brokers' notes, page-3

The broker that gave KSC a mild plug was Deutsche Bank (DB). I do not know what valuation Deutsche Bank ascribed to KSC, not having seen its recent report. The single-broker Thomson Consensus Estimate that I provided yesterday is probably DB's view.

A blurb on the transport sector that links back to Deutche Bank is at: http://finance.ninemsn.com.au/newscolumnists/other/8720432/transport-sector-trundles-along-in-low-gear In relation to KSC it reads:

“A last word on another transport stock - mid tier K&S Corp . The company's earnings are tied to the resources sector, primarily through its Western Australian-based Regal Transport business. K&S is seen more exposed to a resources slowdown than other similar sized transport providers. Deutsche Bank will monitor this area very closely as it continues to be a source of risk for the company. The broker retains a Buy rating.”

The plug being the last sentence. I am unsure of the factual level of the two sentences proceeding it. KSC's mining-related business is less than 20% of the total, but because it was earlier seen to be the shining light in a less-than-scintillating outlook for the rest of K&S's business, it is more significant than its relative size. Whether the resources-slowdown story is a significant long-term negative to Regal Transport's profitability remains to be seen, although KSC's profit announcement of 23rd August 2013 was cautious – to wit:

“Mr Stevenson said activity in the resources sector slowed in the second half of 2012-2013 with declining commodity prices and miners looking to reduce their costs and scale back a number of expansionary projects.”

My uncertainty springs from the fact that the gloomy mood of the first half of calendar year 2013 has shifted to being less negative as iron ore prices have improved, and certainly not dropped as predicted – a myriad sources support this not-so-gloomy perspective, one that I read this morning being:

http://in.reuters.com/article/2013/09/10/markets-australia-stocks-idINL3N0H544420130910 .

K&S certainly has confidence in its long-term outlook for Regal Transport, because the annual report contains the following information:

“On 19 August 2013, the Company completed the purchase of 14.6 hectares of land in Bullsbrook, Western Australia for $13.3 million. The land on the Great Northern Highway, north of Perth, will consolidated the Regal Transport General Haulage operation and will be a bridging depot for the Regal Transport Heavy Haulage business, which encounters curfew issues at its current South Guildford location. The Company’s intention is to develop the site in stages, with initial construction of a workshop facility and hardstand proposed throughout the second half of the 2014 reporting period.”

The history of K&S's expansion into the North West WA business is that in January 2010 K&S acquired Pacific Transport which was focused on the Perth to Broome and Derby regions of Western Australia, and in July 2010 K&S acquired Perth-based Regal Transport Group, which was focused on the Perth to Pilbara region, with depots in Port Hedland, Newman and Karratha. The former was the smaller and less profitable of the two, and it was merged into the latter.

The Regal Transport business is no doubt competitive, with the likes of Linfox having also expanded into the the North West WA business – see http://au.news.yahoo.com/thewest/a/-/national/13832979/head-west-and-double-your-pay/ .

Linfox must be doing OK in WA, because a recent bit in http://www.linfox.com/News-and-Media/Latest-News/2013/Recruitment-push-in-WA.aspx reads:

“Dated –12-08-2013
As a result of continued growth and expansion in Linfox’s mining operations in Western Australia, a new recruitment drive to attract more drivers is at the heart of meeting ongoing demand for the company’s logistics services.

Linfox Western Australia Recruitment Manager Andrew Polley said the company participated in the recent Perth Truck and Trailer Show where his team were on hand to discuss employment opportunities with attendees.

'The Perth Truck and Trailer Show is a major event for the Western Australia trucking industry and while we had a lot of interest at the event, there are still a range of vacancies available for WA based drivers,' Andrew said.”

KSC is not great stock, and it will never be one, but it is not a bad dividend payer, so holding it is a factor of its dividend future on its SP. I continue to hold on that basis.