Here's why Asciano Ltd keeps climbing higher

Asciano Ltd (ASX:AIO) hits 12-month highs: Is it a buy?

Andrew Mudie

Andrew joined the growing team of Motley Fool freelance writers in mid-2013 following years of personal development as a passionate self-taught sharemarket investor. At the time, Andrew was an engineer by trade, writer by hobby, and an investing nerd by passion who spent far too many breaks reading, writing and learning. Andrew’s first investing lesson came with his first stock selection in 2011 when takeover rumours caused a spike and subsequent plunge in the share price of Woodside and then the 21% fall in the market through mid-2011. The next four years of investing saw Andrew dabble in a vast array of strategies until settling on his favourite investment methodology, which is closely aligned with that of the Motley Fool: Fundamentals-based long-term buy-and-hold of great companies at great prices.

Published August 22, 2014 8:04 am AEST

What: Australian freight and ports operator Asciano Ltd (ASX: AIO) on Thursday reported a 24% drop in net profit; from $336.8 million last year to $257 million for the 12 months ending June 30. Surprisingly, the share price surged to close at 12-month highs as investors took solace from an optimistic outlook for 2015, including the sale of assets and earnings growth.

So What: Asciano's CEO John Mullen has forecast earnings growth from the company's rail and ports businesses driven by further cost cutting, new contracts, and overall market growth spurred by iron ore and coal volumes.

Importantly for investors, when once-off costs were stripped away from the profit result, earnings before interest and tax (EBIT) actually rose by 5% to $720 million and coal haulage volumes rose an encouraging 22%.

Other promising signs were an improvement in market share in the national container market, advancing of talks with third parties to sell the group's interest in Patrick Ports, and an increase in final dividend from 6.25 cents to 8.5 cents. The full year dividend was increased by 23% to 14.25 cents per share.

A highlight for me was a comment from the CEO to The Australian Financial Review: "Our job is to drive maximum value for shareholders for the assets that we have and that includes selling all or any parts of the business where there is more value by selling it than owning it."

What Now: Asciano's share price has risen strongly over the last month and now trades on a trailing price to earnings ratio of around 17 and dividend yield of 2.3%, fully franked. Analysts believe that Asciano should be able to generate earnings per share growth of between 5% and 10% in the next 12 months, which indicates a respectable price to earnings ratio of around 15.7.

Those looking for a defensive business with relatively predictable earnings should consider Asciano for exposure to an increase in both imports and exports from Australia. Unfortunately the group doesn't pay a huge dividend, but the recent cost cutting drive and predicted volume growth should make up for it in capital gains.

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