QR National QRN
July 25, 2011 - 3:14pm EST by
2011 2012
Price: 3.38 EPS $0.15 $0.20
Shares Out. (in M): 2,440 P/E 22.5x 16.9x
Market Cap (in $M): 8,247 P/FCF 0.0x 0.0x
Net Debt (in $M): 500 EBIT 0 0
TEV ($): 8,747 TEV/EBIT 0.0x 0.0x

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QR is a railroad company that went public in Nov 2010. They own and lease the tracks as well as operate a haulage business for coal, iron ore and other commodities. Coal is the primary product and the coal miners are their main customers.

The track is a very privileged asset because it is the only network connecting the big Queensland coal mines to the port systems. The tracks are regulated and the returns are regulated to a 10% return on asset framework. This is a monopoly business - other operators can use their tracks but have to pay access fees. The risk of another track coming up is miniscule (regulations, costs).

On the haulage side, QR enters into 5-7 year "take-or-pay" contracts with miners. QR is obligated to haul defined volumes under pre defined service and completion rates, but is protected if the miners decide to ship less. Iron Ore is a new and very small business but it is a promising growth area and management believes that it could one day be as big as their coal business today. They compete with Asciano's subsidiary Pacific National.

They also have a third business- "Intermodal", which connects between major rail centers, and is primarily oriented towards other commodities including grains.

New Management - Lance Hockridge was brought in as CEO in 2007 to start the IPO process. He has a good track record in dealing with union issues and turning around industrial performance. He was President of Bluescope Steel North America where he oversaw a dramatic improvement in ROIC and reduced headcount by 30%. At QRN, he has completely revamped the management team and brought in "industry" people to replace the civil servants. He has upside on A$10mm worth of stock

There are 4 primary drivers of earnings growth
1) Secular growth in volumes - Australia is the most important supplier of coal and iron ore to Asia. As Asian demand and GDP growth continues, Austrailian exports of coal and iron ore will continue to increase at 4-5% a year at least. Because of the floods in early 2011, many coal mines are behind schedule and this growth trend may see an aberration this year. New mines are being opened and current mine capacity is being expanded. The bottleneck is logistics, sometimes rail and sometimes ports. This secular tailwind and QR's position as the only track gives it tremendous privilege
2) Price increases in Coal business. Contracts were historically priced at 3% Roe. They are now being priced at 16%, based on current cost structure. As costs are taken reduced, effective returns will be higher. This has been happening since 2007 and the current contracts are almost halfway repriced at this point. Full repricing will be achieved by 2015.
3) Expansion of Network. QR is laying more track and the return on these projects is higher (initially) than the statutory 10%. As the expansions are funded through debt they are accretive to EPS and ROE.
4) Cost reductions - Management carried out a benchmarking exercise and demonstrated that their costs are very high relative to Asciano's haulage business (Ebitda Margins are 23% vs 33%) and the North American class 1 railroads (margins of 22% vs 37%). THey have already executed 2 voluntary retirement schemes and are also expanding outsourcing and better vendor selection. The opportunity here is obvious. This was a government owned enterprise. No one got fired here and cost control is a new concept. Management has a good track record in dealing with unions and executing rationalization. There is a union agreement that prevents forced layoffs before 2013.


1) Loss of major contracts to Asciano
2) Collapse of China/asia economies and drop in coal/iron ore demand
3) Weather related interruptions


1) Contract renewals and repricing
2) Further cost reductions and VRS scheme
3) New iron ore and coal contracts
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