Will QR National be a casualty of a mining bust?


Rail operator QR National (ASX: QRN) reported a very solid result this week, with underlying EBIT increasing 52% to $584 million. The announced share buyback of around $900 million was welcome news and shows a management team acting in the interests of shareholders.

Investors are well aware of the headwinds potentially facing the resources sector and QR National is a busines with substantial exposure to both coal and iron ore volumes. At the time of its initial public offering (IPO) in November 2010 there were critics questioning the growth forecasts provided in the company’s prospectus. The critics have by and large been proven right with coal volumes falling well short of those forecasts.

In the financial year just ended, coal tonnages were 50 million under IPO expectations. To counter this volume shortfall, management has embarked on a substantial cost cutting and productivity improvement schedule. To their credit they have managed to produce impressive margin expansion across the company, resulting in higher earnings. Some of this has been a ‘free kick’ due to QR National previously being a bloated government enterprise – squeezing out further cost savings and efficiencies going forward will be harder to achieve.

With numerous mining projects being placed in the ‘wait and see’ pile, such as BHP Billiton’s (ASX: BHP) Olympic Dam expansion; mining service companies including freight transport companies such as QR National, Asciano (ASX: AIO) and Qube Logistics (ASX: QUB) face a difficult task of forecasting growth and expenditure requirements.

For the owners of QR National, the concern is whether the billions of dollars being invested in expanding coal and iron ore capacity will ultimately be money well spent. If the increased capacity is not met by increased future demand then money badly spent will be the result –  shareholders would have been better served by their money going more to buybacks and dividends and less to growth capital expenditure.

The Foolish bottom line

QR National owns strategic, quality assets that are performing well and producing plenty of cash. While the stock is backed by $2.98 per share in net tangible assets, the company trades on a hefty earnings multiple that has it priced for a continued resources boom.

The 2013 financial year will see further substantial growth expenditure. It may be better for potential investors to wait and see if this spending turns out to be timely or ill-timed.

If you’re in the market for some high yielding ASX shares, look no further than our “Secure Your Future with 3 Rock-Solid Dividend Stocks” report. In this free report, we’ve put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.

More reading

Motley Fool contributor Tim McArthur doesn’t own shares in any company mentioned. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

OUR #1 DIVIDEND PICK FOR 2016...

Forget BHP and Woolworths. This "dirt cheap" company is growing like gangbusters, and trading on a 5.6% dividend yield, FULLY FRANKED (8% gross). With interest rates set to stay at these low levels for years to come, for hungry investors, including SMSFs, this ASX company could be the "holy grail" of dividend plays for 2016.

Enter your email below to discover the name, code and a full investment analysis in our brand-new FREE report, “The Motley Fool’s Top Dividend Stock for 2016.”

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our https://www.fool.com.au/financial-services-guide">Financial Services Guide (FSG) for more information.