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UBS Investment Research
Adani Enterprises
A cquires Abbot Point Coal Terminal
Event: Mundra Port wins bid for Abbot Point Coal Terminal in Australia
MSEZ, a subsidiary of AEL, has won this terminal (99-year lease) in an
international competitive bid from the State of Queensland for AUD1.8bn
(financed through mezzanine debt currently). The terminal has a capacity of 50mt,
expandable to 80mt. It currently handles ~20mt and has contracted cargo for its
entire 50mt capacity. In our view the strategic intent of the acquisition is to provide
an evacuation point for AEL’s coal mine in Australia.
Impact: Will likely serve as evacuation point for Galilee basin coal reserves
It is a positive development for AEL as being an operational facility, expansion
(for exporting its own coal) will entail lower execution risks (also transportation
would likely be easier than from Dudgeon). For Mundra, we estimate near-term
impact on financials- 1) increase in net-debt to equity ratio to 1.3x-2.1x until
FY14E versus ~0.3x currently and 2) EPS dilution by 11%/6% in FY12/13 (FY13
depending on interest/margins), though valuation impact is not negative (this bid is
at ~8.5x FY16 EV/EBITDA while our implied valuation for MSEZ is ~10x).
Action: Maintain Neutral on Adani Enterprises and Buy on Mundra Port
AEL is a good play on rising energy consumption in the country though valuations
limit upside in our view. We continue to like MSEZ given strong growth visibility.
Valuation: Adani Enterpises PT Rs645, Mundra Port PT Rs180
Our SOTP- based PT for AEL comprises: 1) port: 36%; 2) power: 22%, 3) mining:
20%; 4) trading: 10% and 5) others: 12%. Our SOTP-based PT for MSEZ
comprises 1) Port- Rs155, 2) SEZ- Rs20 and 3) Investments- Rs13.
Key details of the terminal
Mundra Port won this terminal in an international competitive bidding process
that was organized by the Port Corporation of Queensland (a subsidiary of the
North Queensland Bulk Port) as part of its privatization initiative (the port was
constructed by the government entity).
Capacity: Currently 50mtpa.
Facilities: Two berths that can handle cape size vessels of over 200,000tons
Throughput: 20.25mt in FY11, 16.9mt in FY10 and ~50mt in FY16
Lease period: 99 years
Clients: Entire capacity contracted to international miners on a Take or Pay
basis till 2030 (expandable by 10 years). There are multiple contracts,
expiring at different points of time. Post completion, these can be renegotiated.
Charges: Mundra Port will operate as a Port Manager, levying about
AUD6/ton as asset/infrastructure charges, that will likely increase by about
3% pa (inflation). This is not a regulated asset.
Operations: The port is being operated by a subsidiary of Xstrata currentlyit
has the contract to operate the port till 2015 (with an option to extend it to
2020). It levies handling/maintenance charges directly to users (this is over
and above the asset/infrastructure charges; about AUD1.25-1.5/ton). After
the expiry of this contract period, Mundra Port will have the option to
operate the port on its own or give it to someone else.
Margins: Currently 54%, expected to expand to 70% by FY16 led by
increased capacity utilization. MSEZ believes a private sector management
could drive cost efficiencies leading to further margin improvements.
Other bidders: Other bidders included Nathan Tinkler (Australian
businessman with interests in mining), Brookfield Infrastructure Partners and
Macquarie Group. Since it was a closed government bid, the next highest bid
amount is not known. The asset value of the port is about AUD1.6bn.
Expansion: Expandable to 80mt (all clearances in place). Likely by 2017-18
Transaction details
Strategic intent: In our view the strategic intent of the acquisition is to provide
an evacuation point for the coal that Adani Enterprises will mine in the Galilee
basin (asset acquired last year). We think this terminal would require a railway
line of about 423km. Dudgeon Port (where Mundra Port is the preferred
proponent and is currently exploring the feasibility of setting up a port), would
likely require a shorter rail line from the Galilee basin. However, the
transportation to Abbot is likely faster (due to less difficult terrain) and also
Dudgeon is in the southern part of Queensland requiring a longer seatransportation
route (while the Abbot Point Coal Terminal is the most northerly
coal export port in Queensland).
The capacity expansion at the port will likely be completed by 2017-18
(commencing a few years before that) while the production from the mine might
start from 2016 or so. The mine would have a gradual ramp-up and hence this
terminal could serve as an evacuation point for the coal.
Financing: This is an all-cash deal and Mundra Port has taken a mezzanine loan
(for about 2 years) for the same- asset based acquisition financing at a rate of
LIBOR + 3.25%. It will likely restructure the debt in the next six months to
lower the interest cost to LIBOR + 2/2.5%.
Financial impact
This transaction is just one of the many aspects of the total investment program
for the Galilee basin mine. The other aspects like mine development and railline
development costs are yet to be crystallized- only post which the impact on
Adani Enterprises would be completely determinable.
