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Analyst report
Buying opportunities for transport stocks: BXB & RCY
December 3, 2007
Brendon Lau, ShareAnalysis
Transport sector investors worldwide have been nervously eyeing the crude oil price as it threatens to break the US$100/barrel mark. While high fuel prices are a concern to the industry, we believe many in the sector are still travelling in the right direction and investors should use the current price weakness as an opportunity to jump on board some transport-related stocks.
Our positive outlook may sound contrarian to the latest jitters hitting global equity markets, but we feel there is not enough evidence at this stage to believe that global growth would be derailed by the ongoing credit market turmoil and deteriorating economic conditions in the US.
Furthermore, Australia's close proximity to growth centres in the Asia Pacific region (a part of the world that is relatively less affected by the sub-prime contagion) is a lucky break for many of our transport and logistics operators.
Investors can also take heart from a recent report released by the World Bank that has played down the impact of a US economic slowdown on China, even as Chinese exports to the US fell for the second consecutive quarter.
The World Bank is not the lone optimist; other economists have predicted that even if the US drags the rest of the world into a recession, China is still likely to experience high single-digit GDP growth due mainly to the lack of low-cost competitors across a number of sectors.
There is more encouraging news. Japan's exports rose to a record last month despite a drop in exports to the US, as companies shipped more cars and electronics to Asia and Europe. If Brambles' (BXB's) positive outlook statement is anything to go by, China and Japan are not the only countries doing brisk trade. The logistics (pallet pooling) giant has reported growth across all its regions, even in the US where freight operators are feeling the chilling headwinds of slowing domestic demand and high fuel prices. Ironically, the economic turmoil in the US is boosting exports, as its weakening dollar makes US-made products more competitive.
Against the backdrop of robust global trade, there is strong investor demand for transport infrastructure assets. The IPO of Dubai Ports World has been oversubscribed and its float is priced at more than 20 times EBITDA. Interest in such assets is likely to stay strong for the foreseeable future and this positive sentiment is heartening news for our listed port operators.
However, we are not saying that it will be smooth sailing for transportation- and logistics-related stocks either. The risk to global economic growth is clearly skewed to the downside. The latest Organisation for Economic Co-operation and Development (OECD) report underscored this point when it said that the financial market turmoil might be only a precursor to a protracted correction.
Nonetheless, even after we price in these risks, we believe there is still enough value left on the table to warrant a number of Buys in the sector.
Of the five stocks we have a BUY on in the sector, two that may interest you are:
Stock: Brambles
ASX code: BXB
Current price (30/11/07): $12.36
12-month forecast: $14.44
Brambles said that its first four months of FY08 are ahead of the pcp. CHEP like-for-like growth is running at 6%. The company said FY08 outlook remains very positive and it expects strong profit growth. Both AIO and TOL have taken stakes in BXB, raising the possibility of a takeover bid, although AIO said it would not attempt one but will hang on to its 4.09% stake. We have a BUY recommendation on BXB with a 12-month target of $14.44 (technical recommendation: HOLD).
Stock: River City Motorway
ASX code: RCY
Current price (30/11/07): $0.865
12-month forecast: $1.00
RiverCity Motorway (RCY) issued its 1Q08 report up to 30 September 2007. Operating cash flows of -$10.9M appear in line with our current projections. Continuing financing activities are under way to meet construction requirements and distributions. At present, construction is ahead of schedule and we maintain our BUY call on RCY with a 12-month target of $1.00 (technical recommendation: HOLD).
Brendon Lau is the editor of ShareAnalysis, a premium retail investment service offered by Aegis Equities Research. Click here for your free trial.
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Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions. |
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