three to five years are very likely, and that’s going to be additive to earnings as well. So, whilst it’s trading on an apparent lofty PE ratio of around 35 times, this doesn’t accurately reflect the value of earnings from Moorebank and Patrick and also the double digit growth that we’re expecting. We derive an underlying valuation of around $3.75, which excludes the potential deployment of latent balance sheet capacity. So, you’re getting that combination of yield and growth, capital management, as well as valuation upside. So, for us, it’s a reasonably large positioning in our income portfolio, currently.