I have an uneasy feeling about the listing of QR National. Not because I think it’s going to be a disaster. I don’t have a strong view either way on the price. I just don’t think it belongs on the stockmarket.
Many commentators and analysts, including my colleagues at The Intelligent Investor, have been bemoaning the capital intensive nature of the business and the fact that this capital won’t be earning an adequate return by 2012. In this piece on the Sydney Morning Herald website, Greg Hoffman wrote:
QR National requires billions of dollars of investment over the next few years, one of the reasons why a cash-strapped state government is floating it. In Kiyosaki-speak, this company will be a liability for at least as long as its financial forecasts stretch (until 2012).
In 2012, the business is expected to generate $861 million of operating cash flow. This won’t even cover half of the $1.8 billion capital expenditure bill expected for the year, let alone the $193 million of dividends. That’s why QR National’s debt level is forecast to jump by $1.1 billion in 2012, after a whopping $1.3 billion increase in 2011.
This is all true. And it’s typical of the analysis I’ve seen on the business. But it’s an unfair criticism of QR National. The implication is that the business isn’t generating enough cash to cover its capital expenditure requirements – often a sign of a mediocre business. In this case, however, the capex being spent and the earnings being generated have nothing to do with each other. Think about it. Do you really think it costs that much to maintain rolling stock and railway lines? Like most infrastructure assets, once you spend the upfront money, the ongoing capital costs are negligible.
For QR National, 79% of the $3.8bn being spent over the next two years is new infrastructure that will generate earnings of its own. And most of the additional earnings won’t be reflected in 2012’s accounts. For example, the prospectus states:
QR National will have spent approximately $1.1bn on the GAPE X50 rail infrastructure project by the time of its scheduled completion in June 2012. This project is not expected to contribute to EBITDA in FY2011 and is expected to contribute approximately $40m to EBITDA in FY2012. The EBITDA contribution from the GAPE X50 project is expected to increase progressively beyond FY2012 to an annual EBITDA contribution to QRN Network Services of between $170m and $190m when the contracted load on the rail infrastructure is fully utilised.
Assets like these need an owner with deep pockets and a genuine 15-20 year investment horizon. Superannuation funds? Yes. The Future Fund? Yes. Stockmarket investors? Mmmm, I don’t think they quite fit the bill.