Article: QRN investors shrug off Palmer sue threat

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Article: QRN investors shrug off Palmer sue threat
From: The Courier-Mail
by Tony Grant-Taylor
February 06, 2012 11:03AM

http://www.couriermail.com.au/business/qrn-investors-shrug-off-palmer-sue-threat/story-fnbdkrr9-1226263647981

IT MIGHT be thought that a company threatened with an $8 billion lawsuit would see its shares at least get a bit of the on-market wobbles.
Investors in QR National, which was in the blustering sights last week of Queensland's richest man, Clive Palmer, have ignored his threat to sue over QRN's proposal for a coal rail line from the Galilee Basin, which Mr Palmer sees as a competitor to his Waratah Coal's plan to build its own line from Galilee to the Abbot Point coal terminal near Bowen.

Indeed, investors marked QRN's shares up to a $3.81 high on Friday.

Waratah Coal is yet to file any legal process. And Mr Palmer has indicated it might take months.

But looking at QRN, just over a year since its controversial but highly successful November 2010 float, investors don't seem to care. They are concentrating on the fundamentals of QRN's businesses and their growth prospects.

And they generally seem to still like what they see.

"We maintain our positive view," says Evans & Partners analyst Paul Ryan, obviously well aware of the downside risks to QRN's performance as perceived by some observers.

In a recent update to clients, he said: "We pit the bear case (on QRN) - expensive, government overhang, demand cooling, losing marketshare, customers in-sourcing, BMA contract risk, tough IR environment, high-risk track projects, uninspiring management - against the bull case and answer our rhetorical question with a resounding "Yes" for the latter.

QRN's shares were sold in its float to institutional investors at $2.55 each and to retail investors at $2.45.

Mr Ryan said "our blended valuation is likely to rise to about $4.30 when we roll our capitalisation metric to FY13 multiples at the first half (2012) result" due this month.

Macquarie Equities also sees upside on QRN's recent price, though like Evans, its latest update was published a couple of weeks ago with QRN's share price at $3.67.

Analyst Ian Myles says in that note: "Our 12-month price target is $3.94, based on discounted cashflow methodology." He sees "the catalyst" for further price appreciation being an "ongoing recovery in Queensland coal volumes" after the disruptions from 2011's big wet.

Given the huge volatility of equity markets over the past 12 months and that disruption to QRN's coal haulage business, its sharemarket performance had been "stellar" as broker RBS Morgans put it late last year.

And Mr Myles expects more: "QRN has performed well, reflecting the defensive nature of (its) regulated business and opportunities to grow (its coal haulage) network at above-regulated returns.

"(Despite) the continuation of a weak economy, QRN can continue to deliver such growth."

QRN surprised many last year by demonstrating a much more significant ability to quickly cut its costs. Mr Myles and Mr Ryan see further asset and operating efficiencies providing more "internal cost savings that should emerge in 12 to 24 months", as Mr Myles puts it.

Not that everything is necessarily rosy longer term. Mr Palmer and his Galilee Basin competitors, including the GVK-Gina Rinehart consortium, the Adani Group and Chinese-controlled Macmin - are also examining getting into the coal haulage business.

And the BHP Billiton Mitsubishi Alliance, QRN's biggest customer, is looking at the prospect of a dedicated Goonyella to Abbot Point line.

Were QRN to lose a mass of BMA haulage contracts that are up for renegotiation over the next 18 months or so it would be a blow, although QRN will be working very hard to make sure it does not, and a sudden shift of BMA's business, though some may well go to QRN competitor Asciano's Pacific National, is probably unlikely.

Meanwhile, another potential negative for QRN, highlighted by some observers, is the State Government's 34 per cent stake, which Treasurer Andrew Fraser has said would be sold after QRN posted its 2012 results later this year.

At this point, however, investors seem satisfied that any sell-down can be handled without too much price disruption, perhaps partly by allowing QRN to buy back a proportion of the Government's stake.

And while there could well be an LNP rather than Labor government in power once the sale deadline rolls round, the market may have taken some comfort from LNP leader Campbell Newman's recent statement that a government he led would consider putting the stake into a sovereign wealth fund, a sort of Queensland future fund.

Requests to Mr Newman's office and that of his deputy, shadow treasurer Tim Nicholls, asking whether the LNP had any settled policy on what would happen to the stake, went unanswered last week.

But a new government is unlikely to do anything to trash QRN's value - particularly given its continuing board number of individual shareholders.

QRN chief executive Lance Hockridge has said QRN does not expect to remain a monopoly network operator in Queensland in the longer term.

But its recent completion of the $1.1 billion GAP project, which filled in the "northern missing link" between the Goonyella coal haulage system in the central Bowen Basin and the Newlands line linking the northern basin to Abbot Point, was evidence that it will compete to build more infrastructure where it can.

QRN is looking for growth opportunities in Western Australia's iron ore provinces.

[SurfRail]

Even the bonus share issue didn't deflate the price, and I now have an extra share for every 15 I held before November 2011.

I'm disappointed I didn't buy more, frankly.