Logistics company Qube Holdings Ltd (ASX: QUB) move to reassure investors that it won't be materially impacted by the shutdown of Atlas Iron Limited (ASX: AGO) seems to have worked.
Shares in Qube jumped 1.3% to $2.835 yesterday when the broader market was struggling to keep its head above water.
Qube, which counts Atlas Iron as a customer, said that its current year earnings won't be significantly affected by the iron ore miner's decision to suspend operations in the Pilbara due to the collapse in the iron ore price.
It appears Qube's risk management strategy to allow no single customer to account for more than 5% of group revenue has worked and the "take-or-pay" contract with Atlas Iron has also helped as the miner is still liable to pay for Qube's services regardless of whether any ore is shipped from its mine.
However, Qube could feel a sharper prick to next year's earnings from the loss of shipping volumes from the Atlas Iron contract given that ore shipped from the miner's Pilbara operations accounted for 64% of the 16 million tonnes Qube handled out of the Utah Point facility.
What is characteristic of most logistics companies is high operating leverage due to their relatively large fixed cost base. While Atlas may only account for a few percentage points of total revenue, the contract will almost certainly make a bigger dent to the bottom line.
Moreover, Qube's full year earnings this year are relatively unaffected because the problems with Atlas Iron happened towards the tail end of the financial year ending June 30 and because Atlas Iron has so far continued to pay Qube. But if administrators are called in, it is unlikely that if Atlas Iron can continue to fulfil its payment obligations to Qube.
Under this scenario, analysts will have little choice but to downgrade their earnings expectations for Qube.
This isn't normally a big issue as the downgrades will probably not be very significant in the grand scheme of things.
There are a host of other companies that will be in greater pain from the shutdown of Atlas Iron and the potential suspension of operations from higher cost other iron ore producers such as Fortescue Metals Group Limited (ASX: FMG), BC Iron Limited (ASX: BCI) and Mt Gibson Iron Limited (ASX: MGX).
Luckily Qube ships a lot more than iron ore. It hauls nickel, manganese and copper as well as agricultural goods like grains and fertiliser.
However, any downgrade of Qube's earnings could cause indigestion for shareholders because it is trading on a fairly big premium. To give you an idea, the stock is trading on a price-earnings (P/E) multiple of well over 20 times on 2013-14 earnings and its P/E is unlikely to fall below 20 for the next year or two.
But investors shouldn't be too alarmed. The real value of Qube (and the reason I bought the stock) is in its yet-to-be constructed Moorebank Intermodal Terminal.
An announcement on this could come at the end of the month and it's the key reason why Macquarie upgraded the stock to "outperform" two weeks ago.
The broker feels that the market has not fully appreciated the value of Moorebank facility, which is strategically located to connect Sydney's port to major road and rail corridors.
Macquarie believes that Qube's P/E falls to a very attractive 12x in 2017-18.
I know that feels like a long time away but as the market has consistently underestimated the company and given management's good track record, I am happy to give the company time to realise the potential of Moorebank.