The financial impact of the transaction on Mundra Port is likely as follows, in
our view-
We assume a gradual step-up in volumes and margins from FY11 to FY16, with
3% inflation and 30% tax rate. The above excludes the interest cost on debt.
The current tax rate in Australia is about 30%. MSEZ could lower the rate to
about 16% through tax planning structures (like trusts, etc.).
The key variables that would determine the EPS impact would be- 1) Interest
rate (we use 6% while the contracted rate for the mezzanine debt is lower) and
tax benefits on interest cost, 2) EBITDA margins (we assume a step increase
from 54% currently to expected 70% in FY16), 3) coal volumes (we have
assumed a step-increase in volumes in the above calculations), and 4)
realizations (we have assumed a 3% inflation pa over AUD6/ton in FY11).
The company expects EBITDA margins to increase to 70% in FY16 (when full
capacity utilization is achieved). It expects an EBITDA of AUD213m in 2016,
which implies a valuation of ~8.5x. Our implied valuation of MSEZ (including
the port, SEZ and investments) is ~10x FY16 EV/EBITDA and hence this
transaction is not negative from a valuation perspective though EPS dilutive in
the near-term.
Valuation: Neutral on Adani Enterprises, Buy on
Mundra Port
Adani Enterprises: PT of Rs645
We derive our SOTP-based PT on 1) 10% holding company discount to our PT
for listed subsidiaries (Mundra Port PT Rs180; Adani Power PT Rs110), 2) DCF
of individual assets in different segments like mining, agri, real estate and
others, and 3) 4.5x EV/EBITDA for trading businesses
Mundra Port: PT of Rs180
We derive our SOTP-based PT using 1) 12.6% CoE for the port, 2) 14.1% for
the SEZ, and 3) 2-3.5x P/B for the port investments.
Adani Enterprises
Founded in 1988 by Gautam S Adani, Adani Enterprises is the flagship
company of the Adani Group. It has several businesses such as power generation
and trading, coal mining and trading, edible oil manufacturing, agri-logistics and
trading, real estate development, trading in metals, city gas distribution,
bunkering, and oil & gas.
Statement of Risk
The key risks that AEL is exposed to in our view include: 1) Fuel cost from
Indonesia might be higher or availability could be lower, 2) sharp decline in
merchant tariffs, 3) lack of sufficient track record of Chinese power equipment
with Indian coal, 4) execution risks across businesses, especially power and
mining, and 5) lower-than-expected efficiencies in Indian coal mining
operations.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Adani Enterprises
A cquires Abbot Point Coal Terminal
Event: Mundra Port wins bid for Abbot Point Coal Terminal in Australia
MSEZ, a subsidiary of AEL, has won this terminal (99-year lease) in an
international competitive bid from the State of Queensland for AUD1.8bn
(financed through mezzanine debt currently). The terminal has a capacity of 50mt,
expandable to 80mt. It currently handles ~20mt and has contracted cargo for its
entire 50mt capacity. In our view the strategic intent of the acquisition is to provide
an evacuation point for AEL’s coal mine in Australia.
Impact: Will likely serve as evacuation point for Galilee basin coal reserves
It is a positive development for AEL as being an operational facility, expansion
(for exporting its own coal) will entail lower execution risks (also transportation
would likely be easier than from Dudgeon). For Mundra, we estimate near-term
impact on financials- 1) increase in net-debt to equity ratio to 1.3x-2.1x until
FY14E versus ~0.3x currently and 2) EPS dilution by 11%/6% in FY12/13 (FY13
depending on interest/margins), though valuation impact is not negative (this bid is
at ~8.5x FY16 EV/EBITDA while our implied valuation for MSEZ is ~10x).
Action: Maintain Neutral on Adani Enterprises and Buy on Mundra Port
AEL is a good play on rising energy consumption in the country though valuations
limit upside in our view. We continue to like MSEZ given strong growth visibility.
Valuation: Adani Enterpises PT Rs645, Mundra Port PT Rs180
Our SOTP- based PT for AEL comprises: 1) port: 36%; 2) power: 22%, 3) mining:
20%; 4) trading: 10% and 5) others: 12%. Our SOTP-based PT for MSEZ
comprises 1) Port- Rs155, 2) SEZ- Rs20 and 3) Investments- Rs13.
Key details of the terminal
Mundra Port won this terminal in an international competitive bidding process
that was organized by the Port Corporation of Queensland (a subsidiary of the
North Queensland Bulk Port) as part of its privatization initiative (the port was
constructed by the government entity).
Capacity: Currently 50mtpa.
Facilities: Two berths that can handle cape size vessels of over 200,000tons
Throughput: 20.25mt in FY11, 16.9mt in FY10 and ~50mt in FY16
Lease period: 99 years
Clients: Entire capacity contracted to international miners on a Take or Pay
basis till 2030 (expandable by 10 years). There are multiple contracts,
expiring at different points of time. Post completion, these can be renegotiated.
