QR National (ASX:QRN) is Australia’s largest rail freight operator and the world’s largest rail transporter of coal from mine to port for export markets.
QRN is a provider of specialist rail engineering, construction and maintenance services in Australia, operating a network of five terminals and more than 40 depots across five states.
The company not only transports minerals but agricultural goods, and is a significant transporter of grain.
Since being privatised by the Queensland government in November 2010, QRN has been a stock to watch with a large percentage of retail shareholders.
QRN has faced some major headwinds since listing, principally the early-2011 flooding and cyclone in that state.
However, the company proved its resilience by managing to record a healthy FY11 underlying profit despite the impact to coal volumes from the floods.
The expansion into the WA and NSW markets also positions the company well for future growth.
Profit shines despite floods
QRN delivered an FY11 net profit of $349.5 million, which compared to a $36.8 million loss a year earlier when it was still owned by the Queensland government.
QR National faced a number of difficulties last year due to the Queensland floods, yet still managed an 11% lift in revenue and a 35% rise in underlying EBIT.
The growth in earnings was achieved due to the company’s focus on cost management and better revenue quality (more customer-focussed contracts).
With a net gearing ratio of less than 10% at the end of FY11, QRN’s balance sheet was in strong enough shape financially to pursue growth initiatives.
Volumes down, but significant growth potential
The Queensland floods had a big impact on QRN’s coal haulage volumes, and the company is yet to fully recover from the damage.
The slow recovery in Queensland coal volumes necessitates an ongoing focus on cost initiatives as well as pursuing new growth opportunities.
The company has recognised the importance of that second point, and is looking to expand its presence in the NSW Hunter Valley coal region and WA’s lucrative iron ore market.
QRN recently signed an iron ore haulage contract with the Karara Iron Ore Project, which is expected to deliver $900 million in additional revenue over the next ten years.
That is not say QRN has forgotten its core Queensland market. Asciano and QRN recently signed a multi-year deal with Rio Tinto to haul millions of tonnes of coal from its Queensland mines.
Importantly, this deal will leverage QRN’s $1.1 billion project to expand the Goonyella-Abbot Point rail network link.
Outlook
QRN’s management has thus far proven its ability to grow earnings in periods of turbulence.
A focus on improving operational efficiency paid dividends for the company in FY11, and given the slow recovery in Queensland coal haulage, we would look for similar diligence this year.
Along with cost initiatives, QRN is positioning itself for growth via the Goonyella-Abbot Point project and its expansion into the WA and NSW mining industries.
In our view, the positive momentum will translate into more near-term growth for QRN.
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Downer EDI Ltd (ASX:DOW), provides engineering and infrastructure management services to the public and private rail, road, power, telecommunications, mining and resources sectors in Australia, New Zealand, Asia and the Pacific. Downer provides rolling stock services, drilling services for the exploration industry, mine planning and management services and highway maintenance.
