Qube Holdings (ASX: QUB) is a leading provider of logistics solutions operating across multiple industries, focusing on export and import supply chain activities. The business is effectively made up of two divsions, logistics and ports & bulk.
Qube Holdings has had a relatively short existence — the company was originally listed as a trust in 2007. From 2007 to 2009, the share price fell to a low of $0.44 as a result of the economically challenging times, particularly for any business holding significant debt balances.
Since 2009 the share price has steadily climbed and has recently been trading over $2 a share. The steady price rise and impressive 12-month share price chart has caught the attention of many technical traders who have started to follow this company.
A number of analysts have neutral recommendations on Qube Holdings, citing a high price-to-earnings ratio and debt levels. However, the high quality assets held by Qube Holdings are entering a period where they will be generating significant free cash flows which will likely be used to pay down debt and eventually increase the dividend yield.
Qube Holdings has generally beaten analyst forecasts and I believe this trend will continue. Both divisions require a continued increase in actitivies across Australian ports; therefore the business is linked to general business and consumer confidence which remains high.
Another advantage to buying Qube Holdings is diversification is that this one stock can bring instant diversification to your portfolio. Revenue from the logistics division is evenly spread across a number of industries including retail (26%) and agriculture (23%), while revenue from the ports and bulk division includes iron ore (16%), vehicles (11%), coal (11%) and concentrates (11%). So while Qube Holdings has its hands in some booming industries including iron ore it is not overly reliant on any one particular area.
Qube Holdings has proven to have resilient earnings despite a soft economy and is emerging as the preferred investment amongst its peers. Making it a more attractive proposition to many is its links to iron ore, particularly in the Pilbara region where all iron ore passes through its ports.
Qube Holdings is often identified as a mining servies provider, which is not accurate. Further, the portion of its revenues from the mining industry are more resilient than any mining services provider as it profits from production but is not affected by cut backs in capital expenditure or the reduction in exploration budgets.
The less-risk-tolerant investor could wait on the sidelines and watch to be sure the expected cash flows do eventuate and are used to pay down debt and/or increase the dividend yield, which currently sits at 2.2%. If the debt-to-equity ratio falls under 30%, then the risk of this investment would be greatly reduced, making it an extremely appealing buy.
However, at this stage the share price is likely to be trading well above the current levels. The price-to-earnings ratio of 22 appears expensive, however, based on historical performance and management's ability to meet and exceed analysts expectations, I believe these multiples appear warranted.
Foolish takeaway
Timing is everything with an investment in Qube Holdings. With low interest rates, low unemployment, a growing population and improving business confidence, the level of imports and exports should continue to increase. With the benefit of adding instant diversification to your portfolio, there would be many more foolish things to do then to include Qube Holdings on your watchlist.