Charges: Mundra Port will operate as a Port Manager, levying about
AUD6/ton as asset/infrastructure charges, that will likely increase by about
3% pa (inflation). This is not a regulated asset.
Operations: The port is being operated by a subsidiary of Xstrata currentlyit
has the contract to operate the port till 2015 (with an option to extend it to
2020). It levies handling/maintenance charges directly to users (this is over
and above the asset/infrastructure charges; about AUD1.25-1.5/ton). After
the expiry of this contract period, Mundra Port will have the option to
operate the port on its own or give it to someone else.
Margins: Currently 54%, expected to expand to 70% by FY16 led by
increased capacity utilization. MSEZ believes a private sector management
could drive cost efficiencies leading to further margin improvements.
Other bidders: Other bidders included Nathan Tinkler (Australian
businessman with interests in mining), Brookfield Infrastructure Partners and
Macquarie Group. Since it was a closed government bid, the next highest bid
amount is not known. The asset value of the port is about AUD1.6bn.
Expansion: Expandable to 80mt (all clearances in place). Likely by 2017-18
Transaction details
Strategic intent: In our view the strategic intent of the acquisition is to provide
an evacuation point for the coal that Adani Enterprises will mine in the Galilee
basin (asset acquired last year). We think this terminal would require a railway
line of about 423km. Dudgeon Port (where Mundra Port is the preferred
proponent and is currently exploring the feasibility of setting up a port), would
likely require a shorter rail line from the Galilee basin. However, the
transportation to Abbot is likely faster (due to less difficult terrain) and also
Dudgeon is in the southern part of Queensland requiring a longer seatransportation
route (while the Abbot Point Coal Terminal is the most northerly
coal export port in Queensland).
The capacity expansion at the port will likely be completed by 2017-18
(commencing a few years before that) while the production from the mine might
start from 2016 or so. The mine would have a gradual ramp-up and hence this
terminal could serve as an evacuation point for the coal.
Financing: This is an all-cash deal and Mundra Port has taken a mezzanine loan
(for about 2 years) for the same- asset based acquisition financing at a rate of
LIBOR + 3.25%. It will likely restructure the debt in the next six months to
lower the interest cost to LIBOR + 2/2.5%.
Financial impact
This transaction is just one of the many aspects of the total investment program
for the Galilee basin mine. The other aspects like mine development and railline
development costs are yet to be crystallized- only post which the impact on
Adani Enterprises would be completely determinable.
The financial impact of the transaction on Mundra Port is likely as follows, in
our view-
We assume a gradual step-up in volumes and margins from FY11 to FY16, with
3% inflation and 30% tax rate. The above excludes the interest cost on debt.
The current tax rate in Australia is about 30%. MSEZ could lower the rate to
about 16% through tax planning structures (like trusts, etc.).
The key variables that would determine the EPS impact would be- 1) Interest
rate (we use 6% while the contracted rate for the mezzanine debt is lower) and
tax benefits on interest cost, 2) EBITDA margins (we assume a step increase
from 54% currently to expected 70% in FY16), 3) coal volumes (we have
assumed a step-increase in volumes in the above calculations), and 4)
realizations (we have assumed a 3% inflation pa over AUD6/ton in FY11).
The company expects EBITDA margins to increase to 70% in FY16 (when full
capacity utilization is achieved). It expects an EBITDA of AUD213m in 2016,
which implies a valuation of ~8.5x. Our implied valuation of MSEZ (including
the port, SEZ and investments) is ~10x FY16 EV/EBITDA and hence this
transaction is not negative from a valuation perspective though EPS dilutive in
the near-term.
Valuation: Neutral on Adani Enterprises, Buy on
Mundra Port
Adani Enterprises: PT of Rs645
We derive our SOTP-based PT on 1) 10% holding company discount to our PT
for listed subsidiaries (Mundra Port PT Rs180; Adani Power PT Rs110), 2) DCF
of individual assets in different segments like mining, agri, real estate and
others, and 3) 4.5x EV/EBITDA for trading businesses
Mundra Port: PT of Rs180
We derive our SOTP-based PT using 1) 12.6% CoE for the port, 2) 14.1% for
the SEZ, and 3) 2-3.5x P/B for the port investments.
Adani Enterprises
Founded in 1988 by Gautam S Adani, Adani Enterprises is the flagship
company of the Adani Group. It has several businesses such as power generation
and trading, coal mining and trading, edible oil manufacturing, agri-logistics and
trading, real estate development, trading in metals, city gas distribution,
bunkering, and oil & gas.
Statement of Risk
The key risks that AEL is exposed to in our view include: 1) Fuel cost from
Indonesia might be higher or availability could be lower, 2) sharp decline in
merchant tariffs, 3) lack of sufficient track record of Chinese power equipment
with Indian coal, 4) execution risks across businesses, especially power and
mining, and 5) lower-than-expected efficiencies in Indian coal mining
operations.
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