QR National IPO marketing has commenced

QR NationalThe Queensland government has commenced marketing the float of between 60% and 75% of QR National. The float will have a capitalisation of between $6.1 billion and $7.3 billion. The indicative price is between $2.50 and $2.80 with retail investors receiving a 10 cent discount to the book build price.

The QR float rolls in at a time when global investors are searching for long term infrastructure assets and exposure to commodity leverage. QR moved 260 million tonnes of freight including 200 million tonnes of coal in fiscal 2010 courtesy of 700 locomotives and 16,000 rail wagons. The company has commenced a capital expenditure program with another $3.7 billion to be spent on track, signalling and rolling stock by 2013. QR gives investors exposure to both infrastructure and commodity assets.

QR is being sold on the basis that it is “BIG”. It is a big float and the government are maintaining a shareholding of between 25% and 40%. A big float such as this needs solid retail participation, an ingredient that has lead to a mass marketing campaign to stir investors into a frenzy. QR however, has a high initial PE and a low yield which is not optimal in a retail marketing situation. Additionally, the pricing period is in late November; weeks after the peak impact of the marketing campaign. Investors are being asked to pay up now for growth that is delivered later. Queenslanders will be keen to jump on this train but other states will be less enthused. QR is not well known outside Queensland. Many remember what happened last time they bought an asset from government. In the event that retail demand is below expectations, institutions will get a greater allocation which will reduce their need to add stock post the listing.

The local professional investors are driven by metrics rather than marketing and imagery. A picture of a rail car with “BIG” painted on it will not excite them. These investors are currently crunching their numbers and choosing a pricing point that will see them paricipate.

Offshore investors will be opportunistic and price driven. Many hedge funds will sell early to take profits and move on while long only funds will build positions. The more active traders will move quickly onto their next deal regardless of outcome. Asian investors are seeing at least 1 IPO opportunity per day at the moment.

QR has a relatively new management team and is currently government owned. It is generally accepted that QR, which employs over 9,000 people, can be run a lot leaner than it is today. The outlook for coal demand is  very solid for some years. Investors know that competition will increase for QR but that the market will grow to compensate. It is our view that the QR float will be priced at the low end of the range. The stock is the first IPO of size for some years and is attracting a high level of interest. The stock is scheduled to list on 4th December 2010.