While acquiring the right to operate at Abbot Point Coal terminal represents a risk-free profit stream without capital investment, it is unlikely to add to ADSEZ’s profits significantly in the near to medium term
ADSEZ is acquiring the right to operate at the Abbot Point Coal terminal but not the Abbot port itself: On 20 September 2016, ADSEZ, through its Australian subsidiary, has entered into an agreement to acquire Abbot Point Bulkcoal Pty Ltd. (APB) (part of Glencore PLC, GLEN LN, NR, CMP: GBP 196.5, one of the world’s largest global diversified natural resource companies and a major producer and trader of more than 90 commodities), subject to regulatory approval for a consideration of Australian dollar (AUD) 19.25 m (approximately R1 bn). Recall, ADSEZ acquired the Abbot Point Coal Terminal back in 2011 on a 99-year lease and later divested its entire stake in the terminal to Adani Group in 2013. Located in Queensland, north coast of Australia, Abbot Point Coal Terminal is well-equipped with extensive and efficient coal handling facilities, having a capacity of 50 MMTPA. Since inception, the coal terminal has been operated and maintained by APB on a take-or-pay contract.
Takeaway from analyst call: ADSEZ management held an analyst call following the announcement and guided that revenue from this acquisition would be approximately AUD 60 m (approx. R3 bn or 4% of ADSEZ’s FY16 revenue) at an estimated annual coal handling of 30 mmt. Based on cost plus business model, this business would generate operating profit of around AUD 6 m (approximately 1% of ADSEZ’s FY16 profit), according to management. It effectively will have a contract to operate this terminal over the next 18 years (after the first 3 years, it will be renewed every five years from 2020).
HSBC view—a non-event: While we believe that this acquisition represents a risk free profit stream without capital investment, it is unlikely to add anything significant to ADSEZ’s profit in the near to medium term. Moreover, despite being EPS accretive in the long-run, inclusion of nearly 30 million tonne of throughput, AUD 60 m of revenue with 10% Ebitda margin would slightly dilute overall margin for the group.
We maintain our earnings estimates, target price and Buy rating: We believe ADSEZ is a play on India’s long-term structural growth. The company has a pan-India presence which enables it to benefit from rising coastal shipping and transhipment. YTD, ADSEZ’s share price (including dividends) is up 6% vs an 11% increase in BSE Sensex. The stock is trading at 11.7x HSBC FY18e EV/Ebitda, compared to 16.0x for Gujarat Pipavav Ports (GPPV IN, R176.95, Reduce, target price R150).
We believe ADSEZ is a long-term play on India’s trade and infrastructure growth. A pan-India presence enables the company to benefit from rising coastal port throughput. We value the stock using discounted cash flow (DCF). We use a WACC of 11.0%, assuming a risk-free rate of 3.0%, an equity risk premium of 6.5% and a beta of 2.06. We forecast cash flow until FY26e and apply 4% terminal growth beyond. Our target price of R340 implies 23% upside. We rate ADSEZ Buy.
Downside risks include: rising inter-group loans, sharp appreciation of $ against Rupee, sharp increase in interest rates and slower-than expected throughput growth.